Q2 2023 Arch Capital Group Ltd Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the Q2 2023 arch capital 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.
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 in them.
Certainties. 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 the forward looking statements in the call to be subject to the safe Harbor created thereby.
Management also will make reference to certain non-GAAP measures a final performance 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 to the SEC yesterday, which contains the company's earnings press release and is available on the company's website.
And on the SEC 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 Josh good morning, and welcome to our second quarter earnings call.
We're more than halfway through 2023 and through our commitment to underwriting acumen prudent reserving and cycle focus capital allocation, we were able to deliver another quarter of profitable growth.
The second quarter, our results were primarily driven by our willingness and ability to deploy capital into line with superior risk adjusted returns.
Our operating results in the quarter were stellar with an annualized operating return on average common equity of 21, 5% that drove a four 8% increase in artist book value for common share for the quarter.
As you know book value per share growth is our primary focus on our road to creating long term value for our shareholders.
Each segment generated over $100 million of underwriting income in the quarter. These outstanding returns reflect our ability to effectively execute in each segment, we're really operating in our sweet spot.
I also want to commend our employees for the continued exceptional growth. They are delivered in the quarter, most notably a 32% increase in property and casualty net premium written compared to the same quarter a year ago.
This hard P&C market is proving to be one of the longest we've experienced and we are in an enviable position as we look to 2024 and beyond.
We often refer to the insurance cloud developed by falling gray to help illustrate the insurance cycle.
You can find a clock on the download task for this wet gas or on our corporate website.
If you can do to talk right now just picture a traditional clock dial for some time, we've been hovering at 11 o'clock, which is when we expect most companies in the market to show good results as rate adequacy improves and loss trends stabilize.
Last year, a popular topic on earnings calls was weather rate increases were slowing or whether rates are even decreasing. These are classic signs of the clock hitting 12. When returns are still very good but conditions begin to soften yet.
Yet here, we are in mid 2023 and conditions in most markets remain at 11 o'clock.
Even checked the batteries and the clock and they are just fine.
The clock isn't broken it's just that the current environment dictates an extended period of rate hardening.
So what's sustaining this hard market, while I believe it's a relatively simple combination.
Heightened uncertainty is driving an imbalance of supply and demand for insurance coverage.
Since this hard markets inception in 2019, we've had COVID-19 to warn Ukraine increased cat activity and rising inflation, all of which create significant economic uncertainty.
Underwriters have add to account for more unknowns.
Beyond those macro factors.
Industry dynamics also play a role in sustaining the hard market <unk>.
January inadequate pricing and overly optimistic loss trend assumptions during a soft market years of 2016 to 2019 have led to inadequate returns for the industry. The.
The impact of these factors should cause insurers to raise rate and purchased more reinsurance in a capacity constrained market with limited new capital formation.
Put it altogether and it may be a while before the clock strikes 12, and we begin to move beyond just hard market.
I'll now share a few highlights from our segments.
PMT.
In the second quarter. The reinsurance group was successful again at seizing growth opportunities in particular, the midyear property and property cat renewals saw significant improvement in rates adequacy and our underwriters, we are ready willing enable to provide valuable capacity to our clients.
Our P&L or exposure to a single event one in 250 year return period went up in the quarter, while our premium income grew substantially in.
July one our peak zone exposure rose to 10, 5% of tangible equity overall exposure to property cat risks remain well within our threshold and because of our diversified portfolio and broad set of opportunities we retain the flexibility to pursue the most attractive returns across lines and geographies.
Although there are lines, where pricing has declined.
Large public D&O comes to mind P&C markets continued to see rate changes above loss trends, even with those few lines with weakening rates the compounded rate increases over the past several years continues to be earned and are generating attractive returns.
Overall, we like the range of opportunities in front of us and we continue to lean into the current market.
Next is mortgage which keeps generating meaningful underwriting income and risk adjusted returns housing and credit conditions remain favorable although high mortgage interest rates tempered demand for mortgage originations and limit refinancing options.
<unk> of refinancing has led to a historically high persistency rate of 83% high.
