Arch Capital Group Ltd. Q1 2023 Earnings Call
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Good day, ladies and gentlemen, and welcome to the Q1 2023 arch Capital Group Learning earnings Conference call at.
At this time all participants are in a listen only mode.
Later, we will conduct a question answer session and instructions will follow at that time.
As a reminder, this 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 security law.
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 on the company.
<unk> 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 the forward looking statements in the call to be subject to the safe Harbor created thereby.
Management also may make reference.
The reference to certain non-GAAP measures of financial performance.
The reconciliations to GAAP.
For each non-GAAP financial measure can be found in the company's current report on form 8-K furnished on the SEC yesterday, which contains the company's earnings press release and is available on the company's website and on the SEC's website.
I would now like to introduce your host for today's conference.
Mr. Marc <unk> and Mr. Francois Morin Sirs, you may begin.
Thank you Lisa good morning, and welcome to <unk> earnings call for the first quarter of.
2023.
I'm pleased to report that as a direct result of our premium growth momentum from the past few hard market years, we reported an excellent start to the year.
Financial highlights include book value per share growth of eight 4% in the quarter and an annualized operating Roe of 27%.
Our P&C underwriting teams continue continued to me into attractive market conditions are excellent risk adjusted returns remain available growing net premiums written by 35% over the same period last year.
A key element of cycle management has to respond aggressively while you see conditions change since 2019, we have seen the market psychology pivot to underwriting discipline in our underwriting teams were prepare to become more willing provider capacity.
The current property cap dislocation.
Resulted in us targeting growth in property lines and this should further improve our returns as we continue to benefit from the cumulative effect of a growth rate.
And conditions.
The $327 million of underwriting income generated from our two P&C segment this quarter.
A testament to our commitment.
And the improved market.
Our mortgage segment operates on a different cycle than the P&C.
But it remains a significant contributor to earnings generating a healthy $243 million of underwriting income in the quarter as our high quality insurance in force portfolio remained stable at 513 billion.
And then our P&C growth I want to emphasize that arch is first and foremost an underwriting company.
Being an effective underwriting cycle manager means that our underwriters no.
They have degrees of freedom in choosing to deploy capital across our diversified.
This will be focused platform, because we have a wider range of choices to allocate underwriting capital at any time, we can generate more consistent and stable underwriting income over the long run.
Our growth in this hard market would not exist without our unwavering underwriting integrity.
Our focus on underwriting leads through profit stability and better reserving visibility and over time. These more favorable results lead to greater balance sheet strength, which in turn enables us to more aggressively deploy capital when we see market conditions change in our favor.
At arch, we are deeply committed to the art and science of underwriting because we know that underwriting integrity over time solidified our conviction and agility and proactively respond to changing market conditions.
I'll now share a few highlights from our segment first.
First with BNP <unk>.
Overall, the P&C environment continues to offer plenty of opportunities as evidenced by our growth as you see in our premium numbers the reinsurance market in particular is very attractive right now.
Reinsurance typically react more quickly to the changing environment in primary insurance and we are witnessing this phenomenon in these early stages of improvement in the property market.
In our insurance segment, we continue to take advantage of favorable market conditions for the past few quarters property has seen significant rate escalation, which supported our 37% net premium written growth in that line of business during the first quarter of 2003.
The property market is still broadly dislocated and we believe it will take further rate improvement before finding equilibrium.
Elsewhere General liability rate is picking up again and larger count D&O is one of very few P&C lines that has decelerating rates.
Overall, the market remains disciplined in its behavior and we continue to obtain rate above trend.
On our last earnings call, we noted property cat reinsurance dislocation of the one one renewal.
Which led to significant effect of rate increases.
For the first quarter reinsurance GAAP net premiums written roughly doubled over the last same period 'twenty two from our perspective, the improved conditions at one one.
Positive leading indicator as we prepare for the mid year renewals were peak zone capacity remains tight we are well positioned to take advantage of this opportunity.
Ours is an increasingly prominent provider of choice in our property and casualty space. This is to be expected over time because of our differentiated cycle management strategy too.
To execute our strategy, we continuously invest in improving our capabilities, we hire and retain top tier talent and teams and we seek to enhance our tools and technology with the aim of becoming a more intelligent stable enable provider while reinsurance products for our clients finally.
Our compensation structure rewards underwriting performance first and foremost this is a powerful glue that aligned strategy with execution.
Now, let me move to mortgage our mortgage segment continued to generate solid underwriting income and risk adjusted returns.
Largely because our portfolio was safe with a focus on credit quality and data driven risk selection.
Credit quality in our mortgage portfolio is excellent as demonstrated by our 165% delinquency rate the lowest since March of 2020.
Our disciplined underwriting approach has produced a portfolio with a more favorable risk profile, including higher FICO scores and both lower loan to value and debt to income ratios than our peers in the sector.
Typical seasonality and tempered demand for housing in our first quarter effective new insurance written however production was in line with our expectation given the housing market conditions.
