Q1 2022 Arch Capital Group Ltd Earnings Call

April 28, 2022

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Good day, ladies and gentlemen, and welcome to the first quarter 2020 to arch Capital Group earnings Conference call.

At this time all participants are in a listen only mode.

We will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference call is being recorded.

Before the company gets started with its update management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward looking statements under the federal Securities laws.

These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Consequently, actual results may differ materially from those expressed or implied.

For more information on the risks and other factors that may affect future performance investors should review periodic reports that are filed by the company with the SEC from time to time.

Additionally, certain statements contained in the call that are not based on historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

The company intends to forward looking statements in the call to be subject to the safe Harbor created thereby.

Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website.

I would now like to introduce your host for today's conference Mr. Mark Grandison and Mr. Francois Morin Sirs you may begin.

Thank you very much good morning, and welcome to <unk> earnings call for the first quarter of 2022.

<unk> delivered a strong first quarter as our dynamic capital allocation and cycle management strategy combined with strong underwriting skills delivered a $13 six.

<unk> operating Roe.

Past quarter provided yet another reminder.

In a world of uncertainty.

The war in Ukraine has affected countless lives and initiated a humanitarian crisis that is still unfolding and the pandemic continues now into year three.

In addition to the war in Ukraine.

Global inflation and supply chain issues pushed pushed interest rates up which in turn led to investment markdowns in the quarter.

In spite of these headwinds for our industry, we demonstrated the effectiveness of our diversified platform as one we grew premium above market average again to repurchased five 6 million shares and three generated a strong operating ROA.

Our objective remains as always to deliver long term value for our shareholders using all the levers available to us.

The underlying fundamentals of our business has continued to improve as we benefit from better market conditions in the P&C industry and execute our cycle management strategy, where we actively allocate capital to the most attractive sectors of our business.

Our P&C operations generated $2 $3 billion of net written premium in the quarter, which represents an increase of 18% from the same quarter in 2021 and speaks to our confidence in the improving underwriting conditions in our P&C operations mortgage <unk>.

<unk> contributed substantial underwriting profit in the quarter and insurance in force grew modestly again, highlighting that mortgage remains a positive differentiator of our business model.

Now inflation, it's top of mind for everyone in the P&C industry, which through its credit has historically been at depth at adequately respond to inflation trends inflation is not a new phenomenon and in fact, it permeates discussions in evaluating claims all the time.

<unk> and an insurance company.

As such our focus is always on proactively incorporating new data into our reserving and pricing.

We believe that this focus in addition to increased future investment returns and reserving prudently will help mitigate inflation impact.

As far as our mortgage business is concerned.

Inflation, mainly has a positive effect.

It increases <unk> equity, which again mitigate potential losses.

I'll now share a few highlights from our segments.

Across most lines, our P&C units remain in a growth phase of the underwriting cycle. According to falling rates insurance clock in the quarter. Our P&C net premiums earned grew by 25% over the first quarter of 2021 as we continue to earn in the rate increases over the past 24 months.

Our data indicates that we are still experiencing average rate increases in excess of expected loss cost.

And specialty insurance underwriting conditions remained very good as pricing discipline terms and conditions and limit management are stable across most markets. This stability combined with the uncertainties I mentioned at the beginning of this call should help keep the market discipline and sustained.

Rate increases.

Our specialty business in Lloyds and our UK regional business delivered strong growth in the quarter as our European insurance operations now represent 30% of Arts Insurances total net written premium up from 20% pre pandemic. We're pleased to see deposit results of the investments we.

Aid into this platform prior to 2020.

We also created meaningful growth across our U S operations in the quarter, primarily in professional liability, including cyber as well as travel where we believe relative returns are attractive.

On the reinsurance side of the of our business the.

The emphasis remains on quota share treaties over excess of loss reinsurance.

This allows arch to participate in the rate increases on primary reinsurance, while improving the balance between the risk and the return overall in our reinsurance group growth opportunities remains strong.

Since it's been a talking point on prior calls it's worth noting that although property cat rates have improved in response to elevated loss activity in the past few years, we have remained disciplined and have not allocated material additional capital to this line as we maintain I'll review that other lines of business have better risks.

Adjusted returns.

Turning now to the mortgage segment, which once again delivered excellent underwriting results as we continued to benefit from strong housing demand and excellent credit conditions.

Quincy rates on our <unk> portfolio continued to trend to a historically low level levels and cures on delinquent mortgages in our portfolio resulted in favorable prior development in the quarter.

The increase in mortgage interest rates currently at 5% for 30 year fixed rate mortgages is a steeper rise than we have seen in decades.

These higher rates have dramatically curtailed refinancing however, our MA business is far more geared to the purchase market, which continues to benefit from strong demand and limited housing supply of note the decline in refinancing activity improves persistency, which in turn should improve returns.

<unk> on our in force portfolio.

While the rise in mortgage rates may ultimately cool demand and slow the rapid home price appreciation of the last year. So far we have yet to see demand weaken and we expect home prices to continue to rise, albeit at a slower pace again as mentioned earlier rising home prices rising home prices.

<unk> equity for homeowners, which ultimately reduces the risk of claim and mortgage insurance.

So our perspective is that this expected future equity buildup and the strong credit profiles of borrowers to strengthen the resilience of our enforce mortgage portfolio moving forward, our diversified platform and cycle management philosophy will enable our team to continue to make measured responsible decisions with our capital our.

<unk> group as a flexibility to grow or moderate the business they choose to write based on their view of market conditions.

Few brief notes on investments were net investment income was down from last quarter as we reduced risk positions, primarily equities given increasing market volatility.

Rising interest rates also will cause mark to market losses in the quarter. However, the relatively short duration of our investment portfolio as well as our healthy cash flow will naturally allow us to reinvest at higher interest rates, which should be reflected in future quarters.

In closing.

Even with current uncertainties.

Opportunities exist in the quarter harsh was able to deliver strong results with with positive growth across its businesses and we're well positioned to sustain our growth trajectory in this favorable P&C market, we've consistently demonstrated our ability to allocate capital effectively to the areas of our business with the most attractive returns.

As you know with arch, we are constantly looking for and seizing the opportunities that offer the best returns for our shareholders.

Well.

Thank you Mark and good morning to all thanks for joining us today as.

As Mark shared earlier, our P&C units remained on their path of underlying margin improvement while the mortgage group delivered another quarter of strong underlying performance, which was supplemented by solid cure activity in their insured loan portfolio over.

Overall, our results translated into an after tax operating income of $1 10 per share for the quarter and an annualized operating return on average common equity of 13, 6%.

In the insurance segment net written premium grew 21, 3% over the same quarter one year ago.

Growth was particularly strong within our professional liability and travel business units.

Was achieved both in North America and internationally.

Underwriting performance was excellent with an accident quarter combined ratio, excluding cats of 98%, a 250 basis point improvement over the same quarter one year ago.

Similar to last quarter, a change in our business mix as a result of more pronounced growth in lines of business with lower loss ratios helps explain some of the 470 basis point improvement that we observed in our underlying loss ratio.

This benefit was slightly offset by a higher acquisition expense ratio.

Increased contingent commission accruals unprofitable business and lower levels of seeded business for lines with higher ceding Commission offsets also slightly increased the expense ratio.

As we have said before our focus remains on improving our expected returns through a variety of levers and we are encouraged to see that our efforts are paying off for our shareholders.

In the reinsurance segment, it's worth mentioning that reinsurance agreements that were put in place at the time of the closing of the summer's acquisition in the third quarter of last year may.

May comparisons from the current to prior periods imperfect.

For example, while our reported growth in net written premium remained solid at 14% on a quarter over quarter basis.

Would have been 26, 6% after adjusting for the summer session.

The growth came primarily in our casualty and other specialty lines, where rate increases new business opportunities and growth in existing accounts helped increase the top line.

The segment produced a next GAAP accident year combined ratio of 82, 7% in.

And excellent results as we continue to enjoy healthy underwriting conditions in most of the lines that we write.

Losses from first quarter catastrophic events net of reinsurance recoverable and reinstatement premiums stood at $85 8 million or 4.0 combined ratio points compared to 10, five combined ratio points in the first quarter of 2021.

Approximately two thirds of the estimated losses came from the Russia invasion of Ukraine with the rest coming from other global natural catastrophe events, including the Australian floods.

Our mortgage segment had an excellent quarter with with a combined ratio of three 1%.

Due in large part to favorable prior year development of 105, $105 6 million.

In line with last quarter's results net premiums earned decreased on a sequential basis due to a combination of higher levels of ceded premiums a lower level of earnings from single premium policy terminations and reduced U S primary mortgage insurance monthly premiums primarily from recent originations.

Which remain of excellent credit quality.

Production levels were down slightly from last quarter, but certainly in line with seasonal trends and new purchases and diminishing refinancing opportunities for borrowers as.

As we have discussed on prior calls one of the benefits of higher interest rates as an improving persistency rate, which now stands at 66, 9% and should continue to increase throughout 2022.

Ultimately higher persistency benefits our insurance in force and should result in a stable base of premium income to help drive underwriting income for the rest of the year and beyond.