Hi, Persistency stabilizes, our insurance in force, which as many of you know drives mortgage insurance earnings.
Our disciplined underwriting process and risk based pricing model have helped us to build a healthy risk reward profile for the business we write.
The composition of the overall book with high FICO scores and low loan to value and debt to income ratios remains one of the best risk profiles in the industry.
International growth, along with our GSE credit risk transfer business enabled us to profitably manage risk better than more underlying U S. Only companies a key differentiator of our global platform.
That form.
Mortgage insurance plays a valuable role in our diversified business model and continues to generate capital.
<unk> is and can be deployed into the most attractive opportunities across the enterprise.
Moving on to investments now.
Since our second quarter call last year, the federal reserve as inquiries as we all know the rates eight times for a total of 375 basis points, given our short duration portfolio of these hikes.
Additivity affected our net investment income, which is up approximately 22% over the first quarter of 'twenty three.
New money rates exceed our book yield, which along with our strong cash flow set the stage for further growth and book value creation.
Has that tenants on the brain after watching the incredible Wimbledon final couple of weeks ago.
It wasn't an ethic match up.
20 year roll sensation, Carlos Alcaraz, taking on all time, great Novak Djokovic was a back and forth match that lasted nearly five hours before <unk> emerged victorious. There was one pivotal moment that will be remembered for years in the third set.
A single game something that usually it takes about three to five minutes instead last at 26 minutes.
The gain included 13 doses seven breakpoints it wasn't incredible display of tenacity and has left the system not to mention the mental strength required to remain focused it was insane.
But what really struck with me was that kind of lag. This hard market. The game simply refused to and there are many times, where single winning shock could have ended the game, but it just kept going.
About 15 minutes and it became clear that we just needed to enjoy what we were watching and not focus on the end point. So that's what we're doing with this hard market returning with a market serves us with gusto.
As always our goal remains to generate strong risk adjusted returns in order to create long term value for our shareholders at lower volatility the exceptional profitable growth over the last several years has fortified our market presence and helped us achieve one of the most profitable quarters in our company's history.
This is a type of well rounded quarter, we've always envisioned the sweet spot. If you will and we look forward to building on this momentum in upcoming quarters I will cede the court now to Francois and then we'll return to answer your questions.
Thank you Mark and good morning to all and thanks for joining us today on this gorgeous day in Bermuda.
As Mark highlighted our underwriting and investment teams delivered excellent results across our respective areas in the second quarter, which resulted in a performance that exceeded that from our very strong first quarter.
For the quarter, we reported after tax operating income of $1 92 per share for an annualized operating return on average common equity of 21, 5%.
Book value per share was $37 four as of June 30 up.
Four 8% in the quarter and 13, 5% on a year to date basis.
Turning to the operating segments net premium written by our reinsurance segment grew by 47% over the same quarter last year.
And this growth and this growth was observed in most lines of business.
Growth was particularly strong in the property catastrophe and property other than catastrophe lines with net written premium being 205% and 53% higher respectively than the same quarter, one year ago, a reflection of the fact that market conditions in these lines remain very attractive.
As a result, the quarterly bottom line for the segment was excellent with a combined ratio of 81, 9% producing an underwriting profit of $245 million the accident year ex cat combined ratio was 77, 4%.
The insurance segment also performed well with second quarter net premium written growth of 18% over the same quarter, one year ago, and an accident quarter combined ratio, excluding cats of 89, 8%.
Except for professional lines, which saw a slight decrease in net written premium in our public directors and officers business due to a more competitive market.
All of our underwriting units and insurance both in the U S and internationally saw good growth in the quarter as market conditions remain excellent.
Our mortgage segment had another excellent quarter with strong performance across all units leading to a combined ratio of 15%.
Net premiums earned were in line with the past few quarters, reflecting a high level of persistency in our insurance in force during the quarter at U S. M I.
Partially offset by lower levels of terminations in Australia, and higher levels of ceded premiums.
Benefiting our results was approximately $84 million in favorable prior year reserve development in the quarter net of acquisition expenses with over 75% of that amount coming from U S semi and the rest spread across our other underwriting units.