We're seeing pricing discipline across the industry as rates have increased over the past year.
The industry's underwriting discipline is encouraging and allows us to maintain our focus on risk selection to achieve adequate risk adjusted return.
The industry is competitive but pleased with the current risk factors in the broader economy is acting rationally as a result, our team continues to have opportunities to deploy capital.
It is in football season, yet, but with the NFL draft beginning Tonight.
Football with all my mind.
Back in the 19 sixties, a football team from a small Wisconsin town dominated the sport winning five championships in the decade.
The theme as you all know was a green Green Bay Packers and their coach was Vince Lombardi widely regarded as one of the greatest coach of all time in any sport.
One thing that made Lombardi agree leader was his obsession with excellence and execution.
During their dominance a key part of their office was a very simple play called the power suite.
A quarter that would handle the bulk of the running back who ran the ball to one side of the offensive line and then the offensive line acted at blockers, allowing the running back to plough ahead.
No frills.
Most surprises.
Opponents newer what's coming but the car.
Nobody could stomach.
We talked a lot about cycle management and underwriting discipline on these calls and for good reason is hard wired into how we operate the company.
They are not novel concepts. They are actually quite simplistic the key lightweight Lombardi Green Bay Packers his conviction and execution excellence.
Day after day and year after year, relying up and essentially run the same play.
Right a lot of business when rates are high and a lot less when rates are low.
Boswell.
Thank you Mark and good morning to all and thanks for joining us today.
As Mark highlighted we kicked off 2023 with excellent underwriting results across all segments and our investment income continued its upward path.
<unk> from a higher interest rate environment and strong operating cash flows.
For the quarter, we reported after tax operating income of $1 73 per share for an annualized operating return on average common equity of 27%.
Book value per share was up eight 4% in the quarter to 35 point.
$35 25.
Reflecting not only our strong results, but also the unwinding of approximately $350 million of unrealized losses on our fixed income portfolio net of taxes.
Turning to the operating segments net premium written by our reinsurance segment remained on a strong trajectory and grew by 51, 5% over the same quarter of last year.
This growth occurred across most of our lines of business with a particular emphasis on property lines Marine and aviation and other specialties.
The overall bottom line of this segment was also very good with a combined ratio of 84, 3%.
A relatively small impact of $59 million from current accident year catastrophe losses.
It's worth mentioning that our top line reflects the impact of some larger transactions.
Which are not uncommon during periods of significant market dislocation.
We cannot tell whether the frequency and size of these transactions will recur in future periods, but we are optimistic that market conditions will remain attractive for us.
The foreseeable future.
The insurance segment also performed well with first quarter net premiums written growth of 19, 1% over the same quarter one year ago.
In an accident quarter combined ratio, excluding cats of 98%.
There were a handful of items affecting our top line more significantly this quarter, such as a large transaction and the lenders and the warranty line of business and very strong market conditions in the property energy and marine lines business, both positives, which were partially which were partially offset.
By the headwinds of weaker foreign currencies against the us dollar compared to a year ago.
We estimate that on a constant dollar basis, our net written premium growth would've been approximately 230 basis points higher than reported in our financials.
Most of our lines of business still benefit from excellent market conditions, both in the U S and internationally and we remain positive about our ability to grow in the right business as expected returns that meet our ROE targets as we approach the second half of the year.
Our mortgage segment had another excellent quarter with a combined ratio of 40% from strong performance across all our units.
Net premiums earned were up slightly on a sequential basis, reflecting the increased persistency of our insurance in force during the quarter at U S Army and good growth in our units outside of the U S.
We recorded approximately $73 million of favorable prior year reserve development in the quarter with approximately two thirds coming from U S <unk> and the rest spread across our other units.
Cure activity this quarter U S <unk> was particularly strong.
As we benefited from the highest first quarter cure rate, we have seen in the past six years, excluding 2020.
At the end of the quarter over 80% of our net reserves at <unk> are from post cole with accident periods.
Overall, our underwriting income reflected a $126 million of favorable prior year reserve development on a pre tax basis or four three points on the combined ratio and was observed across all three segments.
Quarterly income from operating affiliates stood at $39 million.
And was generated from good result of profiles summers and perennial.
As you May already know Colfax recently declared a dividend of one euro <unk> 52 per share, which should result in a 68 million euro dividends, the origin, which may subject to Colfax shareholder approval.
This amount will not benefit our income statement next quarter. We believe it reflects very well on coal bosses results and prospects for the periods ahead.
Pre tax net investment income was <unk> 53 per share up 10% from the fourth quarter of 'twenty two as our pre tax investment income yield exceeded 3% for the first quarter since 2011.
With new money rates in our fixed income portfolio holding relatively flat in the four 5% to 5% range. We should see further improvement in our net investment income returns in the coming quarters.
Total return for our investment portfolio was 254% on a us dollar basis for the quarter with all our strategy is delivering positive returns.