And with respect to claim activity approximately three quarters of the favorable claim development came from our first lien insured portfolio at U S. Semi as we benefited from better than expected cure activity, mostly related to the 2020 accident year.

The remainder of the favorable development came from recoveries on second lien loans and better than expected claim development in our CRT portfolio and our international operations.

We maintain a prudent approach in setting loss reserves in light of the uncertainty we are facing with borrowers exiting forbearance programs and moratoriums on foreclosures.

Income from operating affiliates stood at $24 5 million and it was generated from good results across our various investments, including Colfax summers and premier.

Total investment return for our investment portfolio was a negative 3.07% on a us dollar basis for the quarter, which explains the decrease in our book value per share to $32 18 at March 31.

Down four 1% in the quarter the.

The decrease was primarily due to the mark to market impact for our available for sale fixed maturities portfolio, resulting in a $1 55 hit to our book value per share.

This quarter, the meaningful increase in interest rates and negative returns in the equity markets contributed to the negative total return.

As you know we have maintained a relatively short duration in our investment portfolio for some time.

And this strategy helped temper the mark to market hit to book value in the first quarter.

While still relatively short we have extended our duration slightly to 293 years at the end of the quarter in order to get closer to our duration target.

The change in net investment income this quarter on a sequential basis was mostly due to a lower level of dividends as we shifted out of some equity positions and higher investment expenses related to incentive compensation payments as is normal for us in the first quarter of the year.

Going forward, we would expect net investment income to increase over the next few quarters as our portfolio gets reinvested at higher yields at the end of the quarter, new money yields were approximately 145 basis points higher than the embedded book yields in our fixed income portfolio.

Alternative investments, representing approximately 15% of our total portfolio returned to one 4% in the quarter.

The performance of our alternative investments as <unk>.

Generally reported on a one quarter lag.

I wanted to spend a brief moment on corporate expenses and what you should expect for the rest of the year as you know the first quarter is always elevated relative to the other quarters due to the timing of incentive compensation accruals. This year. You should also have slightly you should also expect a slightly higher amount in the second quarter.

Again due to our accounting policy for noncash compensation for retirement eligible employees. As a result, we expect corporate expenses to be approximately $25 million in the second quarter before coming down to a level closer to the 2021 amounts for the third and fourth quarters.

Turning briefly to risk management, our natural cat <unk> on a net basis stood at $768 million as of April one or six 4% of tangible shareholders' equity again, well below our internal limits at the single event. One in 250 year return level, our peak zone P&L is currently.

The Florida Tri County region.

On the capital front, we repurchased approximately $5 6 million common shares at an aggregate cost of $255 million in the first quarter, our remaining share repurchase authorization currently stands at $927 2 million.

With these introductory comments, we are now prepared to take your questions.

Thank you.

I have a question at this time. Please press the Star then the number one key on your Touchtone telephone.

<unk> has been answered or you wish to remove yourself from the queue. Please press the pound key.

If you are using a speaker phone please lift the handset.

Our first question comes from Jimmy Buhler with J P. Morgan.

Hey, good morning, So I had a question first just on the expense ratio and I guess, if you could discuss a little bit more how much of it is just because of a mix shift in the business. We are some of the lines that entail a higher loss ratio.

Our lower loss ratio, but higher expense ratio are growing faster.

Whereas as incentive comp or other expenses that might sustain through the rest of the year.

Well I think to me.

Way to think about it is I mean, if you want to focus on operating expenses is where all the incentive comp payments.

Vessels will come through so that.

That you can easily see that our track record the last.

12 months, where you see in Q1, there is higher and then it levels off for the second through fourth quarters. So that should give you a good idea of how to project out the rest I would say.

I'd like to think of it in combination in loss and acquisition to me are we can't think of them separately. They have they go together there is offsets that we think about it.

When we write the business so.

Ultimately the way, we certainly think about the whole.

And the underwriting performance is the combined ratio and.

Yes, that's how I suggest you maybe think about it I think from a perspective of acquisition expense I think that the mix has shifted over the last couple of years. So I think I would probably look at the last one quarter or two quarters.

Indication for the future because our mix is shifting in that direction. So it is clearly and as a result of that you see the loss ratio expectations actually coming down which makes sense based on what <unk> mentioned.

And then on your GAAP losses, I think you mentioned that a majority of the cat losses that were booked this quarter were Russia related and I'm, assuming most of those are I'd DNR.

But if you could give some color on that and then Relatedly you have in the past indicated what you had in terms of Coalbed reserves.

Most of those whether it'd be in ours as well, but if you can talk about.

What you would need to see to be able to start the <unk>.

Leasing some of those reserves related to Covid.

Yes, so I'll start with Ukraine, I think Ukraine again very early to me its somewhat similar to Covid two years ago.

When it's still ongoing right. So we took a fairly we think are prudent approach at this point based on what we know we think we're going to have some losses, but its all <unk> right to the question really we don't have any claims yet that are.

Certain or we have to set up case reserves for its highly preliminary at this point.

And it's based on kind of some some assess.

Assessment of what we think the overall exposure might be.

So we think we're in.

A good place right now, but we're going to have to monitor it and see how it goes.

In future quarters, and nobody about Covid losses were about 70% <unk> at this point in time, so it's still not finalized by any means.

The magnitude.

While our numbers haven't changed so total reserves right. So with total reserves of Covid is about $160 million.

And 70% of that is Covid, sorry, knuckle IBM IBM.

Thank you.

Yeah.

Our next question comes from Tracy Bengie with Barclays.

Hello, everyone.

Is that the 10.

<unk> 10 year anniversary.

Your insurance setting up there.

<unk> is approaching where it is.

These reserves will be released on that first in first out basis in queue. At this time statutory time and I believe arch has about $3 1 billion of such contingency reserves.

Just wondering if this anniversaries of any significance for arch light does this orderly reserve really improve your ordinary statutory dividend capacity or improve your view on capital allocation in any way.

First of all I mean, the fact that condition reserves no question or a statutory requirement.

They are part of our overall way of operating but I would say they havent really been a constraint in the sense of how how we how we deploy capital where we deployed our ability to.

Come in and out of market. So I think it's certainly something we watch and are aware of but I wanted to make sure that everybody understood that it's not it hasn't been really.

It caused a major issue for us at this point.

You are correct that 10 years, though are we're going to start.

Getting closer to our.

Our ability to release contingent reserves and yes, no question that that effectively shifts the money from contingent reserves that are available surplus too.

Yes.

And what gives us more ability to declare dividends upstream from the semi companies.

That said we are always looking.

And we've been able to do a little bit of that with the regulators in last few years.

On an exception basis and have submitted some plans to them to make it. So that we can actually access of those sounds maybe a bit earlier than would have been.

I guess officially the case with the contingency reserves.

We're still something that we're constantly working on.

Got it.

And also I'd like to touch on the negative marks in your investment portfolio I noticed in your proxy or key key kpis like growth in book value per share our Roe.

These are metrics that arch.

Unrealized gains or losses from your peer Yale. So my question basically is to these negative marks change your view of deployable capital in any way.

No not really I think that the operating the way we look at the operating ROE, It's more of a run rate as to how our core business is performing.

Fully recognizing that a lot of the mark to markets will eventually recover so excluding that we've chosen way back in our history to get a better reflection for how we're performing from a core business perspective, letting the vagaries of the market volatility.

There were over time, that's really all the way to be a bit more.

Forward thinking and looking at how we present our returns outperformance.

Got it and Ken.

Thanks.

Yes.

Our next question comes from Josh Shanker with Bank of America.

Sure.

Yes. Thank you if I go back in time about nine months ago, when I asked you.

About opportunities you have to deploy capital.

Mortgage insurance reinsurance share buybacks acquisitions.

The mortgage issuing pace was hot.

And our reinsurance was attractive still is ceding commissions are up now and maybe with where rates are going mortgage issuance is going to be declining.

Does that make insurance and buybacks more attractive on a relative slate of things you can do right now and.

What's changed about the ROI.

Mortgage and reinsurance over the last six months I think over the last year or just a good question in terms of rank ordering our opportunities right now I think that the growth in premium speaks for itself, it's really an indications where we think.

The value proposition is for our shareholders I think that clearly reinsurance and insurance are close to one another.

Our reinsurance team would argue that they have a better return perspective, we'd like to have these discussions internally, but certainly the P&C has moved up in the rank in terms of top top return I think <unk>.

Second and as you saw on the share repurchase I mean, it's clearly another way for us to deploy capital that's very attractive for for our shareholders. So we have a lot of levers that we can deploy that point in time, but having said this our focus right now is really to grow the business because we have so many good opportunities ahead of us.

And.

The Ukraine crisis has caused.

Skepticism about the.

About the value of trade credit, which has hurt the valuation of co founders.

In terms of your view of the attractiveness of that asset post Ukraine and whether the.

The diminished prices an opportunity do you have any thoughts there.

Well I think first the Ukraine, and Russia area is not a big portion of what companies such as Colfax would be playing into so thats certainly is a smaller footprint.

