Dear Shareholders,
It’s a good time to be at Arch. Last year, the power of our diversified platform was on full display as we produced record-breaking results in both premium growth and underwriting income while delivering an operating return on average common equity of 14.8%*. The accelerated growth in our property and casualty (P&C) segments, along with the earnings contributions from our mortgage segment, propelled Arch to a leading position in the specialty insurance sector. Equally important, our ability to execute our strategy over the past several years has positioned Arch and our shareholders to benefit from the market opportunities ahead. Creating solutions for managing risk is at the core of our company and continues to evolve in an increasingly unpredictable world. Our addition to the S&P 500 in the fourth quarter serves as a recognition of our ability to navigate uncertainty while delivering long-term underwriting excellence.
While 2022 was a terrific year for Arch and our shareholders, we remain bullish about what’s ahead. Overall market conditions continue to be favorable, and our diversified platform gives us flexibility on how to maximize our opportunities. Our growth in recent years has been rapid, but we firmly believe there is more we can do in this market.
Long-term shareholders will not be surprised by our success. Our strategy is straightforward. First, focus on underwriting specialty lines where knowledge and expertise provide a competitive advantage. Second, hire outstanding, solution-oriented people who live our Values. Third, allocate capital to the most attractive opportunities while following our cycle management strategy that encourages our underwriting teams to grow during favorable market conditions and remain cautious in the soft period of the underwriting cycle.
Arch’s accelerated growth and excellent overall results over the past few years are the product of successfully executing this strategy. Disciplined cycle management during the most recent soft P&C market limited our exposure to inadequately priced business and ensured we had ample capacity available when opportunities emerged. In addition, as pricing became more favorable, our underwriters and claims managers leveraged their specialty experience to provide creative solutions to our brokers and clients — resulting in a record $15.3 billion of gross premiums written in 2022.
Marc Grandisson
Chief Executive Officer
Arch Capital Group Ltd.
Against the backdrop of a very challenging year for insurers that included the war in Ukraine, persistent inflation, low fixed-income and equity returns and another active natural catastrophe year, each of our three underwriting segments delivered excellent returns. Over the past four years, we have nearly tripled our total P&C net premiums written, not a small feat given our already robust market presence. At the same time, our mortgage group once again demonstrated the diversification power of that business by delivering record underwriting income. Last year, our shareholders were rewarded with a healthy increase in our share price over 2021.
Underwriting Results
Underwriting income across the three underwriting segments was a record $1.8 billion* in 2022, advancing 45% from 2021. We achieved these results despite a third consecutive year of elevated insurance industry losses from catastrophic events. Our estimated net losses from catastrophic events came to $754 million in 2022, up from $643 million in 2021.
Segment Performance
Individually, each segment of our diversified platform is a leader in its sector. However, the collective power of our three underwriting segments helps differentiate Arch from its peers. In 2022, leaning heavily into an improving P&C market, all three of our segments generated significant returns.
Insurance
In 2022, net premiums written increased 21% to $5.0 billion and underwriting income nearly doubled to $225 million from $117 million in 2021. Our growth in 2022 is a direct result of our U.S. and UK teams’ ability to capitalize on the significant investments we’ve made over the past five years to enhance our global platform in preparation for hard market opportunities. Since the early days of the hard market in 2019, our insurance segment has more than doubled its net premiums written and enhanced its contribution to the underwriting income of the enterprise.
Rate increases for most lines exceeded loss cost trends as our underwriting teams deployed our capacity into the most profitable lines. Premium growth in 2022 came from a diverse mix of coverages such as travel, accident and health insurance and professional lines (including cyber) and excess and surplus casualty.
Reinsurance
On a percentage basis, 2022 premium growth in reinsurance accelerated the fastest of our three underwriting segments. Net premiums written were $4.9 billion in 2022, up 51% from 2021. Underwriting income increased by a remarkable 85% to $314 million. Our growth in reinsurance premiums — both gross and net — was also broad-based, with the largest gains coming from other specialty lines (including cyber) and property.
For the past several years, pricing for reinsurance property catastrophe risk was inadequate and constrained our appetite. However, the market began to improve in 2022 as reinsurers were able to increase prices in response to the significant catastrophic loss activity of the past five years, with Hurricane Ian serving as the catalyst for premium rates more reflective of the risk assumed. Pricing, terms and conditions for property catastrophe coverages improved considerably at the January 2023 renewals, which should translate into improved returns for Arch in 2023 and beyond.
