Insurance Operations
Our insurance operations are conducted in Bermuda, the United States, Europe,
Canada, Australia and South Africa. Our insurance operations in Bermuda are
conducted through Arch Insurance (Bermuda), a division of Arch Re Bermuda, and
Alternative Re Limited.
In the U.S., our insurance group’s principal insurance subsidiaries are
Arch Insurance, Arch Specialty, Arch Indemnity and Arch E&S. Arch Insurance
is an admitted insurer in 50 states, the District of Columbia, Puerto Rico,
the U.S. Virgin Islands and Guam. Arch Specialty is an approved excess and surplus
lines insurer in 49 states, the District of Columbia, Puerto Rico and the U.S.
Virgin Islands and an authorized insurer in one state. Arch Indemnity is an
admitted insurer in 49 states and the District of Columbia. Arch E&S, which
is not currently writing business, is an approved excess and surplus lines insurer
in 47 states and the District of Columbia and an authorized insurer in one state.
The headquarters for our insurance group’s U.S. support operations (excluding
underwriting units) is in Jersey City, New Jersey. The insurance group has offices
throughout the U.S., including four regional offices located in Alpharetta,
Georgia, Chicago, Illinois, New York, New York and San Francisco, California
and additional branch offices.
Our insurance operations in Canada are conducted through Arch Insurance Canada,
a Canada domestic company which is authorized in all Canadian provinces and
territories. Arch Insurance Canada is headquartered in Toronto, Ontario with
other regional offices in Canada. Our insurance operations in Europe are conducted
on two platforms, Arch Insurance Company Europe and Arch Syndicate 2012 (the
U.K. insurance operations are collectively referred to as “Arch Insurance
Europe”). Arch Insurance Europe conducts its operations from London, England.
Arch Insurance Company Europe is approved as an excess and surplus lines insurer
in 27 states and the District of Columbia and also has branches in Germany,
Italy, Spain and Sweden. Arch Underwriting at Lloyd’s Ltd (“AUAL”)
is the managing agent of Arch Syndicate 2012 and is responsible for the daily
management of Arch Syndicate 2012. Arch Syndicate 2012 has enhanced our underwriting
platform by providing us with access to Lloyd’s extensive distribution
network and worldwide licenses. Arch Underwriting at Lloyd’s (Australia)
Pty Ltd, based in Sydney, Australia, and Arch Underwriting Managers at Lloyd’s
(South Africa) (Pty) Limited, based in Johannesburg, South Africa, are Lloyd’s
services companies which underwrite exclusively for Arch Syndicate 2012. Arch
Underwriting Agency (Australia) Pty. Ltd. is an Australian agency which also
underwrites for Arch Syndicate 2012 and third parties.
Strategy. Our insurance group’s strategy is to operate in lines of business
in which underwriting expertise can make a meaningful difference in operating
results. The insurance group focuses on talent-intensive rather than labor-intensive
business and seeks to operate profitably (on both a gross and net basis) across
all of its product lines. To achieve these objectives, our insurance group’s
operating principles are to:
Capitalize on profitable underwriting opportunities. Our insurance group believes
that its experienced management and underwriting teams are positioned to locate
and identify business with attractive risk/reward characteristics. As profitable
underwriting opportunities are identified, our insurance group will continue
to seek to make additions to its product portfolio in order to take advantage
of market trends. This may include adding underwriting and other professionals
with specific expertise in specialty lines of insurance.
Centralize responsibility for underwriting. Our insurance group consists of
a range of product lines. The underwriting executive in charge of each product
line oversees all aspects of the underwriting product development process within
such product line. Our insurance group believes that centralizing the control
of such product line with the respective underwriting executive allows for close
management of underwriting and creates clear accountability for results. Our
U.S. insurance group has four regional offices, and the executive in charge
of each region is primarily responsible for all aspects of the marketing and
distribution of our insurance group’s products, including the management
of broker and other producer relationships in such executive’s respective
region. In our non-U.S. offices, a similar philosophy is observed, with responsibility
for the management of each product line residing with the senior underwriting
executive in charge of such product line.
Maintain a disciplined underwriting philosophy. Our insurance group’s
underwriting philosophy is to generate an underwriting profit through prudent
risk selection and proper pricing. Our insurance group believes that the key
to this approach is adherence to uniform underwriting standards across all types
of business. Our insurance group’s senior management closely monitors
the underwriting process.