The contributions of the overall result was primarily led by our fixed income portfolio, which benefited from slight downward pressure on interest rates during the quarter.
While fixed income market volatility was elevated intra quarter.
Cover the strength of the U S and Swiss banking systems, and the implications for monetary policies of central banks.
As of quarter end were generally consistent with those of you in 2022.
The overall position of our investment portfolio remains neutral relative to our target allocation.
And we are well positioned to capitalize.
Should there be further dislocation in the capital markets.
Of interest our commercial real estate exposure is distributed across a variety of strategies accounts for only 6% of arches investment portfolio is highly rated as a low loan to value ratio and is more concentrated in multifamily housing investments with minimal physicians and office property.
Thanks.
On the slide positions are concentrated with large money central banks with no significant exposure to U S regional banks.
Turning to risk management, our natural cat P&L on a net basis stood at $1 $69 million as of April one or eight 1% of tangible shareholders' equity.
Again, well below our internal limits at the single event, one in 250 year return level.
Our peak zone PMO is currently the U S northeast and reflects some pockets of increased capacity. We deployed at April one in response to good market opportunities ahead of the more active renewal periods at June one and July one.
In summary, we remain very positive on the current market and the opportunities ahead of us across all of our segments.
At the current expected returns, we believe deploy meaningful capacity in our businesses currently represents our best options to maximize the returns for the benefit of our shareholders our commitment to being active yet disciplined capital allocators remains a core principle of ours that should lead to long term value creation.
Success with these introductory comments, we are now prepared to take your questions.
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Thank you if you would like to ask a question. Please press star one on your telephone.
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One moment, while we.
Most of the first questions.
The first question comes from Elyse Greenspan of Wells Fargo. Your line is open.
Hi, Thanks, good morning.
My first question Mark in your introductory comments, you said that.
In the early stages.
Property market right now.
And we've seen strong rates at January one that persisted into April one.
My sense is to the midyear. So could you just comment on what you mean by.
Early stages, and how you could see this playing out.
During the rest of 2023 and ended 2024.
Very good question are these good morning, I think the one we have a dislocation such as the one we sort of realized an experienced at the end of the third quarter and the fourth quarter of last year.
The renewables took place on the reinsurance plays out much higher rates by 30%, 50%, 60% pricing and rate increases obviously you heard on another call.
We had the same experience.
The resets are typically the first to move reacting to deploy capacity and they should because they have to commit to capital for 12 months a year now.
Now we have a lot of portfolio from the switch off of the insurance side and this is what I think is going to be leading the market continue to underscore and support the market is the insurance portfolios ours included the interest level they are going through a <unk>.
We optimization realigning of capacity realigning, our pricing terms and conditions and this is widely spread across the industry.
On an insurance product does not get all renewed at one one right at the renewable takes place over a 12 month view so.
So what we're seeing and hearing right now is the market psychology is squarely in the camp of.
Getting improved terms and conditions on the primary side, which will then lead to obviously further improvement on the distance of the reinsurance now this will take 12 to 18 months to really take hold and we believe.
Which is actually a little bit.
Positive from our perspective, we should see that improvement carrying on and staying around for more than this we expect the underlying property improvements to be there for two needed to have it be three years.
<unk> is a great great a leading position to be from the interim so far as the reinsurance react. The interest is reacting it takes a longer time to modify and correct itself as momentum being built in creating a better Calabria money issuance level the ratio will get renewed again at one four but most like you have more more things to improve on a pause.
Folio it because without the hard market takes place over time.
It developed and unfolds over time, so that's what we mean, we think that we have a little bit acquired some nice.
Runway ahead of us because of that reason.
Okay.
That's helpful. Then.
Can you give us a sense.
And your margins in both insurance and reinsurance.
Social inflation or financial inflation.
Did that did that impact.
You talked on the current accident year in both insurance and reinsurance.
Yes, so the way we the way we operate and the way we put our reserving a loss ratio you won't be suffice to hear from us.
We tend to take a prudent stance that the first step that you need to understand and we could call realize and I know we saw that historically one of the key things that we need to work on our game plan is to look at trends and look at the right level on a quarterly basis.
Modified if we have a good reason to modify it and book it to a shall we say 68%.
Confidence interval, Luckily too close to the average because we want to have some protections because who knows what the future will hold so if you look at our reserving overall in our company. We look line by line, we look at inflation, a financial or social bilayer bypass from point by.
By region, and we re corresponding loss ratio for.
For the overall portfolio and what you see in our results in our numbers is a sum total of the aggregation of all of these various decision within our insurance or reinsurance unit.
And I think that and then at the end of the day when I looked at it to make sure that we have we feel more comfortable than that possibly the average bear out there.
Make sure that it's done on a trajectory that is responsible and proved as well so our tenancy will not that the other good news right away we will.
We didn't see growing as well at least as you know so it means that we have to be little bit careful and thoughtful in the way the pace at which we will recognize some of these improvements.
