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By CYRIL TUOHY, managing editor of Risk & Insurance®

Arch Capital Group Ltd., the Bermuda-based worldwide insurer and reinsurer, reported a 21 percent plunge in second-quarter net income to $152.1 million, or $2.43 per share, compared with $192.3 million, or $2.92 per share, in the year-ago period.

The company reported an 87.2 combined ratio for the period, up one-tenth of a percent from the year-ago period. Arch Capital President and CEO Constantine Iordanu said the ratio was "satisfactory in the current environment."

Iordanu said that, even in the midst of slightly firming prices, insured values are dropping because of the recession, reduced payrolls and lower sales. With companies retaining more risk, what they are buying tends to be coverage with lower limits.

"Despite an improvement in the rate environment, current economic conditions are still having a negative effect on our customers," said Iordanu, speaking to analysts last week in the company's quarterly earnings conference call.

ENDURING

Second-quarter profits for Bermuda-based Endurance Specialty Holdings Ltd. soared 57 percent to $149.1 million, or $2.42 a share, compared with $103.3 million, or $1.54 a share, in the year-ago period ended June 30, the company reported this week.

CEO Kenneth LeStrange said the numbers represented "outstanding operating results" and positioned the company well going into the second half of the year and the peak of the hurricane season.

A decline in net premiums written in the insurance segment was more than offset by increases in net premiums written by the company's reinsurance segment and investment income, the company reported.

INSURANCE DOWN

Net written premium in Endurance's insurance segment in the second quarter plunged 34.4 percent from a year ago to $153.8 million due to the firm's exit from the California workers' compensation market and the U.K. property market, according to Endurance's Chief Financial Officer Mike McGuire.

Still, despite the premium decline, the company's insurance segment was profitable thanks in part to premium growth in casualty and professional liability lines and favorable prior year loss reserve developments, said McGuire.

In addition, a 10 percent growth in the number of in-force agricultural policies and higher prices for agricultural commodities insured by the company helped the segment.

"We've ceded nonirrigated cotton exposure to the federal government," said LeStrange. "We take exposures to crops that are irrigated and other crops are coming in nicely."

The combined ratio for the company's insurance segment was 94.9 percent, an improvement of 3.8 percentage points from the year-ago period.

For Arch's insurance segment, the company reported second-quarter net premiums written of $419.3 million, down only 0.5 percent from $421.5 million in the year-ago period.

Second-quarter gross premiums in the insurance segment of $636.6 million rose by 2.4 percent over the year-ago quarter due to renewal rate increases in Arch's executive assurance business and new policies covering construction and property risks, the company reported.

Travel and accident and large construction accounts are coming to Arch "due to difficulties of certain of our competitors in these sectors," said Iordanu.

Increases in premiums coming from directors' and officers' (D&O) liability lines were due to price increases for existing clients and new clients coming to Arch for the first time, he also said.

REINSURANCE HEALTHY

And Arch's reinsurance segment fared better compared with the insurance segment in this latest reporting period, according to the numbers. The reinsurance segment booked $274.5 million in net written premium in the second quarter, up 3.7 percent over the $264.6 million in the second quarter of 2008.

Executive Vice President and Chief Financial Officer John C.R. Hele said the increase was due in part to the renewal of a two-year, $42 million treaty in the company's property business, and the nonrenewal of a specialty "nonstandard auto treaty."

"Our volume in property and property-catastrophe grew," he said. "Growth is coming in our treaty and our facultative books of business."

The outlook with regard to price levels, profitability and growth for property-catastrophe lines remains strong as buyers flock to reinsurers with strong balance sheets, Hele also said.

With Endurance's reinsurance segment, the company reported that net written premium jumped 38.8 percent to $326.3 million compared with the year-ago period, thanks to the company's property, casualty and property-catastrophe reinsurance lines.

LeStrange termed the overall premium growth in Endurance's reinsurance segment "healthy."

The strong year-on-year growth of the company's casualty reinsurance book, albeit from a small premium base, was driven by three new "sizeable" quota-share treaties, said LeStrange.

The segment's combined ratio of 84.1 percent was up 6.5 percentage points from the second quarter of 2008, due to "reduced favorable prior loss-reserve development," said McGuire.

THE SAVING GRACE

But Endurance's saving grace appeared to be its investment results.

Income from the company's investment portfolio shot up 46.9 percent, or $28.4 million, for the quarter compared with the year-ago period, the company also reported.

McGuire said the improved investment results were due to "more stability in the capital markets and better valuations in most sectors."

Arch did not do as well. The company reported second-quarter net investment income of $100.5 million, or $1.60 per share, down 14.1 percent from the $117.1 million, or $1.78 per share in the year-ago period.

The losses were due primarily to a drop in the value of mortgage-backed and asset-backed securities and a share repurchase program, the company also said.

Iordanu said the company would continue with a "cautious" investment strategy given the recent intervention of governments in the capital markets around the world.

"We remain cautious in our investment strategy as we believe that governmental responses and stimulus packages across the global will eventually create significant inflationary pressures," he said.

August 3, 2009

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