Fewer activity at <unk> was again very strong this quarter and our delinquency rate stood at $1 61%.
Its lowest level since the onset of the Covid pandemic.
At the end of the quarter over 80% of our net reserves at U S. Army are from post over the accident periods.
Overall, our underwriting income reflected $116 million of favorable prior year development on a pre tax basis or three nine points on the combined ratio and was observed across all three segments, mainly in short tail lines.
Current accident year catastrophe losses across our group were $119 million.
Over half of which are related to U S. Severe convective storms that have occurred so far this year.
Pre tax net investment income was <unk> 64 per share up 21% from the first quarter of 2023 as our pre tax investment income yield was almost 50.
50 basis points since last quarter.
Total return for our investment portfolio was <unk>, 6% on a us dollar basis for the quarter with most of our strategy is delivering positive returns our interest rate positioning with a slightly shorter duration help minimize the impact of the increase in interest rates during the quarter.
We remain comfortable with our commercial real estate and bank exposure, which is a high quality and short duration.
Net cash flow from operating activities was strong in excess of $1 1 billion this quarter.
Continues to provide our investment team with additional resources to deploy into the higher interest rate environment.
With new money rates on our fixed income portfolio was still in the four 5% to 5% range.
We should see further improvement in our net investment income in the coming quarters.
Rising primarily from positive cash flows and the rollover of maturing the lower yielding assets.
Turning to risk management, our natural cat <unk> on a net basis of this single event. One in 250 year return level stood at one $4 6 billion as of July one or 10, 5% of tangible shareholders' equity again, well below our internal limits.
In light of the improved market conditions in the property market, we were able to deploy more capacity, which resulted in a significant premium growth for property lines in both our insurance and reinsurance segments.
This growth was well diversified across multiple zones.
Our view is that the current enforce port portfolio with a broader spread of risk across many zones is well positioned to deliver attractive returns.
Our capital base remains very strong with $17 4 billion in capital and a debt plus preferred to capital ratio of 25%.
Even though the results of the past quarter set the high watermark for us on many fronts. We believe the continued hard work and dedication from our teams serving the needs of our clients every single day, along with our steadfast commitment as disciplined and dynamic capital allocators.
It's us up very well for future success.
With these introductory comments, we are now prepared to take your questions.
Thank you if you have a question at this time. Please press star one one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please.
Please press star one again and if you are using a speaker phone please lift the handset.
One moment for questions.
Our first question comes from Elyse Greenspan with Wells Fargo You May proceed.
Hi, Thanks. Good morning, My first question Mark can you quantify the supply demand imbalance that you're seeing within the reinsurance market and how much of that.
Do you think could transpire from an education, a pick up in demand potentially at 112024.
I think good question. Good morning, again at least I think the numbers, we've seen sort of around 50 to 70 billion is not crazy number.
So I think Thats, where we still have this imbalance.
Occurring I think the market has found a way to.
Do the reinsurance transaction and by covers but indeed, there was also a there could have been more to be had on the reinsurance perspective, but we believe and you heard on other calls that insurance companies also had two at a sticker shock assortment.
Evaluate what they can buy and how much you could afford based on where the pricing level was.
So I think just imbalanced right. The other reinsurance is also I believe we also believe is imbalanced in the terms and conditions and the overall broad industry.
It needs to be a bit more of a.
Function <unk>.
On one hand, you could create capacity for cat exposure through third party capital of reinsurance protection, but at the same time you could also do it through.
Improving terms and conditions of the insurance level and I think Thats also something that will help bridge the gap and that we believe thats going to be one of the key element as well for the next 18 to 24 months.
And then the 77 for Francois.
Accident year underlying combined ratio within reinsurance is that a good run rate level.
Yes.
Or maybe you could get better as we think about some some rate earning into the catalog or was there anything one off in that number in the quarter.
Well I would say there is anything one off I use certainly a very good quarter. I think are are viewed as we've said in the past when we had some quarters, where there is a little bit more activity as we think it's better to look at it on a on a 12 month kind of a forward looking view.
So.