Focus on providing superior claims management. Our insurance group believes
that claims handling is an integral component of credibility in the market for
insurance products. Therefore, our insurance group believes that its ability
to handle claims expeditiously and satisfactorily is a key to its success. Our
insurance group employs experienced claims professionals and also utilizes experienced
external claims managers (third party administrators) where appropriate.
Utilize a brokerage distribution system. Our insurance group believes that by
utilizing a brokerage distribution system, consisting of select international,
national and regional brokers, both wholesale and retail, it can efficiently
access a broad customer base while maintaining underwriting control and discipline.
Our insurance group writes business on both an admitted and non-admitted basis.
Our insurance group focuses on the following areas:
Construction and national accounts: primary and excess casualty coverages to
middle and large accounts in the construction industry and a wide range of products
for middle and large national accounts, specializing in loss sensitive primary
casualty insurance programs (including large deductible, self-insured retention
and retrospectively rated programs).
Excess and surplus casualty: primary and excess casualty insurance coverages,
including middle market energy business, and contract binding, which primarily
provides casualty coverage through a network of appointed agents to small and
medium risks.
Lenders products: collateral protection, debt cancellation and service contract
reimbursement products to banks, credit unions, automotive dealerships and original
equipment manufacturers and other specialty programs that pertain to automotive
lending and leasing.
Professional lines: directors’ and officers’ liability, errors and
omissions liability, employment practices liability, fiduciary liability, crime,
professional indemnity and other financial related coverages for corporate,
private equity, venture capital, real estate investment trust, limited partnership,
financial institution and not-for-profit clients of all sizes and medical professional
and general liability insurance coverages for the healthcare industry. The business
is predominately written on a claims-made basis.
Programs: primarily package policies, underwriting workers’ compensation
and umbrella liability business in support of desirable package programs, targeting
program managers with unique expertise and niche products offering general liability,
commercial automobile, inland marine and property business with minimal catastrophe
exposure.
Property, energy, marine and aviation: primary and excess general property insurance
coverages, including catastrophe-exposed property coverage, for commercial clients.
Coverages for marine include hull, war, specie and liability. Aviation and stand
alone terrorism are also offered.
Travel, accident and health: specialty travel and accident and related insurance
products for individual, group travelers, travel agents and suppliers, as well
as accident and health, which provides accident, disability and medical plan
insurance coverages for employer groups, medical plan members, students and
other participant groups.
Other: includes alternative market risks (including captive insurance programs),
excess workers’ compensation and employer’s liability insurance
coverages for qualified self-insured groups, associations and trusts, and contract
and commercial surety coverages, including contract bonds (payment and performance
bonds) primarily for medium and large contractors and commercial surety bonds
for Fortune 1,000 companies and smaller transaction business programs.
Underwriting Philosophy. Our insurance group’s underwriting philosophy
is to generate an underwriting profit (on both a gross and net basis) through
prudent risk selection and proper pricing across all types of business. One
key to this philosophy is the adherence to uniform underwriting standards across
each product line that focuses on the following:
risk selection;
desired attachment point;
limits and retention management;
due diligence, including financial condition, claims history, management, and
product, class and territorial exposure;
underwriting authority and appropriate approvals; and
collaborative decision making.
Reinsurance Operations
Our reinsurance operations are conducted on a worldwide basis through our reinsurance
subsidiaries, Arch Re Bermuda, Arch Re U.S., Arch Re Europe and Gulf Reinsurance
Limited. Arch Re Bermuda is a registered Class 4 insurer and long-term insurer
and is headquartered in Hamilton, Bermuda. Arch Re U.S. is licensed or is an
accredited or otherwise approved reinsurer in 50 states and the District of
Columbia and the provinces of Ontario and Quebec in Canada with its principal
U.S. offices in Morristown, New Jersey. Our property facultative reinsurance
operations are conducted primarily through Arch Re U.S. with certain executive
functions conducted through Arch Re Facultative Underwriters Inc. located in
Farmington, Connecticut. The property facultative reinsurance operations have
offices throughout the U.S., Canada and in Europe. Arch Re Europe, licensed
and authorized as a non-life reinsurer and a life reinsurer, is headquartered
in Dublin, Ireland with branch offices in Zurich and London.
