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Arch Capital profits plunge by nearly half

Jonathan Kent
Created: Oct 26, 2010 11:00 AM
A man walks over a damaged road in Paiapoi, 13 miles south of Christchurch, New Zealand, after the city was hit by an earthquake in Sepember , 2010. Christchurch was struck by a powerful 7.1-magnitude earthquake that smashed buildings, cracked roads and twisted rail lines and also ripped a new 11-foot wide fault line in the earth's surface, officials said . At least 500 buildings, including 90 downtown properties, have been designated as destroyed in the quake near the South Island city of 400,000 people.

Arch Capital Group Ltd.'s third-quarter profits fell by nearly half compared to 2009, as catastrophe losses climbed as premium revenue fell.

The Bermuda-based insurer and reinsurer said last night that net income fro the July through September period was $141.6 million, or $2.77 per share, compared to $274.4 million, or $4.39 per share, for the same period last year.

Arch said net losses from catastrophic events totalled $24.2 million in the quarter, $21.6 million of which was incurred by the reinsurance segment.

Most of these losses emanated from the New Zealand earthquake which caused widespread damage in the Christchurch area on September 4.

Arch's book of business contracted during the quarter with reinsurance gross premiums written falling to $208.8 million, compared to $266.2 million last year, while insurance GPW pulled back to $624.5 million, compared to $674 million.

In a live television interview in New York with CNBC last Friday, Arch chief executive officer Dinos Iordanou underlined the importance of discipline for underwriters, especially during the current soft market conditions.

"In order for us to maintain bottom line profitability, we are willing to sacrifice top line," Mr. Iordanou told interviewer Becky Quick.

"If you accept volatility, you can continue through the cycle and maintain very good profit margins at the bottom line."

Arch said its book value surged to $89.24 per share at September 30, an 8.7 percent increase from $82.07 per share at June 30 this year and a 22.2 percent increase from $73.01 per share at the end of last year.

The company's after-tax operating income available to common shareholders represented a 12.3 percent annualised return on average common equity for the 2010 third quarter, compared to 16.4 percent for the 2009 third quarter.

Arch's combined ratio — the proportion of premium dollars spent on claims and expenses — was 90.4 percent, little changed from last year's 90 percent.

The company said its pre-tax investment income yield was 3.33 percent for the 2010 third quarter, compared to 3.76 percent in 2009.

Arch said it ended the third quarter with capital of $5.14 billion and shareholders' equity of $4.39 billion.