arch reinsurance europe underwriting dac 2016 solvency and financial condition report

64 Pages·2017·0.68 MB·English

by  Donald Mobley

ARCH REINSURANCE EUROPE UNDERWRITING DAC
2016 SOLVENCY AND FINANCIAL CONDITION REPORT

19 May 2017
SOLVENCY AND FINANCIAL CONDITION REPORT
Table of Contents

Summary…………………… ......................................................................................................... 1
SECTION A – Business and Performance ..................................................................................... 2
A.1 Business ............................................................................................................................2
A.2 Underwriting Performance................................................................................................3
A.3 Investment Performance ...................................................................................................6
A.4 Performance of other activities .........................................................................................7
A.5 Any other information.......................................................................................................7
SECTION B – System of Governance............................................................................................ 8
B.1 General information on the system of governance ...........................................................8
B.2 Fit and proper requirements ............................................................................................14
B.3 Risk management system including the own risk and solvency assessment ..................15
B.4 Internal control system ....................................................................................................20
B.5 Internal audit function .....................................................................................................21
B.6 Actuarial function ...........................................................................................................23
B.7 Outsourcing .....................................................................................................................24
B.8 Any other information.....................................................................................................24
SECTION C – Risk Profile ........................................................................................................... 25
C.1 Underwriting risk ............................................................................................................25
C.2 Market risk ......................................................................................................................27
C.3 Credit risk........................................................................................................................29
C.4 Liquidity risk ...................................................................................................................30
C.5 Operational risk ...............................................................................................................31
C.6 Other material risks .........................................................................................................32
C.7 Any other information.....................................................................................................32
SECTION D – Valuation for Solvency Purposes ......................................................................... 33
D.1 Assets ..............................................................................................................................33
D.2 Technical provisions .......................................................................................................35
D.3 Other liabilities................................................................................................................41
D.4 Alternative methods for valuation ..................................................................................41
D.5 Any other information.....................................................................................................42
SECTION E – Capital Management ............................................................................................. 43
E.1 Own Funds ......................................................................................................................43
E.2 Solvency Capital Requirement and Minimum Capital Requirement .............................45
E.3 Use of the duration-based equity risk sub-module in the calculation of the SCR ..........47
E.4 Differences between the standard formula and any internal model used .......................47
E.5 Non-compliance with the MCR and non-compliance with the SCR ..............................47
E.6 Any other information.....................................................................................................47
Appendix 1 – ACGL Organizational Structure…………. ........................................................... 48
Appendix 2 – Quantitative Reporting Templates ......................................................................... 49
SUMMARY……………………

Arch Reinsurance Europe Underwriting DAC (“ARE” or the “Company”) is an Irish regulated composite
reinsurance entity authorized by the Central Bank of Ireland (‘CBI”). The Company’s ultimate parent is
Arch Capital Group Ltd (“ACGL” or together with its subsidiaries, the “Group” or the “Arch Group”),
whose common shares are listed and traded on the NASDAQ stock market LLC in the U.S. The Company
is a property and casualty reinsurance underwriting company writing a diversified portfolio, both in
terms of product mix and geography, in non-commoditised niche areas primarily.

During 2016 the Company wrote gross premium of €280m and reported a pre-tax profit of €27m. The
premium written represents growth of 7% compared to the prior year written premium of €262m. Prior
year pre-tax profits were €20m. This modest growth in premium written was achieved in what
continued to be challenging market conditions with price erosion experience in most of the segments
operated in by the Company. The Company has seen increased competition in most of its major lines of
business as additional capital entered the market again 2016 putting renewed pressure on pricing and
contract terms and conditions. Despite this some opportunities were identified during the year which
provided the growth seen. Outside of these opportunities the strategy of the Company was to defend
and retain, to the extent possible, the existing portfolio of business, to leverage our underwriters’
technical abilities and to remain focused on discipline in terms of underwriting decisions.

The Company purchases reinsurance on the business it writes to protect it against adverse performance
and to efficiently manage capital. The Company’s external reinsurance purchases are in the form of
both excess of loss and quota share agreements. In addition, the Company cedes 85% of its net retained
premium under a quota share agreement with a related group entity, Arch Reinsurance Ltd, a Bermuda
domiciled company with $10.5 billion (2015: $7.1 billion) of capital, comprised of shareholders’ equity
and debt as at 31 December 2016.

There were no material changes in the Company’s systems of governance or risk profile during the year.
However there was a material reduction in claims outstanding, compared to 2015, following the
successful commutation of a large loss portfolio transaction during the year. There was a corresponding
impact on reinsurers shares outstanding claims following this commutation.
The Company’s SCR coverage ratio as at 31 December 2016 was 214% with own funds of €426m and a
Solvency Capital Requirement (SCR) of €199m. There were no material changes in SCR during the year.
The Company has a strong capital base enabling it to meet its solvency requirements and to facility the
level of activity anticipated throughout the planning period and within the Company’s Own Risk and
Solvency Assessment (“ORSA”).