In May 2008, we provided $100.0 million of funding to Gulf Reinsurance Limited,
a wholly owned subsidiary of Gulf Re Holdings Limited (collectively, “Gulf
Re”), pursuant to the joint venture agreement with Gulf Investment Corporation
GSC (“GIC”). Under the agreement, Arch Re Bermuda and GIC each owned
50% of Gulf Re. Gulf Re provides property and casualty reinsurance primarily
in the member states of the Gulf Cooperation Council, which include Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. We entered into
a number of strategic initiatives related to Gulf Re in the 2014 fourth quarter,
including an agreement to acquire complete ownership and effective control of
Gulf Re. Such agreement was approved by the Dubai Financial Services Authority
in April 2015 and the transaction closed on May 14, 2015. GIC will continue
to participate equally with us in the financial results of Gulf Re and have
the ability to purchase shares in Gulf Re over the next seven years.
In October 2008, Arch Re Europe was licensed and authorized as a non-life reinsurer
and as a life reinsurer in November 2009. In April 2012, we acquired the credit
and surety reinsurance operations of Ariel Re based in Zurich, Switzerland.
Treaty operations in Canada commenced in 2011 and, beginning in 2015, the business
is written through the Canadian branch of Arch Re U.S. (“Arch Re Canada”).
Strategy. Our reinsurance group’s strategy is to capitalize on our financial
capacity, experienced management and operational flexibility to offer multiple
products through our operations. The reinsurance group’s operating principles
are to:
Actively select and manage risks. Our reinsurance group only underwrites business
that meets certain profitability criteria, and it emphasizes disciplined underwriting
over premium growth. To this end, our reinsurance group maintains centralized
control over reinsurance underwriting guidelines and authorities.
Maintain flexibility and respond to changing market conditions. Our reinsurance
group’s organizational structure and philosophy allows it to take advantage
of increases or changes in demand or favorable pricing trends. Our reinsurance
group believes that its existing platforms in Bermuda, the U.S., Europe, Dubai
and Canada, broad underwriting expertise and substantial capital facilitate
adjustments to its mix of business geographically and by line and type of coverage.
Our reinsurance group believes that this flexibility allows it to participate
in those market opportunities that provide the greatest potential for underwriting
profitability.
Maintain a low cost structure. Our reinsurance group believes that maintaining
tight control over its staffing level and operating primarily as a broker market
reinsurer permits it to maintain low operating costs relative to its capital
and premiums.
Our reinsurance group writes business on both a proportional and non-proportional
basis and writes both treaty and facultative business. In a proportional reinsurance
arrangement (also known as pro rata reinsurance, quota share reinsurance or
participating reinsurance), the reinsurer shares a proportional part of the
original premiums and losses of the reinsured. The reinsurer pays the cedent
a commission which is generally based on the cedent’s cost of acquiring
the business being reinsured (including commissions, premium taxes, assessments
and miscellaneous administrative expenses) and may also include a profit factor.
Non-proportional (or excess of loss) reinsurance indemnifies the reinsured against
all or a specified portion of losses on underlying insurance policies in excess
of a specified amount, which is called a “retention.” Non-proportional
business is written in layers and a reinsurer or group of reinsurers accepts
a band of coverage up to a specified amount. The total coverage purchased by
the cedent is referred to as a “program.” Any liability exceeding
the upper limit of the program reverts to the cedent.
The reinsurance group’s treaty operations generally seek to write significant
lines on less commoditized classes of coverage, such as specialty property and
casualty reinsurance treaties. However, with respect to other classes of coverage,
such as property catastrophe and casualty clash, the reinsurance group’s
treaty operations participate in a relatively large number of treaties where
they believe that they can underwrite and process the business efficiently.
The reinsurance group’s property facultative operations write reinsurance
on a facultative basis whereby they assume part of the risk under primarily
single insurance contracts. Facultative reinsurance is typically purchased by
ceding companies for individual risks not covered by their reinsurance treaties,
for unusual risks or for amounts in excess of the limits on their reinsurance
treaties.
Our reinsurance group focuses on the following areas:
Casualty: provides coverage to ceding company clients on third party liability
and workers’ compensation exposures from ceding company clients, primarily
on a treaty basis. Exposures include, among others, executive assurance, professional
liability, workers’ compensation, excess and umbrella liability, excess
motor and healthcare business.
Marine and aviation: provides coverage for energy, hull, cargo, specie, liability
and transit, and aviation business, including airline and general aviation risks.
Business written may also include space business, which includes coverages for
satellite assembly, launch and operation for commercial space programs.