And maybe just one more sticky in there Mark Wright in the reinsurance segment.
The growth is.
Is that still really strong, but the underlying loss ratio right was was.
No.
The kick off.
From last year, and I think part of that there's always noise in each quarter and it does take time.
And this business great in that January one, but can you help us kind of put that all together and just give us a sense of the margin profile of the reinsurance business over the balance of the year.
Okay.
Yeah, I'll take that one of the least I think a lot of interest people.
Obviously look at the quarterly numbers, our view was we.
We look at it but we don't lose sleep over it I think we look at long term trends, we look at the quality of the business and our prices and when do you expect that returns are.
And when we find the deals but specific to this quarter as I mentioned, let me give you really a whole lot of specifics, but there was two transactions that really distorted a little bit our ratios.
With.
Basically higher loss ratios and lower acquisition. So yes, you saw a little bit of movement on both the loss ratio and the combined ratio the impact of the ex cat accident year loss ratio was two two points. So it's.
That's fair.
We know what's there we don't again.
Make it a trend I mean, that's just the reality of the business rebound this quarter, that's why I mentioned that.
These are nonrecurring items, but in this market, who knows there could be more in the coming quarters. So that's that's kind of how we.
And Thats the result of the business we have this quarter.
Thank you.
Welcome. Thank you one moment.
While we prepare for the next question.
And the next question is coming from Jimmy <unk> of Jpmorgan. Your line is open.
Thanks. Good morning, So first I had a question on.
Your comments on pricing, obviously very positive both in reinsurance and insurance, but can you distinguish between the pricing in both reinsurance and insurance on property and more of the cat exposed business sources the casualty lines.
Yeah. So the last numbers, we heard its a good question last numbers, we heard on a primary side, we're looking at pricing depending on the zone fuel cat exposed obviously is more acute but rate increases, 40%, 40% to 50% plus.
Definitely and using less if youre intercoastal, if you win in land, it's maybe 10 to 15.
<unk> increase, but it's clearly clearly a push for rate increase but what's not really fully reflected and you should hear is are the things going on underneath the terms and conditions deductibles are going up.
Also a really important factor also helps if you're a reinsurer of this portfolio.
There's a statement of value, which pretty much stays that any company now providing.
Providing coverage needs to have a up to date valuation of the property are you trying to ensure and that is a big deal because the industry has been frankly lack and it's updating these numbers and once you have the right exposure it actually makes the pricing thats much more no.
Effective and accurate. So this is the whole market is moving in that direction and thirdly, I think that's also important which creates more dislocation.
Is there is a shrinking of capacity to get into the individual players.
So when people were 2000 $540 million worth of capacity on even a category. These limits are going down two five to two five maybe 10.
$10 million on an exceptional basis.
So I think that the to the insurance portfolio. The rates are going up for a lot of reflection echo back to one of the questions a lot and inflation of brokerage side is reflected in the statement of value. So we're definitely clear that one.
So depending on where you are anywhere from 15, lesser cat exposed $40 $50 you got it goes on the reinsurance.
<unk> side, it's a little bit similar although it's a bit more of a monolithic marketplace the rates.
Ongoing Morris, nor narrow range, it's almost like more commoditized if you will.
If you look at between 30% to 50.
Pretty much broadly across of course there'll be differences will people. The June one reserve for us, but the more acute the cap need the more acute in the key zones of capacity demand the higher the pricing.
But as a general that the overall general pricing is in the insurance, one we'll be able to.
Grab those increased rates and improved terms and condition over the next 12 months. The arrangements work was able to get there quicker.
And then just on the semi business you had very high yours I'm, assuming most of these are just on reserves you put on.
Around Coalbed Wendover forbearance programs and if that is the case.
I'm much more of these such reserves do you have that will most likely I'm, assuming you'll be released over the course of this year.
Well, we still have.
Definitely do have still some some delinquencies that are in forbearance programs.
I quoted 80% of our loss reserves are from post COVID-19 periods.
We don't have all the detail around it.
How much are by year et cetera, but just hopefully that gives you a flavor of like.
What may be quick.
Quick virtually potentially be down they are coming down the pike in terms of.
More releases.
Greg will be Europe .
The fact that unemployment.
Levels are still.
We're forming very well I think thats a good sign right I mean thats. There is some pressure on home prices et cetera for the in force book.
We think again that credit quality has been excellent and we think there is performing well.
When when we're able to explore those delinquencies over time, hopefully that should help the bottom line.
Okay. Thank you.
Good morning.
Thank you one moment, while we prepare for the next question.
The next question is coming from Tracy.
D D.
Barclays. Your line is open.
Thank you.
Yes, I'm trying to understand mechanically why an LPTA type of transaction could add noise here underlying loss ratio on the reinsurance side is it that youre not imposing a loss corridor and youre, assuming losses with attach at inception or is it accounting on the premium recognition. If you could explain the mechanics that would be helpful.