And a lot of the losses that could emerge or are emerging there'll be short tailed by and large right. It's definitely a shorter term, even though we're not out of the woods yet in terms of developing losses broadly I think on trade credit I am confident that the <unk> team has a good handle as to what their exposures is and I think if I take COVID-19 as an example for you.

Our resilient they are even absence on the government scheme.

I think that we like the resilience and the diversification even within core fad themselves what they provided to the shareholders. So let's just say we're not overly concerned I mean, I think the numbers are going to come today or very recently I think they will have more than way more insight into this but at this point in time, our expectation is that it's it's.

It will have an impact on their results, but not the extent that as always it seems that the market expected and way more.

Downside then actually meets the eye because it is a line of business that I believe is largely misunderstood.

And the way that <unk> and his team has developed.

Deploy risk management is underappreciated I think we'll find that they would do a very very good job in risk managing the portfolio.

And if I can sneak one more in you said that 75% of Covid reserves are still in <unk> is COVID-19 , a long tail or short tail risk and what would you be waiting for it to get better comfort on.

<unk> use or lack thereof of the IV in our reserves.

I think on our short and long tail I would say yes.

So it's both right I mean, there's a lot of things going on and I think.

We certainly saw some of the bi losses, right, Josh last year or even even early or middle of 2020, I think some of them are being resolved as we speak.

I think we're of the mind that this is a big event things have happened built people are still trying to figure out as they recover into this new market. This new environment, and it's still being thrown into it some inflation and more it seems more dislocation. So I think that we may have things coming through.

On the liability side of things eventually it's hard to know what is going to look like but it is clearly clearly a lot that we've never faced before so that's why we will tend to be more prudent that arch has you know us as a lot more uncertainty than in the average loss that we've seen so far in our history and even though the short tail that you would think they will come.

<unk> are going to be litigated and then we'll take your willing to resolve itself. So I mean, we're we're keeping an eye on it but.

We think it's going to be with us for quite a bit longer.

Thank you for all the answers thanks Joshua.

Our next question comes from Ryan Tunis with autonomous.

Hey, Thanks, Good luck.

Are you still there Brian we can't hear you.

Brian you may be on mute.

Yes.

Okay.

Yes, I think Robin just came out somehow.

Oh.

Brian Yes, you guys got me, yes, we got to that low grade.

We got that.

We got there we got it sorry about that.

So yes, I had a reserve question its not as deep and just the last one I don't think but.

What I was curious about is just.

Trying to get a feel for how.

2020 that year has developed.

Obviously, you guys released a lot of reserves from that year.

This quarter and maybe it's something I can calculate myself, but.

Yes, it would have been the total number of reserve releases on the 20 years since you initially booked it.

Oh Boy I don't have that number handy with me.

It's most of it on the ones. We just did that would be most of it.

Because most of the delinquencies and it was the largest cohort in April may of 2022nd quarter and those are the ones that are obviously coming out of foreclosure delinquencies and are being settled so most of it is from the 2020 year.

Do you have a sense I guess large for lake.

If we were to compare what that ultimate is now relative to kind of the year's headed into 2020 are we getting to a point where yes.

On a fully developed basis not year looks like.

Some of the years I'm, just trying to understand like how.

Much more reserve potential there could be.

Yes.

I have to be careful the way I answered I think I would say to you that 2020, and 21 may turn out to be more like a like an average year.

There's a good possibility for that to happen. It's still it's still uncertain. Good we are still going through the forbearance and exiting as we speak it is accelerating.

Really as we speak literally.

So I think 2000, 2021 will turn out to be much more of average years than we had.

Maybe fee when when we talked about in the second quarter of 2020.

Got it and then on.

On the P&C side.

I guess I might be wrong on this but I don't remember there being quite this much.

Volatility with the acquisition costs. It seems like something that is kind of a ramp in that like as you said in the past two to three quarters.

Could you just give us maybe a little bit of a better understanding of.

Why are we seeing more of that now obviously because of the amount of loss ratio improvement.

Going through the business.

The way you structured reinsurance I'm, just kind of trying to collect data we understand what might have changed.

A good question and I would just welcome you to arches way of cycle management, which is moving and pivoting to where the opportunities are so.

It will be probably surprising to you as far as it already and I don't really know what kind of acquisition expense will have any one quarter because our team just make the best evaluation possible as to what's ahead of them and I think on the reinsurance side right. We mentioned in our commentary is that a quarter share focus definitely overtime will increase the acquisition expense.

Ratio and on the on the instrument side of travel for instance, right was really we went down in premium written as you remember Ryan in 2020 is coming back up and that is a historically a high high expense ratio. We also have some programs.

New programs that we've entertained on the insurance side and those will naturally come up with higher acquisition. So I think that it's a really dynamic market I don't think we've seen that kind of market, where we can shuffle around and really pivot.

Make capital allocation or decision to write more one or the other I think you had more of a.

To your point about not having more volatility this quarter than ever before is because we had a very stable to frankly dull market for about five or six years. We were defensive there was really no need for us to shift and we're sort of across the board shifting down our involvement in the P&C side now I think it's way more dynamic and that's why you have this shift around so.

But to your question about the loss ratio the loss ratio itself.

We will find its way naturally whether we write quota share or excess of loss. So the higher the expense ratio frankly, the lower you said you expect the loss ratio to be.

Because it's really a combined ratio of game as we said before so I understand that if it's not easy to pin down we understand but it's really due to the cycle management and what we are in this marketplace.

Understood that makes sense, thanks, guys. Thanks.

Thanks.

Our next question comes from Meyer Shields with K B W.

Thanks, I want to start with one underwriting question.

And maybe it pertains to what you were just talking about Mark.

We have seen year over year written premiums and program basically go down after some very solid growth in the first three quarters of 2021 and is hoping you could talk us through what's going on there.

Yes, and that Theres a bit of noise I think it's really related to the timing of a renewal of a program and when we on boarded one so.

Wouldn't read too much into that.

Meyer I think it's very.

It's a one off I think the earned premium is a better indicator of that.

Trajectory of where we're going here.

Okay, perfect Thats very helpful.

Second question I'm sorry.

Go ahead Mike.

Okay.

A lot very helpful. In terms of the guidance for corporate expenses, there the same sort of accrual trend in the individual segments.

Yes.

Im asking because of the year over year growth in other operating expenses.

Well I mean, it's the same general I mean, the timing is the same it's just that obviously at the corporate and the corporate segment or what you're seeing in corporate expenses.

It's a very I mean, it's a there is yes more more noncash comp that comes into play right and that that is again more tilted to the first quarter.

And.

It's just basically all of it is I mean for the most part that's just comp and benefits versus the opex in.

In the segments has a lot more to it right there is.

Systems there is.

There is a lot more things that you'll never have that much.

Impact or more as much volatility in the segment.

The rules are the same though I mean, when we have people that.

Become retirement age eligible.

It triggers that they're a different kind of accounting or immediate expensing of the noncash comp and thats part of it.

Related I think just the growth in the Opex dollars no question that went up.

And we we look at that we certainly.

I want to make sure that premium is growing faster. So I think the ratio as you saw in all of our segments certainly insurance arrangements went down.

And I think.

The important message here is that.

We've been performing well and we need to pay our people and our people is basically all we have we need to retain that talent and that came through in Q1, as we kind of made incentive comp decisions and Meyer what I would add to this is you can look at that line item either as an expense so as an investment items. So I think from our perspective, we're also.

Investing in our people as you heard from Francois and investing other things right that will improve.

The results over time and Thats.

It's a good time to invest and where we have a growing growing platform moneys coming in so it's a good time to invest so we're really also spending some money to make it more sustainable as a platform.

Okay perfect. Thank you so much.

Welcome.

Our next question comes from Mark Dwelle, with RBC capital markets.

Hey, good morning.

Just a couple of questions we've already covered a lot of ground.

On the Russia, Ukraine losses.

Lines of business or products were impacted there was it your own trade credit or <unk>.

One marine whatever.

Yes, it's a traditional lines you would expect I think that most of our losses come from our exposure at Lloyd's either through from the insurance platform. The reinsurance platform and Thats. What you would expect right. Because this is a specialty lines have been underwritten.

So either through a Lloyd's of London operation. So this is where we're expecting it from.

And some of the trade credit as part of the considerations again like I said. So it's also a part of that as well. So we look look across all lines of business, but I would think London, Lloyd's Aviation Marine War.

The classic Lloyds exposure.

Okay.

And then building on that.

I'm, just trying to make sure I understand it correctly to the extent that co fast encourage losses.

You are picking those up effectively on a one quarter lag basis, so whatever they have youll get your proportional share.

Sure.

How that was run through in the second quarter and so on going forward correct.

100% correct, yes.

Okay.

And then the last question.

Wanted to clarify you made a number of comments related to the investment portfolio.

I understand it correctly, so you're both extending the duration and getting a higher new money yield on.

Both the reinvestment as well as I guess any any new money that youre generating.

Yes, no one year no question I may have mentioned the 145 basis points that is comparing your embedded book yield on the portfolio at the end of the quarter to what we're currently seeing in the market.

And extending the duration is really a bit more of a strategic thing I mean, we were short I mean relative to our benchmark, we got a bit closer to the benchmark.