ARE Solvency and Financial Condition Report – 2016 1
SECTION A – BUSINESS AND PERFORMANCE
A.1 Business
A.1.1 Name and Legal Form of the Undertaking
ARE is incorporated in Ireland as a designated activity company (“dac”). A dac is a corporate form for a
private company limited by shares, which activities are limited by its objects clause, and its constitution
comprises a memorandum and articles of association. The address of the registered office of the
Company is:
Level 2, Block 3, The Oval
160 Shelbourne Road, Ballsbridge
Dublin 4, Ireland

This Solvency and Financial Condition Report (“SFCR”) covers ARE on a solo basis.
A.1.2 Insurance Supervisor and Group Supervisor
Insurance Supervisor
Central Bank of Ireland (“CBI”)
PO Box 559
Dublin 1, Ireland
Group Supervisor
Bermuda Monetary Authority (“BMA”)
BMA House
43 Victoria Street
Hamilton HM 12 Bermuda

A.1.3 External Auditor
PricewaterhouseCoopers
One Spencer Dock
North Wall Quay
Dublin 1, Ireland

A.1.4 Description of the ownership details including proportion of ownership interest
Arch Financial Holdings Europe II Limited, a private company limited by shares and incorporated in
Ireland, owns 100% of the equity share capital of the Company.
A.1.5 Group Structure
The Company’s ultimate parent and ultimate controlling party is ACGL, a Bermuda public limited liability
company. ACGL prepares group financial statements and is the largest group for which group financial
statements are drawn up and of which the Company is a member. Copies of the ACGL group financial
statements are available on ACGL’s website located at www.archcapgroup.com or on the website of the
U.S. Securities and Exchange Commission located at www.sec.gov.
An organization chart illustrating ARE’s position in the Group is included as Appendix 1.
ARE Solvency and Financial Condition Report – 2016 2
A.1.6 Material Lines of Business and Geographical areas where business is conducted
The following tables set forth summary information regarding net premiums written, by major business
line and geographical region for the year to December 31 2016;

Gross Written Premium
Major line of business (000 EUR)
Casualty 73,681
Other Property 18,494
Other Specialty 185,132
Property Cat 1,331
Marine and Other 1,121
Grand Total 279,759

Gross Written Premium
Geographic Region (000 EUR)
Asia and Pacific 40,088
Europe 197,930
North America 3,995
Other 37,746
Grand Total 279,759

A.1.7 Significant Business or Other Events
No significant business or other events occurred during 2016 that had a material impact on the
Company.

