Bermudian re/insurer Arch Capital Group saw its fourth quarter net income fall by 38% year-on-year from $203.5 million in 2017 to $126.1 million in 2018, primarily due to the impact of natural catastrophes on its results.
Arch’s Q4 catastrophe losses totalled $118.2 million, net of reinsurance and reinstatement premiums, with losses mostly resulting from Hurricane Michael and the California wildfires.
This was within the catastrophe loss range that Arch estimated last month, but considerably below the upper band estimate of $130 million.
Despite these cat losses, Arch managed to maintain a steady after-tax operating income of $189.2 million in Q4 2018, compared to $187.4 million for the same period in 2017.
The company also saw favourable development in prior year loss reserves of $74.4 million and achieved a combined ratio of 80.8% (excluding catastrophe activity and prior year development).
In terms of its reinsurance segment, Arch’s gross and net premiums written were 41.5% higher and 54.7% higher than in the fourth quarter of 2017, respectively.
This reflected continued growth in the company’s casualty business, other specialty business, primarily in international motor quota share contracts, and opportunistic growth in non-catastrophe property business.
The 2018 fourth quarter loss ratio included 26.1 points of current year catastrophic activity, primarily related to Hurricane Michael and the California wildfires, compared to 2.3 points of catastrophic activity in the 2017 fourth quarter.
This was offset to some extent by favourable development in prior year reserves and significant improvement in the underwriting expense ratio, which was 27.1% in Q4 2018, compared with 39.7% in Q4 2017.
Nevertheless, losses resulted in a combined ratio of 110.9% for Arch’s reinsurance segment in the fourth quarter, compared with 94.5% Q4 2017.
For the primary insurance segment, Arch increased its gross premiums written by 8.5% and net premiums written by 4.3% when compared with the prior year.
This reflected growth in most lines of business, due to a mix of new business, growth in existing accounts and rate increases, although it was partially offset by lower writings in contract binding, higher cessions in professional lines and a non-recurring item in the 2017 fourth quarter within national accounts.
The combined ratio for the insurance segment was 102.8% in Q4 2018, compared with 98.3% in Q4 2017, with the 2018 Q4 loss ratio having been impacted by 6.0 points of catastrophe activity.
Additionally, Arch benefitted from 16% increase in its pre-tax net investment income, which rose from $99.6 million in Q4 2017 to $115.6 million in Q4 2018.
Arch said this growth reflected the reinvestment of fixed income securities at higher available yields and a shift from municipal bonds to corporates.
During the 2018 fourth quarter, the company also repurchased 3.6 million common shares for an aggregate purchase price of $98.2 million, an average of $27.11 per share.