Just being a bit more of a defensive move I want to make sure we weren't too far off from the target.

In terms of thinking forward, which will have the greater impact on rising investment income it will be the I would assume it would probably be the higher new money rate more so than the duration extension.

Totally.

Yes, we a lesson.

We don't know how quickly the portfolio will turn over but certainly as Mark mentioned, the free cash flow coming in and also.

How quickly that portfolio will churn or either mature or will trade in and out of certain securities.

We'll be able to reinvest at so it will take certainly a few quarters, but as I mentioned I think we will start seeing some benefits.

Starting next quarter and by the end of the year it should be.

Fleet somewhat.

Measurable and meaningful.

Okay. Thank you I appreciate the thoughts.

Okay.

Our next question comes from Yaron <unk> with Jefferies.

Hey, good morning, everybody.

Mike.

My first question and maybe it's just me rephrasing and making sure I'm thinking about it correctly.

And I want you to understand really your focus or your myopic focus is on getting the loss ratio better and you're kind of agnostic as to whether the expense ratio goes up or down as long as the combined ratio comes down because of the loss ratio improves.

Yes, I think youre lapping the combined ratio, which leads to return on equity is what we're focusing on yes.

Yes.

And I should probably be careful with how I phrase. It this way we talk industry here.

Yes.

At some stage you expect in the cycle you expect to see some adverse reserve development and then probably followed by some favorable development I guess, where do you see the industry at today.

And maybe at what point do you start seeing the reported combined ratio improvement coming more from favorable development as opposed to the accident year loss ratio improvement.

Yes, I cant speak really to the.

To the level of reserve in the industry I mean, everybody.

Beauty is in the higher the beholder right, it's kind of difficult for me to opine on this.

In terms of earnings versus pricing cycles, I think it's true that the pricing cycle peaks and in the earnings cycle peaks. Bobby couple two to three years. After so I think that that historically that's been the case, so I would expect.

Earnings if pricing is I don't think nothing in speaking, but once it's peaked.

We should probably have earnings still getting better for a couple of years. After that so we're still very much in the margin improvements still in the market.

So it's a tough question to ask as opposed to what you are and where it's going to come from prior development or current accident year. So thats a different probably different also for every company.

Sure I'd be happy for you to pine on arch, specifically, if you want.

We're doing pretty good.

Okay.

If I could sneak one last one in.

Two thirds of cat losses are related to Russia is that true for both the insurance and reinsurance segments.

It's a good question I mean, directionally, it's about that.

I mean, we might have a bit more.

The non Ukraine cat losses were mostly reinsurance.

Australia floods is where we can that we picked up a bit more from the reinsurance side, but it's directionally. It's about it's not a big difference.

Got it thanks, so much.

Our next question comes from Brian Meredith with UBS.

Hey, Thanks, a couple ones here for you first Mark could you talk a little bit about what you think about.

Opportunities may be in Florida, with the renewal season, it's a lot of turmoil going on down there.

Yes, I can only tell you right now what I, what we hear from our team and what we hear from our teams and including.

Our colleagues.

Brokers and friendly brokers out there or is this going to be a tough renewal.

There's a lot of question marks not a decision that needs to be make it made its too early Brian to call. What is going to look like but people are expecting I think you may have heard some of the call it difficult renewal.

There's a lot of things that need to be fixed in there between the recognition of the litigation that hasnt really start the whole as much as we would've wanted some of the companies are struggling to even survive do you get paid your reinstatement and I understand that the state is also trying to find solution that we probably have an impending discussion from department of insurance as to what they want to do or the direction where they are.

Wanted to in Florida. So we're like you, Brian we're in a wait and wait and see kind of mode.

The one thing I would tell you, which all our shareholders for here is if that's an opportunity. We have we have we have capital to deploy there.

Yes.

So I wanted to see if you got the company and then another one so a couple of stories out last night.

This morning about companies.

Potentially sell themselves.

I'm just curious what your thoughts are on M&A kind of arches view with respect to the M&A environment.

Organic growth opportunity is just too good right now to distract yourself from.

Potential M&A opportunities.

We are broadly equal opportunity kind of company right. We will look at what can be done and what should be done and what makes sense for the shareholders were not.

We're not.

Not looking for transactions necessarily but our history shows that when a transaction come that's accretive to our shareholders, we'll entertain and look at it we certainly have a look at what's out there what what has been discussed as you would expect Brian . So I think we have that.

Probably the best position possible, which is we don't have to do anything we have plenty of opportunity.

And we are in the seat where we can just wait for the pitch to come to us. So I feel very very fortunate to be what we are at arch capital. So we will look at it we look at a bit if we like it will swing if not we'll just let it go by.

Great. Thank you.

Sure.

Our next question comes from Elyse Greenspan with Wells Fargo.

Hi, Thanks, My first question.

I look at your insurance segment.

Quarters in a row, where you guys have grown by more than 20%. It seems some of your comments you guys are pretty bullish about opportunities there, even with perhaps a little bit less right now.

Does this feel like an environment, where you can continue to see pretty robust levels of growth within your insurance segment for this year and beyond.

<unk>.

The answer is yes, Elyse I wonder where you work.

For the call the answer is yes.

Broadly it was probably more of a broad market opportunity probably two years ago now it's refining itself in more certain lines of business as we mentioned before some of the programs. We are seeing a better pickup in pricing in property as we speak right now is getting hard again.

The heels of failing to get the value right as an industry. So listen I think that it's a bit more of an opportunistic I think we still have though the ability and the willingness.

To lean in hard if we see opportunities and we are seeing opportunities. So yes, it's not just not as broad based perhaps as it would've been two years ago.

And then as we think about some stuff that's come up throughout the call. We're dealing with higher inflation also higher interest rate that you guys mentioned can be a tailwind on the investment income side, So where would you put on.

ROE within the P&C business, what do you think thats running at today. When you think about how 2022 could come in I know you've talked about.

Kind of targeting the double digits in the past yes.

Yes.

What do you think things are now I think we can speak for our book of business I think we expect our ROE on the policy year basis, what we write currently to be close to the mid teens I mean, we're really getting there inching every possibly every quarter since since.

The end of 2019.

So yes. This is sort of where we are at least.

Yes pretty much what else was there another part of your question I just want to make sure I think you had something else no.

No.

And then they go up yet again.

And then another one just on.

Buybacks and I think this came up a little bit earlier, when you guys were talking about <unk> in general.

Past move funds that book value you guys. It seems like bought back your stock right within the range of one four book into Q1, I know the shares are a little bit higher today by partially that's a function of the mark to market in the quarter.

So obviously with buybacks that depend upon the growth opportunities, but now it seems like you guys.

There'll be willing to buy back your stock.

This is the valuation today.

I think Thats fair I think listen I mean again, the multiple is not something we will.

Focus when we look at it but again I think on the heels of Mark's answer out to your earlier question I think.

We like our prospects I mean, we think the forward looking ROE that we have in front of US are are very attractive. We think the stock is priced relatively attractively for us.

And.

Depending on what opportunities come our way and how we can deploy the capital share buybacks are always part of the solution or part of the part of the how we deploy our capital.

Thanks for the color.

Thanks.

Yes.

Our next question comes from Tracy <unk> with Barclays.

Thank you so much for it takes me on again.

I noticed that you increased your reinsurance cat writings by 10% this quarter and I recognize you're underweight on Pn Monster Archie peers. It's still can you breakdown how meaningful is it ground chicken by exposure increases experienced as rate increases.

And if you could just comment about your overall risk appetite.

Cat risk balancing price inflation.

Hi management.

Yes in terms of appetite we've been relatively neutral for the recent last few quarters I mean, we haven't grown I mean this again this is a bit of a.

A slight one off in terms of the you saw the growth in our premium just the timing of a renewal we had like a 14 month premium that.

Program that fell in different quarters, so again wouldn't read too much into the $1 of growth in the quarter.

But.

We still we're still players in the space, we still say and believed that we need to.

Get a bit more to really put the.

The pedal to the metal and.

We'll see where it goes on the cat exposure Tracy.

I think that we look at how we deploy it where you could deploy it through <unk> you could do it for auto quota shares of some marine.

It's coming from many lines of business and I think that for the last 18 months or 24 months because of the significant increases in TNC changes improvements on the property and large property property segment in general that our deployment of capital from the from the Cat perspective has been more towards quota share reinsurance.

<unk>.

And I think the <unk> sale has been lagging frankly in terms of pricing and we've said that more than once so I think that the.

Again, that's another one that the similar answer to the program that I answered to my earlier, which is the earned premium is probably a better indicator of our relative growth.

Growth on non growth in this case in the property cat space.

Okay, Great and just one real quick follow up on Lisa's.

Question.

I felt like last quarter, you kind of alluded to that you could buy back stock above the one three times just given your view of intrinsic value.

I don't know if the economies were fully appreciated.

You could flesh out your being lumpy.

You think intrinsic value there in my book and how that plays.

Well, it's part of the forward looking ROE. So no question that there is significant embedded value that's built into the semi book and we have good visibility on that we're very bullish on it and that gives us even more comfort that.

