Arch ‘very relaxed’ about Brexit as it reveals further UK expansion via Barbican

Marc Grandisson, president and CEO of Bermuda-based international (re)insurer Arch Capital, told analysts he is “very relaxed” about Brexit as the group announced an agreement to acquire Lloyd’s underwriting group Barbican. This is the third UK acquisition made by Arch this year. In January, it completed the acquisition of the UK commercial lines business owned by The Ardonagh Group and part of its Geo Underwriting (Geo) operating segment. This business generated more than £150m of gross written premium in 2017 and became the newly formed Arch UK regional division, focused on commercial property, casualty, motor, professional liability, personal accident and travel. Then, in April, the group announced the acquisition of UK managing general agency Axiom Underwriting, having initially purchased a 60% share of the business in 2015. Axiom generated approximately £20m of gross written premium in 2018 and became part of the new Arch UK division. The Barbican acquisition is the biggest of the three by far. In 2018, Barbican generated gross written premiums of £434m, a combined ratio of 108.8% and a loss of £21m. The acquisition includes Barbican Managing Agency Limited, Lloyd’s Syndicate 1955, Lloyd’s Syndicate 1856, Lloyd’s Special Purpose Arrangement 6132, Castel Underwriting Agencies Limited and other group entities. Mr Grandisson announced a healthy set of second-quarter 2019 results for Arch this week, which included net profits of $458.6m compared to $233.2m for the same period last year. In doing so, he was understandably asked by one analyst why the group was investing so heavily in the UK given the uncertainty surrounding its departure from the European Union. Mr Grandisson pointed out that Arch has already covered its position within the EU post-Brexit by shifting its European operation to Dublin, where it has been present since 2008 and gaining new licences. It is also part of the recently launched Lloyd’s Brussels operation that is also licensed to operate across the EU post-Brexit. “We already – as everybody else in the industry – have repositioned our European operation into Dublin. So, this is where we are currently doing non-UK business as of the end of March. And we also have… Lloyd's Brussels… so we're also a participant in that marketplace,” said Mr Grandisson, according to results reporting service Seeking Alpha. And despite some costs associated with Brexit, Arch is pretty bullish about its expanding UK business, particularly given the hardening market. “Actually… we're very keen on developing more of the retail [insurance business] and we did the acquisition [at the] end of last year of the Ardonagh retail network, so that's actually going very, very well. So, it [Brexit] creates some barriers to entry for possibly other participants, but I think everybody has been pretty good, including ourselves, in setting ourselves up for being able to write the business whatever happens, whether it's hard Brexit or negotiated Brexit,” he continued. “We are already well ahead of whatever could happen; [it will be a] little bit more expensive because you tend to have a bit less concentration of back-office and then underwriting support but, by and large… hopefully that will presumably find its way through pricing anyway. So we're very relaxed [about] Brexit,” added Mr Grandisson. All international insurers that have reported second-quarter results so far have reported upward rate movement and expect the momentum to continue. Arch was also relatively positive about the state of the market from an insurer’s perspective. Mr Grandisson told analysts that market conditions in Arch’s P&C segments continued to improve and, as a result, it selectively increased its writings. But the Arch CEO cautioned that this is not a dramatic market turn. Insurers still need to box cleverly and allocate their capital carefully, he said. “While we hope that the market firming has legs, we will continue to focus on allocating capital to those lines with the best risk/reward characteristics. In our view, this is a market which favours those companies [that] are nimble and focus on expected returns, risk selection, and risk selection and segmentation in building their book of business,” he said. “Across the property and casualty industry, we have seen several market opportunities where we have increased our capital deployment, notably in London and in E&S [excess and surplus] lines in the US. It is worth noting that because we have kept our powder dry in the recent soft markets, we are better positioned today to flex into these markets as rates improve. Despite these tailwinds, the firming is not occurring across the board. One factor that makes us cautious is the uncertainty surrounding the margin of safety,” continued Mr Grandisson. The Arch CEO said that, in some cases, rates are increasing on a relative basis but are still not adequate on an absolute basis The company’s insurance group's rate changes for renewed business averaged about 3.5% across all lines in the second quarter. “However, there is strong anecdotal evidence that the majority of our new business came in at better levels than the renewal business. This is a sign of a transitioning market,” commented Mr Grandisson. Overall, Arch estimates that roughly 20% of its increased premium writings in insurance came from rate and the balance from exposure growth. “There are a number of well-known factors driving today's P&C environment. Number one, de-risking by some of our competitors; two, significant cat losses sustained by the industry in recent years; three, current interest rate levels support the need for further firming in premium rates; and most significantly, fourth, a lack of margin in pricing that exacerbates volatility in quality results and the attendant implicit recognition that reserve levels could be inadequate,” concluded Mr Grandisson.

Arch ‘very relaxed’ about Brexit as it reveals further UK expansion via Barbican

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