A.2 Underwriting Performance
Since the Company prepares its financial statements in accordance with Generally Accepted Accounting
Practice (“GAAP”) in Ireland (accounting standards issued by the Financial Reporting Council of the UK,
including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and
Republic of Ireland and promulgated by the Institute of Chartered Accountants in Ireland and Irish law),
the underwriting performance information given in this section is on an GAAP (Ireland) basis. The
following table summarizes the performance, by major line of business in Euro ‘000, for the technical
account for year ended 31 December 2016.
ARE Solvency and Financial Condition Report – 2016 3
Casualty Other Property Other Specialty Property Cat Marine & Total YTD
Other
€'000 €'000 €'000 €'000 €'000 €'000
Gross premiums written 73,681 18,494 185,132 1,331 1,121 279,759
Net premiums written 9,220 2,675 23,203 70 157 35,324
Net premiums earned 9,225 2,531 22,266 111 107 34,241
Other underwriting-related fee income - - (2,223) - (2,223)
Net Losses and LAE 7,957 954 13,669 (267) 27 22,340
Net Acquisition expenses – GAAP (13,406) (2,772) (3,227) (339) (14) (19,759)
Other operating expenses - GAAP 6,688 4,145 16,789 111 104 27,836
GAAP underwriting profit (loss) 7,987 204 (7,188) 606 (9) 1,601
GAAP net ratios:
Losses and LAE 70.94% 37.7% 61.39% -241.43% 25.35% 61.12%
Acquisition expenses -145.33% -109.51% -14.49% -305.82% -13.38% -57.71%
Other operating expenses (Incl DKK fee) 72.49% 163.74% 85.39% 99.9% 96.51% 87.79%
Combined ratio -1.89% 91.92% 132.28% -447.35% 108.47% 91.2%
The above table does not include items such as income investment income and realized and unrealized
gains and losses including those relating to foreign exchange.
Qualitative discussion – major lines of business:
2016 to 2015 comparison:
Gross written premium for 2016 was €279.8m, prior to cessions to the Company’s retrocessionaires.
This compares to €262.1m in 2015. Overall the business volumes were flat with some growth seen with
the Other Specialty lines and Other Property although this was offset by lower activity in other lines
including Casualty and Property Cat. The loss ratio for 2016 was 61.1% compared to 51.7% for same
period in 2015. This differential is reflective of certain items including favorable loss development
occurring in 2015 which were not repeated in 2016. The net underwriting profit for 2016 was €1.6m,
excluding investment income and realized gains and losses and other non-underwriting items. The
equivalent result for 2015 was a profit of €8.5m.
Casualty
In the Casualty area the Company’s focus is on providing coverage to ceding company clients on third
party liability products like motor, employers’, general and/or professional liability, primarily on a treaty
basis. Our main markets are in Continental Europe, United Kingdom and Ireland. We are active in
exploring other European territories as well.
The Casualty reinsurance market remains competitive with the exception of some niche areas on which
we concentrated our efforts.
The performance across the Company’s Casualty book is well within expectations overall.
Other Property
The Company provides coverage for both personal lines and commercial property exposures and
principally covers buildings, structures, equipment and contents. On the treaty side we have seen little
growth with most of our business being from multiline bouquet covers we participate on in Europe and
Israel. Rate pressure in this line continued in 2016 and in 2017.
The Company’s Property Facultative business is written by two teams based in London and Zurich. Both
teams have found the market challenging in 2016 largely due larger ceding companies retaining more
ARE Solvency and Financial Condition Report – 2016 4
risks on their own balance sheet. Notwithstanding this the team has managed to generate new
opportunities to supplement this lost income by more intense marketing efforts.
Whilst the European market has seen some increase in risk losses there was little claims activity in our
portfolio.
Other Specialty
Within the Other Specialty unit the Company provides coverage to ceding company clients for surety,
accident and health, workers’ compensation catastrophe, agriculture, trade credit and political risk and
proportional motor liability. Geographically we run most of those lines on highly diversified a world-
wide basis excluding the United States.
In trade credit & surety the reinsurance market has continued to be competitive due to ample capacity
as other reinsurers have sought diversification into specialty lines. The Company has maintained to stay
relevant with its clients base and develops new opportunities that may emerge in these tough
conditions. The performance of this line meets our expectations.
The agriculture team was able to increase its participations in a few markets which experienced tight
capacity on favourable terms and conditions. As for performance our agriculture book meets our
expectations.
The accident and health part of Other Specialty experiences flat premium writings in 2016 as price
competition and disciplined underwriting result in few new opportunities. In the Cat and per risk excess
of loss part of the book competition is strong. The supplemental health activity during 2016 continued
to focus mainly on a small number of core relationships on the Continent. Premium in 2016 reduced
slightly in this product following a drop in demand. The book performed as expected.
Marine and other
The Company has Marine activity in some legacy accounts and some ancillary premium relating to
terrorism.

ARE Solvency and Financial Condition Report – 2016 5
A.3 Investment Performance
ARE invests in a diversified portfolio of highly rated securities. Fixed income securities comprise the
majority of the Company’s investment assets. In addition to fixed income the company also holds some
short term cash or cash equivalent securities and an investment in a limited partnership which is value
using the equity method. The following table summarizes our invested assets by asset class (sub-class in
the case of fixed income securities).
Position Description Moody’s Rating S&P Rating Market Value
(€’000)
Fixed & Short Term Investments
Asset Backed Securities Aaa AAA 6,873
Commercial Mortgage Backed
Securities Aaa NA 3,602
Corporates Aa1 AA+ 62,683
Non US Government Aa1 AAA 143,027
Short Term Aa1 AAA 25,587
US Govt & Agency Aaa AA+ 74,501
Equity method investments
Limited partnership investment 13,891
TOTAL_ASSETS Aa1 AA+ 330,164

The components of net investment income included in the statement of income and expenses are as per
the table below.
Asset classes 2016 (€’000) 2015 (€’000)
Fixed income securities:
Investment income 2,628 2,822
Realised gains and losses 4,202 15,524
Unrealised gains/losses including foreign currency gains/losses 438 (4,083)
Cash & cash equivalents:
Investment income 7 -
Unrealised gains/losses including foreign currency gains/losses (1) -
Investments valued under equity method:
Income /losses 5,346 3,398
Investment expenses (593) (628)
Total investment income 12,027 17,033

ARE Solvency and Financial Condition Report – 2016 6
A.4 Performance of other activities
The following table summarizes the profit and loss account in Euro for the non-technical account for
year ended 31 December 2016 and year ended 31 December 2015.
Year Ended Year Ended
31/12/2016 31/12/2015

€’000 €’000
Balance on the technical account 29,087 21,575

Net investment return included in the non-technical account (455) (628)

Profit on ordinary activities before taxation 28,632 20,947
Tax on profit on ordinary activities (1,511) (1,079)
Profit on ordinary activities after taxation 27,121 19,868

There were no material other income or expenses during the year.
A.5 Any other information
No other material information to report as of 31 December 2016.

ARE Solvency and Financial Condition Report – 2016 7