There is significant value in the stock so as we think about buybacks I mean, no question that from our side, it's fully factored in.

Okay. Thanks.

Thanks Tracy.

Our next question comes from Michael Phillips with Morgan Stanley .

Hey, Thanks, just one follow up for me inspecting them off for a second.

I'm trying to trying to marry your earlier comments on the rank order of capital allocation and you put in my second behind P&C, which obviously makes sense given the fundamentals of the P&C book right now.

But if we take that and then look at earlier comments opening comments, which were pretty positive on their my space I'm trying to figure out how to think about any help you can give us some thinking about growth for the Ams business given what we saw this quarter growth over the next year.

Yes.

Well I think we are.

It's hard to see from the way we report, but I think the growth we have a fair amount of growth through the CRT. We also have a very healthy CRT, which is a credit risk transfer programs from the GSE.

Also have as you know taking on the mortgage.

The mortgage company that was owned by a doublet by Westpac in Australia. So thats also seeing some growth.

In the U S. I mean, we expect to put I mean, we have to.

Remember the production was record for 2020 in 2021, so it's kind of hard to grow from there significantly so the market itself.

While we will might be decreasing a little bit so, we'll see where it shakes up definitely.

Financing is.

It's very very much.

And very much pretty much behind us because of the mortgage rate increases with a six months so.

I wouldn't say I wouldn't say that new production is at.

No.

It does it by virtue of the size of the market on the U S semi sort of shrinking somewhat from the refining refinancing perspective, but what is happening because of this mortgage rates increasing the premium written will be much more stable and actually could increase because of the lack of refinancing precisely which means the insurance in force will increase.

<unk>, which will give some lift into our ongoing written premiums. So even though we may not have a similar production prominent IW perspective, I think that the existing portfolio I would expect.

Premium to to go up on a gross basis definitely at some point in the starting in probably the second half of the year Francois possibly yet.

Okay. Thank you Mark thanks for the color Thanks, Mike.

Yeah.

I am not showing any further questions I'd now like to turn the conference back over to Mr. Mark Anderson for closing remarks.

Yeah, Thanks, everyone for being here today, great questions and we look forward to see and talk to you again in July Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.

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Good day, ladies and gentlemen, and welcome to the first quarter of 2020 to arch Capital Group earnings Conference call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.

As a reminder, this conference call is being recorded.

These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Consequently, actual results may differ materially from those expressed or implied.

For more information on the risks and other factors that may affect future performance investors should review periodic reports that are filed by the company with the SEC from time to time.

The company intends to forward looking statements in the call to be subject to the safe Harbor created thereby.

Management also will make reference to some non-GAAP measures of financial performance.

The reconciliation to GAAP and definition of operating income can be found in the company's current report on form 8-K furnished to the SEC yesterday, which contains the Companys earnings press release and is available on the company's website.

I would now like to introduce your host for today's conference Mr. Mark Grandison and Mr. Francois Morin Sirs you may begin.

Thank you very much good morning, and welcome to <unk> earnings call for the first quarter of 2022.

<unk> delivered a strong first quarter as our dynamic capital allocation and cycle management strategy combined with strong underwriting skills.

Levered, a $13 six annualized operating Roe.

This past quarter provided yet another reminder, that we live in a world of uncertainty.

The war in Ukraine has affected countless lives and initiated a humanitarian crisis that is still unfolding and the pandemic continues now into year three.

In addition to the war in Ukraine.

Global inflation and supply chain issues Bush Bush to interest rates up which in turn led to investment markdowns in the quarter.

Our objective remains as always to deliver long term value for our shareholders using all the levers available to us.

<unk> contributed substantial underwriting profit in the quarter and insurance in force grew modestly again, highlighting that mortgage remains a positive differentiator of our business model.

Now inflation is top of mind for everyone in the P&C industry, which through its credit has historically been at depth at adequately respond to inflation trends inflation is not a new phenomenon and in fact, it permeates discussions in evaluating claims all the time.

In an insurance company.

As such our focus is always on proactively incorporating new data into our reserving and pricing.

We believe that this focus in addition to increased future investment returns and reserving prudently will help mitigate inflation impact.

As far as our mortgage business is concerned.

Inflation, mainly has a positive effect as it increases <unk> equity, which again mitigate potential losses.

I'll now share a few highlights from our segments.

Our data indicates that we are still experiencing average rate increases in excess of expected loss cost.

In specialty insurance underwriting conditions remained very good as pricing discipline terms and conditions and limits management are stable across most markets. This stability combined with the uncertainties I mentioned at the beginning of this call should help keep the market discipline and sustained <unk>.

<unk> increases.

We made into this platform prior to 2020.

We also created meaningful growth across our U S operations in the quarter, primarily in professional liability, including cyber as well as travel where we believe relative returns are attractive.

The reinsurance side of our business.

The emphasis remains on quota share treaties over excess of loss reinsurance. This allows arch to participate in the rate increases on primary insurance, while improving the balance between the risk and the return overall in our reinsurance group growth opportunities remains strong.

<unk> returns.

Turning now to the mortgage segment, which once again delivered excellent underwriting results as we continue to benefit from strong housing demand and excellent credit conditions.

Delinquency rates on our <unk> portfolio continued to trend to a historically low level levels and cures on delinquent mortgages in our portfolio resulted in favorable prior development in the quarter.

The increase in mortgage interest rates currently at 5% for 30 year fixed rate mortgages is a steeper rise than we have seen in decades.

On our in force portfolio.

While the rise in mortgage rates may ultimately cool demand and slow the rapid home price appreciation over the last year. So far we have yet to see demand weaken and we expect home prices to continue to rise, albeit at a slower pace again as mentioned earlier rising home prices rising home prices increase.

<unk> equity for homeowners, which ultimately reduces the risk of claim and mortgage insurance.

Our <unk> group as a flexibility to grow our moderate the business they choose to write based on their view of market conditions a.

A few brief notes on investments were net investment income was down from last quarter as we reduced risk positions, primarily equities given increasing market volatility.

Rising interest rates also cause mark to market losses in the quarter. However, the relatively short duration of our investment portfolio as well as our healthy cash flow will naturally allow us to reinvest at higher interest rates, which should be reflected in future quarters.

In closing.

Even with current uncertainties.

The opportunities exist in the quarter harsh was able to deliver strong results with positive growth across its businesses and we are well positioned to sustain our growth trajectory in this favorable P&C market, we've consistently demonstrated our ability to allocate capital effectively to the areas of our business with the most attractive returns.

As you know with arch, we're constantly looking for and seizing the opportunities that offer the best returns for our shareholders.

Well.

Thank you Mark and good morning to all and thanks for joining us today as.

Overall, our results translated into an after tax operating income of $1 10 per share for the quarter and an annualized operating return on average common equity of 13, 6%.

In the insurance segment net written premium grew 21, 3% over the same quarter one year ago.

Growth was particularly strong within our professional liability and travel business units.

And was achieved both in North America and internationally.

Underwriting performance was excellent with an accident quarter combined ratio, excluding cats of 98%, a 250 basis point improvement over the same quarter one year ago.

Similar to last quarter change in our business mix as a result of more pronounced growth in lines of business with lower loss ratios helps explain some of the 470 basis point improvement that we observed in our underlying loss ratio.

This benefit was slightly offset by a higher acquisition expense ratio.

Increased contingent commission accruals unprofitable business and lower levels of seeded business for lines with higher ceding Commission offsets also slightly increased the expense ratio.

As we have said before our focus remains on improving our expected returns through a variety of levers and.

And we are encouraged to see that our efforts are paying off for our shareholders.

In the reinsurance segment, it's worth mentioning that reinsurance agreements that were put in place at the time of the closing of the <unk> acquisition in the third quarter of last year.

May comparisons from the current to prior periods imperfect.

For example, while our reported growth in net written premium remained solid at 14% on a quarter over quarter basis.

Would have been 26, 6% after adjusting for the summer session.

The growth primarily in our casualty and other specialty lines, where rate increases new business opportunities and growth in existing accounts helped increase the top line.

This segment produced an X cat accident year combined ratio of 82, 7%.

And excellent results as we continue to enjoy healthy underwriting conditions in most of the lines that we write.

We'll also from first quarter catastrophic events net of reinsurance recoverable and reinstatement premiums stood at 85 8 million or 4.0 combined ratio points compared to 10, five combined ratio points in the first quarter of 2021.

Approximately two thirds of the estimated losses came from the Russia invasion of Ukraine with the rest coming from other global natural catastrophe events, including the Australian floods.

Our mortgage segment had an excellent quarter with a with a combined ratio of three 1%.

Due in large part to favorable prior year development of 100, $105 6 million.

Which remains of excellent credit quality.

Production levels were down slightly from last quarter, but certainly in line with seasonal trends and new purchases and diminishing refinancing opportunities for borrowers.

As we have discussed on prior calls one of the benefits of higher interest rates as an improving persistency rate, which now stands at 66, 9% and should continue to increase throughout 2022.

Ultimately higher persistency benefits our insurance in force and should result in a stable base of premium income to help drive underwriting income for the rest of the year and beyond.