Sure.
At a high level, what these transactions typically look like us.
Limited so in terms of the acquisition expenses zero, if not very very small so you think in a.
Traditional quarter share deal where the.
The acquisition ratio could be 30%, while that goes away.
And then you're effectively just picking up losses.
And yield.
The investment income on the float is effectively part of the overall return of the transaction. So it changes the dynamic and Thats what were trying to convey here is that on.
On the underwriting side.
It's usually booked closer to a 100% combined.
Within.
That kind of range, but the investment income that you pick up.
He has significant so that impacts the overall bottom line returns on the business.
Okay.
Also and maybe a little bit early but can you discuss how June one and July 1st renewals are shaping up at this point like how would you compare pricing. So what you saw in January .
So we heard from our team we've been talking to them quite a bit.
And the.
I can't talk about specific but at a high level the continuation of the hard market that we saw at one one we're seeing a.
Continuing hardening will continue on the same level as one of if not that did better.
I want to <unk> 671 are not done yet, but people are still very actively looking at it but.
The momentum is there clearly.
So how would that compare when you see momentum the same or better.
Its early I think it's early right now.
I don't want to venture because.
Also with Tracy, where we all collectively have to keep in mind is 71% 22 was also pretty good renewal sorry.
Your appointment despite so it may not need as much of a pricing.
Because we believe we're at specifically in Europe .
We believe not as well priced as supposed to be based on the risk you are taking so.
It's still going to be return wise better than most likely better return than possibly the most likely the one that we sold because its peak zone is everybody to help source of capital or.
Use of capital.
Thank you.
Thanks.
One moment, while we prepare for the next question.
The next question is coming from Iran.
<unk> of Jefferies. Your line is open.
Thank you good morning.
Going back to the margins in reinsurance the underlying margins.
Even with the LPT ski accident year loss ratio ex cat.
Deteriorated a bit.
And I just want to understand kind of the context for why that would be if we are seeing business mix shifting more to kind of inherently lower loss ratio lines on an underlying basis.
And with the rate environment.
Yes, three things I'd say is I mean, we focus on returns and in a while.
Obviously, the what you what's in front of you is just the underwriting part of it.
Focus on overall returns, which is the first thing second thing I'd say is.
You got to give us a little bit of a chance to earn the brand I mean that I mean, the market was solid in 'twenty, two and get better at 123, we're a quarter into the year I think there is more.
More benefits are more improvement to come but it doesn't all show up.
Initially.
Third thing as Mark said that earlier I think were deemed prudent.
The math may suggest that eight you said there is a math that combined ratio or loss ratio should be X, but.
We are prudent in how we look at things in <unk>.
The data tells us that the health, maybe we were a bit high it will be more than happy to release those reserves, but we're not going to declare a victory quite yet.
Okay.
And then a second question just on Capex could you maybe offer some color on the distribution between those various sources, whether its Turkey or New Zealand towards the European.
Storms and so on in both reinsurance and insurance.
Yes.
A small ticket items I'd say the biggest one for US was we had $25 million loss in Turkey, which is kind of what we do it's not a huge deal but that was the biggest item. Yes, we had some kind of participations in New Zealand with the cycle there.
And also some bloods.
And in the U S.
The normal run of the mill.
Tornadoes.
The storms that hit that was mostly insurance, but a little bit of noise, there as well in range or so.
Call. It a hodgepodge of small things, but the biggest one was for US this quarter was the third year.
And with Turkey, and in New Zealand were those mostly reinsurance.
Yes, well, yes, Turkey was only reinsurance yes, okay.
And so I mean, both of them are only reinsurance.
Got it thanks, so much.
Yes.
Thank you.
One moment, while we prepare for the next question.
The next question will be coming from Josh Shanker of Bank of America. Your line is open.
Yes, hi, there everybody.
Good good morning.
I was looking at the investment return I mean, theres a lot of ways to measure yield I'll just take the.
Net investment income divided by the float I'm getting about.
276% for the quarter, which makes.
Arch by material amount with the lowest earner on its float in your peer group.
I know you guys have a more conservative portfolio.
That's also allowed you to redeploy higher pretty quickly.
But with new money yields maybe in the 5% range.
Taking any equity risk or whatnot, you have an opportunity to increase that yield.
Are you still keeping some powder dry you still think it's time to be fairly conservative in.
In seeking youll at this point.
I mean, it's.
Someday, we obviously realize that there is new money yields are higher and for us. It becomes a question of like personalizing losses, there's implications around statutory versus GAAP accounting.
We have restrictions in some places so I think.
For us.
We do the analysis very carefully and trying to make sure that we're doing what's best for the ultimately the shareholders, sometimes we're better off.
Holding some investments the majority until and not taking on any of the loss and reinvesting the money faster.
But.
In terms of opportunities, whether we see more of one I think more on more risk it's something that we are.
Thinking about and we have grown our presence in alternatives in the last few years and Thats something depth and breadth of alternatives is call. It more REIT structure kind of.