Other specialty: provides coverage to ceding company clients for non-excess
motor, including U.K. business primarily emanating from two clients, and other
lines including surety, accident and health, workers’ compensation catastrophe,
agriculture, trade credit and political risk.
Property catastrophe: provides protection for most catastrophic losses that
are covered in the underlying policies written by reinsureds, including hurricane,
earthquake, flood, tornado, hail and fire, and coverage for other perils on
a case-by-case basis. Property catastrophe reinsurance provides coverage on
an excess of loss basis when aggregate losses and loss adjustment expense from
a single occurrence or an aggregation of losses from a covered peril exceed
the retention specified in the contract.
Property excluding property catastrophe: provides coverage for both personal
lines and commercial property exposures and principally covers buildings, structures,
equipment and contents. The primary perils in this business include fire, explosion,
collapse, riot, vandalism, wind, tornado, flood and earthquake. Business is
assumed on both a proportional and excess of loss basis. In addition, facultative
business is written which focuses on commercial property risks on an excess
of loss basis.
Other. includes life reinsurance business on both a proportional and non-proportional
basis, casualty clash business and, in limited instances, non-traditional business
which is intended to provide insurers with risk management solutions that complement
traditional reinsurance.
Underwriting Philosophy. Our reinsurance group employs a disciplined, analytical
approach to underwriting reinsurance risks that is designed to specify an adequate
premium for a given exposure commensurate with the amount of capital it anticipates
placing at risk. A number of our reinsurance group’s underwriters are
also actuaries. It is our reinsurance group’s belief that employing actuaries
on the front-end of the underwriting process gives it an advantage in evaluating
risks and constructing a high quality book of business.
As part of the underwriting process, our reinsurance group typically assesses
a variety of factors, including:
adequacy of underlying rates for a specific class of business and territory;
the reputation of the proposed cedent and the likelihood of establishing a long-term
relationship with the cedent, the geographic area in which the cedent does business,
together with its catastrophe exposures, and our aggregate exposures in that
area;
historical loss data for the cedent and, where available, for the industry as
a whole in the relevant regions, in order to compare the cedent’s historical
loss experience to industry averages;
projections of future loss frequency and severity; and
the perceived financial strength of the cedent.
Mortgage Operations
Our mortgage group includes direct mortgage insurance in the United States
primarily provided by Arch MI U.S. and through an affiliate of Arch MI U.S.,
Arch Mortgage Guaranty Company; mortgage reinsurance provided primarily by Arch
Re Bermuda to mortgage insurers on both a proportional and non-proportional
basis globally; direct mortgage insurance in Europe provided by Arch MI Europe;
and various GSE credit risk-sharing products provided primarily by Arch Re Bermuda.
On January 30, 2014, we completed the acquisition of CMG Mortgage Insurance
Company from its owners, PMI Mortgage Insurance Co., in Rehabilitation (“PMI”)
and CMFG Life Insurance Company (“CUNA Mutual”) and acquired PMI’s
mortgage insurance platform and related assets. CMG Mortgage Insurance Company
was renamed “Arch Mortgage Insurance Company” (Arch MI U.S.) and
entered the U.S. mortgage insurance marketplace in 2014. Arch MI U.S., based
in Walnut Creek, California, is licensed and operates in all 50 states, the
District of Columbia and Puerto Rico. It has been approved as an eligible mortgage
insurer by Fannie Mae and Freddie Mac, each a GSE, subject to maintaining certain
ongoing requirements.
In addition, Arch Mortgage Guaranty Company, an affiliate of Arch MI U.S., offers
direct mortgage insurance to U.S. mortgage lenders with respect to mortgages
that lenders intend to retain in portfolio or include in non-agency securitizations.
Arch Mortgage Guaranty Company is licensed in all states. Arch Mortgage Guaranty
Company insures mortgages that are not intended to be sold to the GSEs, and
it is therefore not approved by either GSE as an eligible mortgage insurer.
Strategy. The mortgage insurance market operates on its own distinct underwriting
cycle, with demand driven mainly by the housing market and general economic
conditions. As a result, the creation of the mortgage group provides us with
a more diverse revenue stream. Our mortgage group’s strategy is to capitalize
on its financial capacity, the mortgage insurance technology platform of Arch
MI U.S. and its experienced management and operational flexibility to offer
mortgage insurance, reinsurance and other risk-sharing products in the United
States and around the world. Our mortgage group’s operating principles
and goals are to:
Expand Arch MI U.S.’s business. Prior to its acquisition, Arch MI U.S.
was the leading provider of mortgage insurance products and services to credit
unions in the U.S. and was approved by the GSEs as an eligible mortgage insurer
solely for credit union customers. Our mortgage group’s strategy is to
continue to broaden Arch MI U.S.’s customer base to national and regional
banks and mortgage originators, while maintaining and increasing Arch MI U.S.’s
share of the mortgage insurance credit union market.