The remainder of the favorable development came from recoveries on second lien loans and better than expected claim development in our CRT portfolio and our international operations.

We maintain a prudent approach in setting loss reserves in light of the uncertainty we are facing with borrowers exiting forbearance programs and moratoriums on foreclosures.

Income from operating affiliates stood at $24 5 million and was generated from good results across our various investments, including Colfax summers and premier.

Total investment return for our investment portfolio was a negative 3.07% on a us dollar basis for the quarter, which explains the decrease in our book value per share to $32 18 at March 31.

Down four 1% in the quarter.

The decrease was primarily due to the mark to market impact for our available for sale fixed maturities portfolio, resulting in a $1 55 hit to our book value per share.

This quarter, the meaningful increase in interest rates and negative returns in the equity markets contributed to the negative total return as.

As you know we have maintained a relatively short duration in our investment portfolio for some time and this strategy helped temper the mark to market hit to book value in the first quarter.

While still relatively short we have extended our duration slightly to 293 years at the end of the quarter in order to get closer to our duration target.

Alternative investments representing approximately 15% of our total portfolio returned a one 4% in the quarter.

The performance of our alternative investments is generally reported on a one quarter lag.

The Florida Tri County region.

With these introductory comments, we are now prepared to take your questions.

Thank you.

I have a question at this time. Please press the Star then the number one key on your Touchtone telephone if.

If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

We're using a speaker phone please Mr handset.

Our first question comes from Jimmy Buhler with J P. Morgan.

Whereas as incentive comp or other expenses that might sustain through the rest of the year.

Well I think to me, it's the way to think about it as to I mean, if you want to focus on operating expenses is where all the incentive comp payments or expenses will come through so that.

That you can easily see that our track record the last.

12 months, where you see in Q1. There is there is higher and then it levels off for the second through fourth quarters. So that should give you a good idea of how to project that out the rest I would say.

I'd like to think of it in combination in loss and acquisition to me are we can't think of them separately. They have they go together there is offset stay we think about it.

When we write the business so.

Ultimately the way, we certainly think about the whole.

And the underwriting performance is the combined ratio and.

That's how I suggest you maybe think about it I think from a perspective of acquisition expense I think.

The mix has shifted over the last couple of years. So I think I would probably look at the last one quarter two quarters or the indication.

Indication for the future because our mix is shifting in that direction. So it is clearly and as a result of that do you see the loss ratio expectations actually coming down which makes sense based on what <unk> mentioned.

And then on your GAAP losses, I think you mentioned that a majority of the cat losses that were booked this quarter were Russia related and I'm, assuming most of those are <unk>.

But if you could give some color on that and then relatedly you've in the past indicated what you had in terms of Covid reserves and I think most of those were IV and <unk> as well, but if you can talk about.

What you would need to see to be able to start with.

Leasing some of those reserves related to Covid.

Yeah, So I'll start with Ukraine, I think Ukraine again very early to me its somewhat similar to Covid two years ago.

When it's still ongoing right. So we took a fairly we think are prudent approach at this point based on what we know we think we're going to have some losses, but.

It's all IBM right. So the question really we don't have any claims yet that are.

Certain or we have to set up case reserves for its highly preliminary at this point.

And it's based on kind of some some assessment of what we think the overall exposure might be.

So we think we're.

And in a good place right now, but we're going to have to monitor it and see how it goes.

In future quarters, and nobody about Covid losses were about 70% <unk> at this point in time, so it's still not finalized by any means.

And what's the magnitude.

While our numbers haven't changed so total reserves right. So with total reserves of Covid is about $160 million.

And 70% of that is Covid, sorry, <unk>, yes.

Thank you.

Sure.

Our next question comes from Tracy Bengie with Barclays.

Hello, everyone I recall that the 10.

<unk> 10 year anniversary.

Insurance setting up there.

<unk> is approaching where these reserves will be released on that first in first out basis in queue. At this time statutory time and I believe arch has about $3 1 billion of tax contingency reserves.

Just wondering if this anniversaries of any significance for arch light does this orderly reserve release improve your ordinary statutory dividend capacity or improve your view on capital allocation in any way.

First of all I mean, the fact that condition reserves no question or a statutory requirement.

They are part of our overall way of operating but I would say they havent really been a constraint in the sense of how how we how we deploy capital where we deployed our ability to.

Come in and out of market. So I think Thats certainly something we watch and are aware of but I wanted to make sure that everybody understood that it's not it hasn't been really.

Caused a major issue for us at this point.

You are correct that 10 years, though we're going to start.

Getting closer to the.

Our ability to release contingent reserves and yes, no question that.

That effectively shifts the money from contingency reserves that are available surplus too.

And what gives us more ability to declare dividends upstream from the semi companies.

That said, we are always looking at.

And we've been able to do a little bit of that with the regulators in last few years.

No.

On an exception basis and you'll have submitted some plans to them to make it. So that we can actually access of those phones may be a bit earlier than would have been.

I guess officially the case with the tissue reserves.

We're still.

And we're constantly working on.

Got it.

And also I'd like to touch on the negative marks on your investment portfolio I noticed in your proxy or key key kpis like growth in book value per share our Roe.

These are metrics that are extending a charge for unrealized gains or losses from your peer Yale. So my question basically is to these negative marks change your view of deployable capital anyway.

No not really I think that the operating the way we look at the operating ROE, It's more of a run rate as to how our business is performing.

There were over time, that's really all the way to be a bit more.

Forward thinking and looking at how we present, our returns and our performance.

Got it and Ken.

Thanks.

Yes.

Our next question comes from Josh Shanker with Bank of America.

Sure.

Yes. Thank you if I go back in time about nine months ago, when I asked you.

About opportunities you have to deploy capital.

Mortgage insurance reinsurance share buybacks acquisitions.

The mortgage issuing pace was hot.

And our reinsurance was attractive it's still is ceding commissions are up now and maybe with where rates are going mortgage issuance is going to be declining.

Does that make insurance and buybacks more attractive on a relative slate of things you can do right now and.

What's changed about the ROI.

Mortgage and reinsurance over the last six months I think over the last year or just a good question in terms of rank ordering our opportunities right now I think that the growth in premiums speaks for itself, it's really an indication of where we think.

Value proposition is for our shareholders I think that clearly reinsurance and insurance are close to one another.

Our reinsurance team would argue that they have a better return perspective, we'd like to have.

These.

Discussions internally, but certainly the P&C. It has moved up in the rank in terms of top top return I think.

Second and as you saw on the share repurchase I mean, it's clearly another way for us to deploy capital that's very attractive for for our shareholders. So we have a lot of levers that we can deploy at that point in time, but having said this our focus right now is really to grow the business because we have so many good opportunities ahead of us.

And.

The Ukraine crisis has caused.

Skepticism about the.

About the value of trade credit, which has hurt the valuation of co Fox.

In terms of your view of the attractiveness of that asset post Ukraine and whether the.

The diminished prices an opportunity do you have any thoughts there.

Well I think first the Ukraine, and Russia area is not a big portion of what companies such as Colfax would be playing into so that certainly has a smaller footprint.

And a lot of the losses that could emerge or are emerging there'll be short tailed by and large right. It's definitely a shorter term, even though we're not out of the woods yet in terms of developing losses broadly I think on trade credit I am confident that our Colfax team has a good handle as to whether exposures is and I think if I take COVID-19 as an example for.

Our resilient they are even absence on the government scheme.

I think that we like the resilience and the diversification even within core fad themselves, while they provided to the shareholders. So let's just say we're not overly concerned I mean, I think the numbers are going to come today or very recently I think it will have more than way more insight into this but at this point our expectation is that it's it's.

It will have an impact on their results, but not the extent that as always it seems that the market is expecting and way more downside than actually meets the high because it is a line of business that I believe is largely misunderstood.

And the way that Debbie and his team has developed.

Deployed risk management is underappreciated I think <unk> do a very very good job in risk managing the portfolio.

And if I can sneak one more in you said that 75% of Covid reserves are still in <unk> is COVID-19 , a long tail or short tail risk and what would you be waiting for it to get better comfort on.

The use or lack thereof of the IV in our reserves.

I think on our short and long tail I would say yes.

So it's both right I mean, there is a lot of things going on and I think we.

We certainly saw some of the bi losses, right, Josh last year or even even early or middle of 2020, I think some of them are being resolved as we speak.

I think we're of the mind that this is a big event things have happened.

We're still trying to figure out as they recover into this new market this new environment, and it's still being thrown into it some inflation and more it seems more dislocation so.

I think that we may have things coming through.

On the liability side of things eventually it's hard to know what is going to look like but it's it's clearly clearly a lot that we've never faced before so that's why we will tend to be more prudent that arch has you know us as a lot more uncertainty than in the average loss that we've seen so far in our history and even though the short tail that you would think of Turkey.

<unk> are going to be litigated in that that will take to resolve itself. So I mean.

We're keeping an eye on it but.

We think it's going to be with us for quite a bit longer.

Thank you for all the answers thanks Joshua.

Our next question comes from Ryan Tunis with autonomous.

