A champion of innovation

While Arch Capital Group is not immune to the tough market conditions that have enveloped the industry in recent years, it does boast some distinct advantages that have allowed it to sidestep the more problematic parts of the business.

Arch’s biggest differentiator is its diversification. Since it was formed in 2001 in the aftermath of the 9/11 terrorist attacks in New York, the company was different from its peers in that it opted to write both primary business and reinsurance from the start.

The advantages it has developed since then are better attributed to the leadership and vision of Constantine ‘Dinos’ Iordanou, its chairman (since 2009) and chief executive since 2003, who has been instrumental in the company and its strategic direction since its inception. He has always championed the importance of talent and innovation within the company and this philosophy has paid off.

One of the recent moves the company made was in early 2014 when it moved into the mortgage insurance business by acquiring the assets of the bankrupt Private Mortgage Insurance company, or PMI, for approximately $300 million.

Iordanou sees this foothold in the mortgage business as offering the company a third leg of diversified income that doesn’t correlate with its primary and reinsurance businesses. That diversification has allowed it to enjoy continued growth and solid results at a time when others in the industry have floundered.

“I suppose some might call it innovative, but it is not a new product line for the market, of course, but it was for us and it does offer a separate earnings stream. It was a decision to enter a new sector of the insurance business that we felt was appropriate at the time and which offered opportunities based on economic conditions and macro economic factors,” Iordanou says.

Even within this space, Arch is not content merely to build a primary mortgage business. The company has again embraced innovation—it is one of just two companies that have introduced a risk-based pricing product into the market.

“We are trying to assess the risk in a different way than the industry has traditionally,” Iordanou says. “We do view that as innovation. We are trying to develop a more appropriate product for the customer that is based on the true characteristics of the risk.”

The move into the mortgage insurance business is a part of the reason Arch’s destiny is in its own hands, protecting it from the flurry of consolidations taking place elsewhere in the insurance industry. Iordanou says this is a good position to be in for a company amid turmoil and change elsewhere in the industry.

“We have our own path and we will try to grow in a different fashion,” he says. “Five years ago we did not have the mortgage operations, yet now that adds significantly to our business and it will accelerate in the future. We did not make a traditional acquisition yet it allowed us to expand capacity into that sector.”

He offers a warning of the perils of pursuing consolidation for the wrong reasons. “When you are doing an acquisition or a merger for strategic reasons, you need to be very careful,” he says.

“The integration of firms can be very disruptive; it can change the underwriting culture, for instance. When you bring the culture of two companies together, there can be a lot of spillage.

“There are some deals that have been very strategic and make sense, I would put the ACE-Chubb deal into this category and probably XL-Catlin. But simply looking at consolidation to get bigger is not worth it. Any positives will be more than outweighed by consolidation risks, and those sorts of deals do not excite us.”

Developing talent within

Driven and informed by his own career path within the industry as a young ambitious executive working for the likes of AIG and Berkshire Hathaway, Iordanou has a strong belief in securing and nurturing talented executives.

“We do like to promote from within,” he says. “We have a leadership group of talented individuals who we try to identify at an early stage. We give them exposure to different areas of the business and we look to them as the managers of the future. We also have close links with St. John’s University’s School of Risk Management.”