Arch Capital Group Ltd. CEO Discusses Q4 2011 Results - Earnings Call Transcript

Arch Capital Group Ltd. ( ACGL)

Q4 2011 Earnings Call

February 14, 2012 11:10 AM

Executives

Dinos Iordanou - President and CEO

John Hele - EVP and CFO

Analysts

Mike Zaremski - Credit Suisse

Greg Locraft - Morgan Stanley

Jay Gelb - Barclays Capital

Vinay Misquith - Evercore Partners

Matthew Heimermann - JPMorgan

Ian Gutterman - Adage Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Arch Capital Group Earnings Conference Call. My name is Keisha, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Before the company gets started with its update, management wants to first remind everyone that certain statements in today’s press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management’s current assessments and assumptions, and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied.

For more information on risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby.

Management also will make reference to some non-GAAP measures of financial performance. The reconciliations to GAAP and definition of operating income can be found in the company’s current report on Form 8-K, furnished to the SEC yesterday, which contains the company’s earnings press release and it’s available on the company’s website.

I would now like to turn the conference over to your host for today, Mr. Dinos Iordanou and Mr. John Hele. Please proceed.

Dinos Iordanou

Thank you, Keisha. Good morning ladies and gentlemen and thank you for joining us today. We are finally closing the 2011 year, which was challenging from a natural cat point of view. It was our worst year ever surpassing even the 2005 Katrina year for us. Fortunately, we have started the 2012 year with a more positive outlook as market conditions are showing signs of improvement. Taking all that into consideration, our fourth quarter performance was acceptable.

On an operating basis, we earned $126.8 million or $0.92 per share, which on annualized basis represents at 12% return on equity. Our investment performance for the quarter including the effects of foreign exchange was a total return of 82 basis points and our underwriting performance was very good at 90.1 combined ratio.

This was aided by reserve releases from prior years predominately from short-tail lines. John will give you more of a breakdown in a few minutes.

Cash flow for the quarter was $110 million, which on an adjusted basis was slightly higher than the 2010 fourth quarter numbers. A book value for common share was $32.03 at 2.7% increase from September 30, 2011 and it was due mostly of our operating results.

The broad market environment continues to show improvements across the board. From a rate standpoint, most lines of business moved into positive territory. The exceptions were in executive assurance and healthcare where we’re still seeing rate reductions, a bit less than in prior quarters but they’re in the range of 1% to 7% for healthcare and approximately 6% for executive assurance.

Even with these improvements in the rate environment, we believe that significant more rate is needed in many lines in order to achieve rather good returns. In our view based in part on the level of increased rates currently available for new money invested, the long tail lines require quite a bit of improvement in premium rate to become attractive.

We view primary casualty, umbrella liability, excess liability as areas requiring the most significant rate improvement. Workers’ compensation on an industry-wide basis is achieving high single-digit rate improvements, but this is still not enough to bring this line of business to quite a good returns.

In our reinsurance sector, rate improved significantly on a risk-adjusted basis in the property cat area while all other lines remained basically unchanged. From a premium production point of view, on a consolidated basis our gross written premiums were up 5.3% and our net written premiums were up 5.8%.

The insurance group was up approximately 2.5% on both a gross and net basis. The reinsurance group was up 16.5% on a gross basis and 14.7 on a net basis. The increase resulted from new opportunities in UK Motor based on current operating conditions in that marketplace and increase in accident and health business as well as from property cat backup progress due to the storms.

We’re always looking for opportunities to expand our underwriting capabilities organically. In the past six quarters, we were successful in attracting management teams in life and accident and health, mortgage insurance and reinsurance, (inaudible) insurance in Canada, global crop hail business as well as tidal insurance in Canada. All these are investments in talent and capabilities for the future.

In some of these lines, we're already producing business and in some, we're in the process of building the needed infrastructure and obtaining the necessary licenses. While the degree of success of these opportunities in the short term will be dependent on market conditions, we are confident that over the long term, these will prove to be successful profit centers contributing to the value of our enterprise.

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