Okay.

Hey, Thanks, Good luck.

Are you still there Brian we can't hear you.

And you may be on mute.

Yeah.

Okay.

Yes, I think Robin just came out somehow.

<unk>.

Brian .

You guys got me.

We got to that low grade.

We got that lease you've got we've got so we got it sorry about that.

So yes, I had a reserve question its not as deep as the last one I don't think but.

But I was curious about is just.

Trying to get a feel for how.

2020 that year has developed.

Obviously, you guys released a lot of reserves from that year.

This quarter and maybe it's something I can calculate myself.

Yes, it would've been the total number of reserve releases on the 20 years since you initially booked it.

Oh Boy I don't have that number handy with me.

It's most of it Nobel on the ones that we just did that we'd be most of it.

Because most of the delinquencies and there was the largest cohort in April and May of 2022nd quarter and those are the ones that are obviously coming out of foreclosure delinquencies being settled so most of it is from the 2020 year.

Do you have a sense I guess mark for like I mean, if we were to.

What that ultimate is now relative to kind of the year's headed into 2020 are we getting to a point where yes.

On a fully developed basis not year looks like.

Some of the years I'm, just trying to understand like how.

Much more reserve potential that could be.

Yes.

I have to be careful to awareness I think I would say to you that 2020, and 21 may turn out to be more like a like an average year.

There's a good possibility for that to happen. It's still it's still uncertain. Good we're still going through the forbearance and exiting as we speak it is accelerating.

Really as we speak literally.

So I think 2000 2021, it will turn out to be.

Much more of average years than we had.

Maybe feared when when we talked about in the second quarter of 2020.

Got it and then on.

On the P&C side.

I guess I might be wrong on this but I don't remember there being quite this much.

Volatility with the acquisition costs. It seems like something that is kind of ramping up.

You said in the past two to three quarters.

Could you just give us maybe a little bit of a better understanding of.

Why are we seeing more of that now obviously because of the amount of loss ratio improvement.

It's going through the businesses.

The way you structured reinsurance I'm, just kind of trying to kind of qualitatively understand what might have changed.

Good question and I would just welcome you to arches way of cycle management, which is moving and pivoting to where the opportunities are so.

It will be probably surprising to you as <unk> already and I don't really know what kind of acquisition expense will have any one quarter because our team just make the best evaluation possible as to what's ahead of them and I think on the reinsurance side right. We mentioned in our commentary is that quarter share focus definitely overtime will increase the acquisition expense.

Ratio and on the on the insurance side of travel for instance, right.

Really we went down in premium written as you remember Ryan in 2020 is coming back up and that is a historically a high.

High expense ratio, we also have some programs new.

Make.

Allocation or decision to write more one or the other I think you had more of a.

To your point about not having more volatility this quarter than ever before is because we had a very stable too.

Frankly dull market for about five or six years, we were defensive there was really no need for us to shift and we're sort of across the board shifting down our involvement on the P&C side now I think it's way more dynamic and that's why you have this shift around so.

To your question about the loss ratio the loss ratio itself.

I'll find its way naturally whether we write quota share or excess of loss. So the higher the expense ratio frankly to lower usage, you expect the loss ratio to be.

Because it's a very good combined ratio of game as we said before so I understand that it's not easy to pin down we understand but it's really due to the cycle management and where we are in this marketplace.

Understood that makes sense thanks, guys.

Thanks.

Our next question comes from Meyer Shields with K B W.

Thanks, I want to start with one underwriting question and maybe it pertains to what you were just talking about mark.

We've seen year over year written premiums and program basically go down after some very solid growth in the first three quarters of 2021 I was hoping you could talk us through what's going on there.

Yes, and that Theres a bit of noise I think it's really related to the timing of a renewal of a program and when we on boarded one so.

Kind of read too much into that.

Meyer I think its Barry.

It's a one off I think the earned premium is a better indicator of that.

Trajectory of where we're going here.

Okay, perfect Thats very helpful.

Second question I'm sorry.

Go ahead Mike.

Okay. So you talked a lot and very helpful. In terms of the guidance for corporate expenses. There the same sort of accrual trend in the individual segments.

Yes.

I'm asking because of the year over year growth in other operating expenses.

Well I mean, it's the same general I mean, the timing is the same it's just that obviously at the corporate and the corporate segment or what you're seeing in corporate expenses.

It's a very I mean, it's a there is yes more more noncash comp that comes into play right and that that is again more tilted to the first quarter.

And it's.

It's just basically all of it is I mean for the most part that's just comp and benefits versus the opex in.

In the segments has a lot more to it right there is.

Systems there is.

There is a lot more things that start with you.

Youll never have that much.

Impact or more as much volatility in the segment.

The rules are the same though I mean, when we have people that.

Become retirement age eligible.

It triggers that you have different kind of accounting or immediate expensing of the noncash comp and thats part of it.

Related I think just the growth in the Opex dollars no question that went up.

And we we look at that and we certainly.

I want to make sure that premium is growing faster. So I think the ratio as you saw in all of our segments certainly insurance arrangements went down.

And I think the.

The important message here is that.

We've been performing well and we need to pay our people and our people is basically all we have we need to retain that talent and that came through in Q1, as we kind of made incentive comp decisions Meyer what I would add to this is you can look at that line item either as an expense so as an investment items. So I think from our perspective, we're also.

Investing in our people as you heard from Francois and divesting other things right that will improve.

The results over time and Thats.

It's a good time to invest and we have a growing growing platform moneys coming in so it's a good time to invest so we're really also spending some money to make it more sustainable as a platform.

Okay perfect. Thank you so much.

Welcome.

Our next question comes from Mark Dwelle, with RBC capital markets.

Hi, good morning.

Just a couple of questions we've already covered a lot of ground.

On the Russia, Ukraine losses.

Lines of business or products were impacted there or was it your own trade credit or.

<unk> marine whatever.

Yes, it's a traditional lines you would expect I think that most of our losses come from our exposure at Lloyd's either from the insurance platform the reinsurance platform and Thats. What you would expect right. Because this is what our specialty lines have been underwritten.

So either through a Lloyd's of London operation. So this is where we're expecting it from.

In terms of trade credit as part of the considerations again like I said. So it's also part of that as well. So we look look across all lines of business, but I would think London, Lloyd's Aviation Marine War.

The classic in Illinois exposure.

Okay.

And then building on that.

I'm, just trying to make sure I understand it correctly to the extent the coface incurred losses.

We're picking those up effectively on a one quarter lag basis, so whatever they have youll get your proportional share.

Yeah.

How those ran through in the second quarter and so on going forward correct.

100% correct, yes.

Okay.

And then the last question I just wanted to clarify you made a number of comments related to the investment portfolio My.

Am I understanding correctly, so youre, both extending the duration.

And getting a higher new money yield on.

Both the reinvestment as well as I guess any any new money that youre generating.

Yes, no one year no question I mean, I mentioned, the 145 basis points that is comparing your embedded book yield on the portfolio at the end of the quarter to what we're currently seeing in the market.

And extending the duration is really a bit more of a strategic thing I mean, we were short I mean relative to our benchmark, we got a bit closer to the benchmark.

Just being a bit more of a defensive move we want to make sure we werent too far off from that.

The target.

Totally yes, we a lesson.

We don't know how quickly the portfolio will turn over but certainly as Mark mentioned, the free cash flow coming in and also.

How quickly that portfolio will churn or either mature or what will trade in and out of certain securities will be able to reinvest that so it will take certainly a few quarters, but as I mentioned I think we will start seeing some benefits.

Starting next quarter and by the end of the year it should be.

Hopefully somewhat.

Measurable and meaningful.

Okay. Thank you I appreciate the thoughts.

Okay.

Our next question comes from Yaron <unk> with Jefferies.

Hey, good morning, everybody.

Mike.

My first question and maybe it's just me rephrasing and making sure I'm thinking about it correctly.

And I want you to understand that really your focus or your myopic focus is on getting the loss ratio better and you're kind of agnostic as to whether the expense ratio goes up or down as long as the combined ratio comes down because of the loss ratio improves.

Yes, I think youre lapping the combined ratio, which leads to return on equity is what we're focusing on yes.

Yes.

And I should probably be careful with how I phrase that assuming we talk industry here.

Yes.

Some stage you expect in the cycle you expect to see some adverse reserve development and then probably followed by some favorable development I guess, where do you see the industry at today.

And maybe at what point do you start seeing the reported combined ratio improvement coming more from favorable development as opposed to the accident year loss ratio improvement.

Yes, I cant speak really to the.

To the level of reserve in the industry I mean, everybody.

Beauty is in the higher the beholder right, it's kind of difficult for me to opine on this.

In terms of earnings versus pricing cycles, I think it's true that the pricing cycle peaks and in the earnings cycle peaks. Bobby couple two to three years. After so I think that that which.

Historically, that's been the case, so I would expect.

Earnings if pricing is I don't think nothing it's peaking but want to speak.

We should probably have earnings still getting better for couple of years. After that so we're still very much in the margin improvements still in the market.

Sure I'd be happy for you to pine on arch, specifically, if you want.

We're doing pretty good.