All the investments and Thats, where we see the better opportunities and we've been pretty aggressive in growing the money there, but obviously the returns. They are don't show up in investment income that show up as a sharpened equity method funds for the most part and that's where we expect to see a little bit of pickup as well going forward, but you also just thinking about the overall risk right.
The enterprise right. So we have a lot of underwriting.
Push and grow so I'll just also factored in.
Now that we have.
Sorry, but just it's always one of the other part of the equation that we have to factor in as well.
And what's the new money yield right now for you.
We're going to have to buy.
Okay.
And then look I know that you do with the interior Competitors' conference call. So when you think about what they're saying.
The pricing is pretty attractive.
I think thats universally viewed.
Your competitors have said as much and then when we look at their premium growth in the quarter.
It's kind of tepid, especially on the insurance side.
You guys growing your net premium written about 20% right now it's been going that way for a little while.
His business card to capture.
It's hard to get the business do you want me <unk> been very successful outmaneuvering your competitors.
I guess I guess Theres two things one is why are you successful growing when others have not been able to do so and two can you give comfort. The fact that maybe some question maybe the March not as good we think it is and maybe there should be more concern schizophrenia. How can you give us comfort that rate adequacy and why are you successful where others have failed.
So from a rate accuracy perspective, I mean, this is sort of a <unk>.
System Thats royalties to help us with our company.
How many tons, we verify the assumptions and protection via that the individual underwriter level group level in segment level at corporate between ability at the holding company, including the board and we did a lot of bidding going on comparing notes and triangles anything. So we are pretty pretty confident we wouldn't be growing that level. If we didn't think that the returns work.
And our favorite <unk>.
Going to get all the returns that we expect precisely to the decimal most likely enough Josh we're in an uncertain world that we are making a bet on a longer term expected and thats. The best thing that we can do right now we're victims of thinking about the rate as being by far the most important.
Phase two to start to make sure that you have.
Enough.
You put the odds in your favor in the rates going up lower lines rates were up 68%.
70%, even if some of them one to two times and even if there is some of it.
<unk> goes to one nine times, while we also look at the history of the industry and the industry was briefing harvest next years ago.
65% loss ratio, even if they were wrong and our reserving level.
Gross 80, and you put all of that factor in.
Trend and you put the accumulative rate impact I think that there are no certainty, but certainly a level of margins that you've seen that you've built within the price.
And that's what makes us a much more comfortable now in terms of.
Our production in the marketplace, how we're able to lean in and see that business first.
We're early in the 2019 to really lean into a lot of people were pulling back.
And that creates voids and vacuum for our clients.
We were the ones.
The Beacon and the storm, if you will able to give them capacity and thats goodwill.
For lack of a better word a rebuild upon itself. So really creates more relationship business relationship that frankly has been a little bit less.
Strong because of our defensive mode. Prior.
Prior to 2019, but we rebuild it very very nicely, we're always there, but we rebuilt the kindle them and must meet your way if you look.
Taco our producers they will tell you that we're a great partner there and that makes a big difference so more than the next piece of business comes in you look at the people who could write that business that we purchased from our insurance group. While you can look at end markets. The market once the business right now with 104 years ago.
I'll, probably not half the first this added audio has the first look at it because we were there for four five years.
Also I would add that we're in E&S player and as you heard.
DNS market as well so the market is also growing.
Towards us as a tailwind going from our perspective on that note.
And we're pretty good security jobs with pretty good company people want to deal with US we're good for the money.
We have a good expertise and good teams that really can advise declined I think we spent a lot of time.
Not only providing coverage policies, both advising clients and being a good market.
Leader.
And right now and certainly that growth of about three or four years have created its own momentum and inertia. So the gravity. If you will has been creating it's been pretty nice and helps it helps grow further even in that marketplace and even the market gets a bit more competitive I would argue that we'll be able to hold on to another good business that we've written for last quarter.
Yes.
Well. Thank you for the full from the answers and congratulations to everyone on graduating from rounding to the nearest surroundings.
Rounding to the nearest million.
Yeah.
Thanks.
Great. Thank you.
One woman and the next question.
Okay.
Next question is coming from Brian Meredith of UBS. Your line is open.
Yes. Thanks, a couple of them here for you just quickly Francois you gave us loss ratio impact of the LPT can you give us what the combined ratio maybe the premium impact just for modeling purposes.
Our combined ratio was one one.
That's two.
$2 two in the loss ratio again, I'll ask gap and the premium was $118 million.
Brilliant thanks second question.
Mark looking at the six one renewals, Florida.
I guess, one what is the impact.
Passed the legislation that was recently enacted having do you think on that marketplace will it have an impact on renewals pricing capacity coming into the market and then how do you typically think about.
Florida from a reinsurance perspective is it a market you'd like to play catch like play quota share how do you kind of think about it when you look at the Florida market.