Capitalize on profitable underwriting opportunities. Our mortgage group believes
that its experienced management, analytics and underwriting teams are positioned
to identify and evaluate business with attractive risk/reward characteristics.
Maintain a disciplined credit risk philosophy. Our mortgage group’s credit
risk philosophy is to generate underwriting profit through disciplined credit
risk analysis and proper pricing. Our mortgage group believes that the key to
this approach is adherence to uniform underwriting standards across all phases
of the applicable housing and mortgage lending cycles.
Provide superior and innovative mortgage products and services. Our mortgage
group believes that it can leverage our financial capacity, experience across
insurance product lines, and its analytics and technology to provide innovative
products and superior service. The mortgage group believes that its delivery
of tailored products that meet the specific, evolving needs of its customers
will be a key to the group’s success.
Our mortgage group focuses on the following areas:
Direct mortgage insurance in the United States. Under their monoline insurance
licenses, Arch MI U.S. and Arch Mortgage Guaranty Company may only offer private
mortgage insurance covering first lien, one-to-four family residential mortgages.
Nearly all of Arch MI U.S.’s mortgage insurance written provides first
loss protection on loans originated by mortgage lenders and sold to the GSEs.
Each GSE’s Congressional charter generally prohibits it from purchasing
a mortgage where the principal balance of the mortgage is in excess of 80% of
the value of the property securing the mortgage unless the excess portion of
the mortgage is protected against default by lender recourse, participation
or by a qualified insurer. As a result, such “high loan-to-value mortgages”
purchased by Fannie Mae or Freddie Mac generally are insured with private mortgage
insurance.
Mortgage insurance protects the insured lender, investor or GSE against loss
in the event of a borrower’s default. If a borrower defaults on mortgage
payments, private mortgage insurance reduces and may eliminate losses to the
insured. Private mortgage insurance may also facilitate the sale of mortgage
loans in the secondary mortgage market because of the credit enhancement it
provides. Our primary U.S. mortgage insurance policies predominantly cover individual
loans at the time the loan is originated. We also may enter into insurance transactions
with lenders and investors, under which we insure a portfolio of loans at or
after origination. In the future, Arch MI U.S. or Arch Mortgage Guaranty Company
may offer mortgage insurance on a “pool” basis. Under pool insurance,
the mortgage insurer provides coverage on a group of specified loans, typically
for 100% of all contractual or policy-defined losses on every loan in the portfolio,
subject to an agreed aggregate loss limit.
Direct mortgage insurance in Europe and other countries where we identify profitable
underwriting opportunities. Since 2011, Arch MI Europe has offered mortgage
insurance to European mortgage lenders. Arch MI Europe’s mortgage insurance
is primarily purchased by European mortgage lenders in order to reduce lenders’
credit risk and regulatory capital requirements associated with the insured
mortgages. In certain European countries, lenders purchase mortgage insurance
to facilitate regulatory compliance with respect to high loan-to-value residential
lending. Arch MI Europe offers mortgage insurance on both a “flow”
basis to cover new originations and through structured transactions to cover
one or more portfolios of previously originated residential loans.
Reinsurance. Arch Re Bermuda provides quota share reinsurance covering U.S.
and international mortgages. Such amounts include a quota share reinsurance
agreement with PMI pursuant to which it agreed to provide 100% quota share indemnity
reinsurance to PMI for all certificates of insurance that were issued by PMI
from January 1, 2009 through December 31, 2011 that were not in default as of
an agreed upon effective date. Other than this quota share, no PMI legacy mortgage
insurance exposures were assumed.
Other credit risk-sharing products. In addition to providing traditional mortgage
insurance and reinsurance, we offer various credit risk-sharing products to
government agencies and mortgage lenders. The GSEs have reduced their exposure
to mortgage risk and continue to shift more of it to the private sector, creating
opportunities for insurers like Arch. In 2013, Arch Re Bermuda became the first
(re)insurance company to participate in Freddie Mac’s program to transfer
certain credit risk in its single-family portfolio to the private sector.