Arch Capital Group Management Discusses Q2 2012 Results - Earnings Call Transcript

Arch Capital Group (ACGL)

Q2 2012 Earnings Call

July 26, 2012 11:00 am ET


Constantine P. Iordanou - Chairman, Chief Executive Officer, President, Member of Executive Committee, Member of Finance & Investment Committee and President of Arch Capital Group (Us) Inc

John C. R. Hele - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Mark D. Lyons - Chairman of Arch Worldwide Insurance Group and Chief Executive Officer of Arch Worldwide Insurance Group


Michael Zaremski - Crédit Suisse AG, Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Jay A. Cohen - BofA Merrill Lynch, Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Jay Gelb - Barclays Capital, Research Division



Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Arch Capital Group Earnings Conference Call. My name is Dave, and I'll be your operator for today. [Operator Instructions] As a reminder, this call 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 the 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 be than 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 reconciliation to GAAP and definition of operating income can be found in the company's current reports on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website.

I would like to turn the call over now to your hosts, Mr. Dinos Iordanou and Mr. John Hele. Please proceed.

Constantine P. Iordanou

Thank you, David, and good morning, everyone, and thank you for joining us today. We had a terrific second quarter. But before I get into the details, I would like to address the management changes we have announced at Arch.

Joining me on the call today are both John Hele and Mark Lyons. This will be John's last call as Arch's CFO as he's leaving to join another financial services firm. I would like to take this opportunity to thank John for his contributions to Arch over the past 3 years, and we wish him the best in his new endeavors.

I'm not going to re-welcome Mark Lyons since he has been my partner for the past 30 years as we have worked together first as insurance rookies at AIG then onto Berkshire Hathaway, Zurich and now, of course, with Arch. Mark calls it both a blessing and a curse that he has been with me for such a long time, but it has been a great 30 years, at lease from my perspective. And in his new role as our CFO, the curse part will take precedence as he will be sitting right next to my office in Bermuda.

We are also pleased that David McElroy will be replacing Mark as the Chief Executive Officer of our Insurance group and that Michael Murphy will become President of our U.S. underwriting operations and will also be our Chief Underwriting Officer for the Worldwide Insurance Group.

I have tremendous confidence in these individuals and our entire senior management team in both our Insurance and Reinsurance group. Accordingly, we are well positioned at Arch to move our business forward based on the improvement we see in the market opportunities and market conditions.

All of these appointments, once again, demonstrate the deep bench we have built at Arch and our ability to promote first from within and to give all of our people the ability to grow professionally over time.

Now let me turn back to our quarterly results. On an operating basis, we earned $1.2 per share, which on an annualized basis represents a 12.3% return on equity. Our reported underwriting performance was excellent, with a combined ratio of 87.2, while our investment performance for the quarter, including the effects of foreign exchange, was satisfactory, with a total return of 63 basis points for the quarter.

Cash flow was $252 million, an increase of $30 million over a year ago and $100 million over the past quarter. Our book value per common share was $34.45, a 3.4% increase from March 31, 2012, and a 12.2% increase from a year ago.

We also had very strong revenue increases for the quarter, which I will comment on in a few minutes.

The market environment continues to show improvement across the board in our U.S. Insurance business, where we have the strongest statistics both by volume and granularity. Rates increased on a weighted average by approximately 4%, which is 1% better than last quarter and slightly above our weighted averages loss trends.

Two other trends of note are emerging in the U.S. Insurance group. In our specialty lines, we achieved an average rate increase of 6%, so our specialty business is a bit stronger than standard. And our E&S submission activity increased year-over-year, another sign that standard lines underwriters are returning more business to the E&S market, where it belongs in the first place. To us, these are indications that the market is moving into new territory of gradual improvement, although we cannot call it a trend as of yet. Even with a better rate environment, given the level of investment yields currently available and our view of rate adequacy on an absolute basis, we believe that longer-tail lines still require substantial additional rate improvement to become attractive, at least to us.

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