But the second part of that by the second part of your question is easier I think we're much more of a.
Excess of loss a writer in Florida.
The better play for us.
At this point in time and that seems to be sort of well also where the market is slowly migrating to more of a seasonal the first indication.
The second part of your first part of your question two the most interesting one is we're in Florida.
We'll be in Missouri in the show me state, but we need to show we could start to see an evidence that those.
Tort reform will take hold its going to take a while as we all know we have a slew of claims that went in before the.
Fourth of April the first American beverage on a slew of planning to make sure that we take advantage of the last remnants of the weaker towards area there.
But that's going to take a while to work through it also might mean that some of the losses from prior years of developing adversely which is not necessarily be useful and helpful for those who try to review.
On an ongoing basis, why if you have more losses from that.
The prior year's Reacceleration of losses, you may have to.
Makeup for a lot of that for some of a lot of if you were a buyer of reinsurance. So I think overall I think the market will take.
Sort of.
A view that it is not there at 100% and they will probably sort of factor in who is more is more or less.
Exposed to those are they get credit for those who are less exposed, but youre not going to get its like everything else, we'll need to see it through to get full credit.
The market will get some credit, but not the full extent of it there's no way at least not at this point, maybe in two years or next year or.
A three years' time, but it will take a while because we need to show and see what's happening before.
Great. Thank you sure.
Thank you one moment, while we prepare for the next question.
And the next question comes from Meyer Shields of <unk>.
I'm Goldman.
Thanks, I had one I guess technical question on the LPT side of things.
Is it fair to assume that this is a 100%.
Combined ratio business as you write it or does the fact that it pertains to well let me stop there.
Okay.
Well Thats typically where we book it I mean, plus or minus those types of transactions thats kind of where the yes, that's where the combined ratio is on those yet because it because their contribution to profit and margin is.
We're a lot more on the investment income side that is on the.
The underwriting income Purion arising comes back.
Okay, and then speaking I don't know if you want to talk about the transactions or the demand that youre seeing can you talk about that I guess understandably being a function of distress in the marketplace is it.
If the market right now focusing on the let's say 2019 and earlier accident years, where pricing was soft or or and or is there interest in even more recent years because of loss trends.
Yes, I think the market is focusing on it because I think and also if you add on top of it the reopening of the court postponed.
Post Covid, there's a lot of uncertainty we've heard about inflation.
<unk> financial inflation, and social inflation, so there's a lot of scrutiny and the rates were much lower.
So there is definitely.
Less bank for those years too.
To get the right number or the right loss ratio picks. So yes definitely people are are looking as we all as we as we are as well and where were you on the reinsurance side.
Youre Treaty.
We can see.
Dominating anything you saw some companies' development of adverse and those spirit some of them, but yes. It is definitely a point of discussion, which I think Meyer helps explain why we had the we continue to have these price increase in the GL for instance, I do believe that people are realizing it and understanding that you had recasting right.
A long term trend.
Long term loss ratio projections on a level basis.
So I think really that people are reflecting and Thats also why we have this we don't have massive combined ratio above 100 across the industry. We do have still a healthy level of price increase because of that phenomenon.
Okay. That's helpful and if I can just pick up on that because in your prepared comments you talked about GL rate increase is picking up a little bit.
Haven't heard a lot of that we've heard a lot on the property side, we're looking to get a little more color.
Yes, the liability lines are of course, a lot of it has been historically led by.
With auto and sufficient significantly umbrella, but the GL is clearly picking up again and as of late and also international and we have always book of business as well as our.
Insurance portfolio in the U S. I think that there is also a dislocation going on in the GL side people are reevaluating the lines of business the areas in the industry that they provide NGL.
Coverage for so this is happening.
We added more sort of slowed down a bit towards the second half of 'twenty, two and I think this re optimizing our re underwriting or we will refocus on the underwriting and pricing for the GL and its also led as you can appreciate my about some increase in trend.
Typically if you on the excess layers to get this lever. So I think thats what were seeing some of that prior year coming through and having to recast the pricing, which you wouldn't have had or will have seen necessarily in 2021 because those years 16 to 19, what probably too young to really get the development coming out. So you probably can see that the duration is developed.
NGL coming through and people are reacting to it.
Okay. That's helpful. Thank you so much.
Luis.
Okay.
Thank you one moment, while we will prepare for the next question.
The next question comes from Mike <unk>.
Grand scheme of BMO. Your line is open.
Hey, thanks.
Maybe a question or two on that.
The catastrophe levels this quarter.
Mark you brought up.
Terms and conditions changes.
Think of probably below certain people's mindset, the valuations on property.
Just getting up to date and it seems kind of antiquated, but thats just the way that the.
Reinsurance, maybe sorry, the overall marketplace works, but just curious so.
The Tcs cat loss levels for the industry and <unk> in the U S. We're way above our normal one Q I know you guys arent right that's not the best guide for arch.
It looks like arches cat levels were.