Mortgage
Underwriting income for the mortgage segment increased 32% to a record $1.3 billion in 2022. Since we acquired United Guaranty Corporation for approximately $3.3 billion on Dec. 31, 2016, the mortgage segment has generated $5.4 billion of underwriting income.
Net premiums written were $1.1 billion in 2022, down 10% from 2021 as the U.S. housing market slowed. However, rising persistency in our portfolio allowed us to grow our U.S. primary mortgage insurance in force to an all-time high of $295.7 billion at year-end. Of significance to the expected future performance of our portfolio, the credit quality of homebuyers with loans we insure remains excellent. We continue to focus on credit quality and profitability — not on volume — which is a benefit afforded to us by our diversified platform. We believe our mortgage business is well positioned to thrive under a variety of economic scenarios.
Investment Results and Cash Flow
Investable assets totaled $28.1 billion at the end of 2022, increasing slightly from 2021. Assets were bolstered by $3.8 billion from net cash flow provided by operating activities. While rising interest rates negatively impacted the market value of many of the securities in our portfolio, they helped us generate more investment income on new money invested. Investment income was $497 million in 2022, increasing 43% from 2021. We believe today’s higher interest rates should allow us to continue to grow our investment income well into 2023 and beyond.
We continue to take a cautious approach toward duration and credit risk. At the end of 2022, approximately 77% of the portfolio was invested in fixed maturity and short-term securities with an average credit quality of “AA-/Aa3,” and our overall portfolio had an average effective duration of 2.9 years. In addition to investing in fixed-income securities, we invest a portion of the portfolio in equities and alternative investments, which have both contributed positively to our bottom line over the years, albeit with more volatility than our fixed income portfolio.
Capital Management
Our reputation as an astute capital allocator is one we are proud of and do not take lightly. We maintain a conservative balance sheet with a prudent level of liquidity to support our obligations to clients and provide the financial resources to take advantage of business opportunities as they arise. At year-end 2022, we maintained a conservative level of financial leverage as the ratio of debt and preferred shares to total capital was 22.7%.
The strength of our balance sheet provided a competitive advantage in 2022. As the P&C market hardened further, we had ample resources to quickly write more business and serve the needs of clients in the marketplace.
We are responsible stewards of the capital entrusted to us, and we carefully weigh opportunities in how we deploy that capital. In 2022, we repurchased $586 million of Arch common shares, almost entirely in the first half of the year. In the second half of the year, burgeoning opportunities in the P&C market encouraged us to allocate capital to fuel that growth — which should be reflected in our results in the coming years.
Arch People
We would not be successful without the knowledge, hard work, innovation and dedication to client needs of the more than 5,800 Arch employees around the world. A hallmark of our success is our deep bench of talent, which provides the consistent leadership needed to execute our strategy year after year. In 2022, we made several key promotions and hires across our global footprint.
Outlook
Even after two decades of success, the energy of our employees and opportunities in front of us have me feeling as though we’re just getting started on our next chapter. Arch is a time-tested, active allocator of capital that understands how to navigate insurance and reinsurance cycles with the primary objective of being able to deliver superior returns. Our agility and underwriting skills served us well in 2022, and we are optimistic about our prospects for 2023. Although insurance markets are by nature cyclical and can turn quickly, I believe the hard market conditions present in the P&C environment will persist and should allow us to create significant additional value for our shareholders.
As we have frequently noted, we believe long-term growth of book value per common share (BVPS) drives shareholder value. Overall, Arch’s BVPS has grown at a compound annual rate of 14.1% since the Company’s recapitalization in 2001. Considering where we are in the underwriting cycle, improvements to the investment environment and the strength of our balance sheet, we believe Arch is well positioned to grow BVPS in 2023.
I want to thank Arch employees around the world for continually raising the bar and working to Enable Possibility for our clients, shareholders and communities where we live and work. Thank you, as well, to our distributors and clients for choosing to do business with Arch. And, most importantly, thank you to our shareholders for your continued confidence and support.
Marc Grandisson
Chief Executive Officer
Arch Capital Group Ltd.
Read the original letter here.