Okay.

And if I could sneak one last one in.

Two thirds of cat losses or related to Russia is that true for both the insurance and reinsurance segments.

It's good question I mean, directionally, it's about that yeah, I mean, we might have a bit more.

The non Ukraine cat losses were mostly reinsurance.

Australia floods is where we can that we picked up a bit more from the reinsurance side, but it's directionally. It's about it's not a big difference.

Got it thanks, so much.

Our next question comes from Brian Meredith with UBS.

Hey, Thanks, a couple of ones here for you first Mark could you talk a little bit about what you think about.

Opportunities may be in Florida, with the renewal season, it's a lot of turmoil and stuff going on down there.

Yes, I can only tell you right now what we hear from our team and what we're hearing from our teams and including.

Colleagues.

Brokers and friendly brokers out there is this going to be a tough renewal.

There's a lot of question marks not a decision that needs to be make it made its too early Brian to call. What is going to look like but people are expecting I think you may have heard this on the call it difficult renewal.

There's a lot of things that need to be fixed and then between the recognition of the litigation that hasnt really start the whole as much as we would have wanted some of the companies are struggling to even survive that you get paid your reinstatement and I understand that the state is also trying to find solution. We probably have an impending in discussions on department of insurance as to what they want to do or the direction where they.

Wanted to in Florida. So we're like you, Brian we're in a wait and wait and see kind of mode.

The one thing I would tell you, which all our shareholders for here is if that's an opportunity. We have we have we have capital to deploy there.

Great.

Okay.

That's what I wanted to see if you got the company and then another one so.

<unk> of stories out last night and this morning about companies.

Or potentially sell themselves.

I'm just curious what your thoughts are on M&A kind of arches view with respect to the M&A environment.

Organic growth opportunity is just too good right now to distract yourself from.

Potential M&A opportunities.

We are broadly equal opportunity kind of company right. We'll look at what can be done and what should be done and what makes sense for the shareholders were not.

We're not.

We're not looking for transactions necessary, but our history shows that when a transaction come that's accretive to our shareholders, we'll entertain and look at it we certainly have a look at what's out there what what has been discussed as you would expect volumes. So I think we have.

That's probably the best position possible, which is we don't have to do anything we have plenty of opportunity and we are in the seat where we can just wait for the pitch to come to us. So I feel very very fortunate to be where we are at arch capital. So we'll look at it we look at it a bit if we like it will swing if not we'll just let it go by.

Great. Thank you.

Sure.

Our next question comes from Elyse Greenspan with Wells Fargo.

Hi, Thanks, My first question.

If I look at your insurance segment.

Quarters in a row, where you guys have grown by more than 20%.

It seems from your comments you guys there.

Pretty bullish about opportunities there, even with perhaps a little bit less right now.

Mark do you just feel like an environment, where you can continue to see pretty robust levels of growth within your insurance segment for this year and beyond.

The answer is yes, Elyse I wonder where you work.

For the call the answer is yes.

Broadly it was probably more of a broad market opportunity probably two years ago now it's refining itself in certain more certain lines of business as we mentioned before some of the programs. We are seeing a better pickup in pricing in property as we speak right now is getting hard again.

On the heels of failing to get the value right as an industry. So listen I think that it's a bit more of an opportunistic I think we still have though the ability and the willingness.

To lean in hard if we see opportunities and we are seeing opportunities. So yes, it's not just not as broad based perhaps as it would have been two years ago.

And then as we think about some stuff that come up throughout the call right. We're dealing with higher inflation also higher interest rate that you guys mentioned can be a tailwind on the investment income side, So where would you point.

Ro.

The P&C business, what do you think thats running at today. When you think about how 2022 could come in I know you talked about kind.

Kind of targeting the double digits in the past.

Yes.

What do you think things are now I think we can speak for our book of business I think we expect our ROE on a policy year basis, what we write currently to be close to the mid teens I mean, we're really getting their engineering.

Possibly every quarter since since the end of 2019.

So yes. This is sort of where we are at least in.

Yes pretty much what else was there another part of your question I do want to make sure I think you had something else.

No.

And then they go up yet again.

And then another one.

On buybacks and I think this came up a little bit earlier. When you guys were talking about <unk> in general I know in the past we move funds that book value right, but you guys. It seems like bought back your stock right within the range of one book in the queue line I know the shares are a little bit higher today by partially thats a function of the mark to market in the quarter.

<unk>.

So obviously with buybacks it depends upon the growth opportunities, but it seems like you guys.

There'll be willing to buy back your stock.

Given the valuation today.

I think Thats fair I think listen I mean again, the multiple is not something we.

We focused we look at it but again I think on the.

Our heels on Mark's answer up to your earlier question I think.

We like our prospects I mean, we think the forward looking ROE that we have in front of US are are very attractive we think the stock is price.

Notably attractively for us.

And.

Depending on what opportunities come our way and how we can deploy the capital share buybacks are always part of the solution or part of the part of the how we deploy our capital.

Thanks for the color.

Thanks.

Yes.

Our next question comes from Tracy <unk> with Barclays.

Thank you so much for it takes me on again.

I noticed that you increased your reinsurance cat writings by 10% this quarter and I recognize you are underway on Pn monster Archie peers, but still can you breakdown how meaningful is this ground chicken by exposure increases experienced as rate increases.

And if you could just comment about your overall risk appetite.

Catriona.

<unk> price increase in Europe .

Thank you management.

Yes in terms of I mean appetite we've been relatively neutral for the recent last few quarters. I mean, we haven't grown I mean this again this is a bit of a.

A slight one off in terms of the you saw the growth in the premium just the timing of a renewal we had like a 14 month premium that.

Program that fell on different quarters, so again, when read too much into the $1 of growth in the quarter.

But.

We still we're still players in the space, we still say and believe that we need to.

Get a bit more to really put the.

The pedal to the metal and.

We'll see where it goes on the cat exposure Tracy.

I think that we look at how we deploy it where we could deploy it through <unk> you can do it through Prado quota shares of some marine.

It's coming from many lines of business and I think that for the last 18 months or 24 months because of the significant increases in TNC changes improvements on the property and large property property segment in general that our deployment of capital from the from a cat perspective has been more towards quota share reinsurance.

<unk>.

And I think the <unk> sale has been lagging frankly in terms of pricing and we said that more than one so I think that the.

Again, that's another one that the similar answer to the program that I answer to my earlier, which is the earned premium is probably a better indicator of our relative growth.

Growth on non growth in this case in the property cat space.

Okay, Great and just one real quick follow up on Lisa's.

Question.

I felt like last quarter, you kind of alluded to that you could buy back stock above the one three times just given your view of intrinsic value.

I don't know if the economies were fully appreciated.

You could flesh out your VA Levy.

You think intrinsic value there might be and how that plays out.

Well, it's part of the forward looking ROE. So no question that there is significant embedded value that's built into the book and we have good visibility on that we're very bullish on it and that gives us even more comfort that.

There is significant value in the stock so as we think about buybacks I mean, no question that from our side that's fully factored in.

Okay. Thanks.

Thanks Tracy.

Our next question comes from Michael Phillips with Morgan Stanley .

Hey, Thanks, just one follow up for me and it's back to <unk> for a second I'm trying to trying to marry your earlier comments on the rank order of capital allocation and you put in my second behind P&C, which obviously makes sense given the fundamentals of the P&C book right now.

But if we take that and then look at earlier comments opening comments, which were pretty positive on their my space I'm trying to figure out how to think about any help you can give us some thinking about growth for the business given what we saw this quarter growth over the next year.

Yes.

Well I think we have it.

It's hard to see from the way, we report, but I think the growth.

We have a fair amount of growth through the CRT. We also have a very healthy CRT, which is a credit risk transfer programs from the GSE.

We also have as you know taking on the mortgage the mortgage company that was owned by <unk> by Westpac in Australia. So that is also seeing some growth.

<unk>.

In the U S. I mean, we expect to put I mean, we have to remember the.

Reduction was record for 2020 in 2021.

It's kind of hard to grow from there significantly so the market itself.

While we will might be decreasing a little bit so, we'll see where it shakes up definitely the refinancing is it.

It's very very much.

Very much pretty much behind us because of the mortgage rate increases with a six months. So I wouldn't say I wouldn't say that new production is at.

Because of by virtue of the size of the market on the U S semi sort of shrinking somewhat from the refining refinancing perspective, but what is happening because of this mortgage rates increasing to premium written will be much more stable and actually could increase because of the lack of refinancing precisely which means the insurance enforced.

Will increase which will give some lift into our ongoing written premiums. So even though we may not have a similar production implemented IW perspective, I think that the existing portfolio I would expect.

Written premium to to go up on the <unk>.

Gross basis definitely at some point, starting probably in the second half of the year Francois possibly yet.

Okay, well, thank you Markus thanks for the color.

Mike.

I'm not showing any further questions I'd now like to turn the conference back over to Mr. Mark Anderson for closing remarks.

Yeah, Thanks, everyone for being here today, great questions and we look forward to see and talk to you again in July Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.

Q1 2022 Arch Capital Group Ltd Earnings Call

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