Normal ish, but you can correct me if I'm wrong any read throughs on the terms of conditions changes that have taken place at R. R.
Is there any read through there that there's some good things coming through.
I think on our results I don't think you would describe the improvement in terms and conditions I think it's probably just a function of how the book.
Where our exposures are.
It didn't have as much exposure in the areas, where the big losses occurred.
I guess I would say, it's a mix that could happen when that happened sometimes.
That's really all we can see right now we haven't seen.
The impact of the things I mentioned already because they're starting to take hold in with home depot for the entity.
That loss of these losses next year would presumably be because of all the conditions in terms of the cold you are changing.
It would be reasonable to expect that the losses will be less than they are right now, but we have yet to see whether the portfolios. Both of these changes so nothing other than.
Our exposure was not where losses occur.
And as a follow up.
When we're hearing about.
<unk> stands for rate increases.
Especially in property.
Does that take into account the terms that congestion.
Additional changes or is that kind of risk adjusted rate increases you are speaking to you on some industry participants are speaking to.
They're not fully risk adjusted so really good question, because it's a factor of a harder market or a softer market that when you see a rate the things that you can measure youre willing to incur.
Incorporate into your calculation, but there are things that you cannot.
Calculate or more specifically isolate for input and you a formula.
Right.
There is some coinsurance clause in there that are finally going to be put back in the marketplace.
Really prevents some of the collections that could otherwise happened thats not factored in the pricing.
I think the venue for litigation as a mitigation of the losses to be in a different environment. One that's for instance, more.
More litigious to one that's less a pitcher thats not unable to factor that into the pricing. So I would say to the extent that you factor in the deductibles are supplementing and you could run the cat losses, basically layers, where you attach a few at that higher I think that is reflected in the pricing that we mentioned the other things that are also going.
In the same direction.
That's the trademark of a hard market that is not fully reflected in sort of the that's where the extra pick up that extra gravy and we don't see but we know collectively as their net OXXO also helps us feel.
Still a bit more we have more conviction.
Owning more of that business.
Got it and maybe lastly, switching gears a bit.
I believe our strike a decent amount of professional lines.
That's one marketplace that we've.
We've seen some stats pointing it to being.
More of a softer marketplace, maybe you can comment if thats the case for arch as well and I don't know if you gave commentary also just overall kind of rate increases on your primary insurance book this quarter. Thanks.
So thank you Dave good question. So on the first part for the P&L.
Our portfolio has been going down.
This further than the rate increase that we saw the professional lines that we have on our on our financial supplement includes more than that obviously.
But so.
Suffice it to say that we're like everybody else seeing a little more aggressive at aggressiveness in that segment, but the one thing that we're that makes us being still wanted to be in there.
And not declare that this is over by any means is that the trends have been the trends have been favorable to the FCA claims were down for last two years.
And a lot of clients Scotts broad brushed rate increase.
The rate increase.
And presumably do not fully deserve it so there's a lot of pushback on this as we speak right now so again talking about underwriting and risk selection.
There are ways and there are areas, where youll keep getting a 10% rate or are there areas, where you're not okay, given getting a buffer so I think our mark.
Our team is extremely experienced and been doing this for almost 30 years. So there.
Pretty good at picking and choosing our spots.
And that basically the overall rate change on that and we don't recorded because the overall rate change.
It's not a good indicator, especially especially when you have so many varied line of business going up and down I think that the delta between the rate in.
What other people and also our book of business.
The average if not already.
Good indicator, but I think the pickup between the trend and the rate is anywhere between two to 500, depending on the lines of business and we're still getting some pickup.
That we may not be getting pick up in margin at least from the appearance the <unk>.
<unk> allowed us to weather the losses the loss trend is truly positive so it's still not certain.
Were these.
These lines of volt.
Specifically D&O.
Thank you.
Yes.
Welcome.
Thank you.
One moment, we have a follow up question from Jimmy.
Your BMS, they've obviously gone up good view.
Written a lot more business than you were gaining a lot more.
The eight 1% number that you mentioned, it's still lower than where would you feel comfortable taking it if the market environment remained favorable.
Well, we think.
Just a quick reminder, I think.
Zones for us.
Right now we're kind of.
Northeast is our peak zone, but we also have like Florida, Tri County, which is kind of at the same level of one one renewals were more international more national So national accounts is not really.
Southeast specific where we expect to see more.
More activity of 671. So no question that we think it will go up I mean, if the market stays as it is right now.
Could it go up to 10, 12% we think so.
It's a reasonable scenario, but.
Obviously, we'll have to wait and see.
Figure out and see how the renewals.
How is everything gets lined up that.
Directionally I think thats kind of where we think we might be.
On July one.
Okay. Thank you.
One of them.
Sure.
Thank you I'm not showing any further questions would you like to have further.
Remarks.
Thank you everyone for listening to our story, it's a great one and we are looking forward to get even more good news in the July call. So thank you for everything.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.
Okay.
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