Is this quarter going to repeat in the future may be we just don't know, but I will say is certainly good there is room for further improvement but.
Again, recognizing that there's going to be volatility in the reinsurance segment from quarter to quarter I would say, it's I'll, let you make your pick from there.
Thanks, and then Mark one more for you.
Your stock has done really well so you have a problem.
Pavan that any CEO would want and that you are an extremely valuable currency.
We sit here with a hard market.
You guys, obviously have a lot of organic growth opportunities what would you need to see from an M&A perspective to consider.
Your stock as currency to enter into any type of transaction.
While many things are needed obviously you need is it takes two to tango.
I appreciate in this world, but I think at a high level at least where we're not focused on M&A at this point in time, we're really focusing on growing the book organically.
We're also maintaining pretty well in EMEA as well as other non property exposure. So we are seeing a lot of opportunity broadly.
And.
This is where this is where what our shareholders are paying us to do and this is what we're doing and this is this represents really a once in a little while opportunity to redeploy and really good.
To get access to the market in a bigger way to provide more capacity to our clients and we don't want to miss debt and.
And M&A would have to strategically fits for us beyond the money.
I think right now our efforts and time is better focused on organic growth at this point in time.
This is where I think we have plenty of opportunities on our own.
Thanks Mark.
Thanks.
Yes.
Thank you one moment for questions.
Our next question comes from Tracy <unk> with Barclays. You May proceed.
Thank you.
You mentioned that you're wanting to hit the P&L at tangible equity with having a 10, 5% at 71, which was up from eight 1% at four one.
And I recognize your upper tolerant to 25% it almost feels to me like you have a couple of them below the 25% is it fair to assume that getting closer to 25% requires an even higher Roe.
Hurdle rate or pricing like we just be theoretical what would you need to see in order to get more comfortable taking on more volatility or Bob for you.
Can get closer overtime to that 25%.
Well I think the where.
The one thing about the PMA, which is so interesting to us is that when the early innings of where it's going to go. So we have to be careful of the week.
We talk about this even internally ourselves. This is these are the early innings of a market getting much better than that because I mentioned terms and conditions. We believe also improving and really helping to manage cat and the cat related risks better as an industry. So we'll see how that develops over time Tracy I think that were also a different animal than we were.
Way back when.
We have grown up our capital faster than the growth in exposure Anita so.
25, before it's probably a lesser number I think youre quite right and we also have to balance the overall portfolio risk profile, but.
But having said all of this there's plenty of room to go from kind of have to wherever we're going to end up we don't know where that's going to be assuming conditions.
They are or even improve further its certainly will will mean more more PMA PMA.
P&L growth.
I think that it would have to be substantially better we'd actually have a very very solid construct within our overall capital allocation that will dictate what kind of market share we would have in the market.
And although we would say is there's always a place to go to the lab numbers you talk about but.
We will see if we get there and I will also remind everyone that it is not that leads to start.
The video line index up one of the major a broker as you all know.
Shows us that.
And the pricing for the cat is the highest its ever been since 1990, even before Andrew So theres a lot of room and we're excited to see where that takes us and one final thing I will say Tracy if we look back at it always the old five six or seven or eight if you go back on this if you have enough on the memory of a good document retention policy, where a bad one.
Europe Company Youll see that our P&L grew.
670, <unk>, so we kept on accumulating in and growing the P&L. So it's just a start.
Yes.
I'll add on that just going back to Mark's earlier point about supply and demand imbalance in Florida is obviously a big market.
It was a big renewal at six one and the reality is even if we wanted to deploy more capital I think Oracle where capacity I mean, the buyers or the ceding companies just don't have the resources or the money to buy the coverage that we think there should be buying so there's a little bit of a wait and see whether.
It will take you won't be a full year before.
They reprice.
Their product and then it gives us more money potentially to spend on reinsurance protection, which we again, assuming the pricing stays at the current levels, we would deploy more capital, but certainly the demand is a big factor in our ability to grow okemo.
Got it I would say that if you do change your thresholds and I get it's very fluid and the demand equation right.
Alright.
And that you would provide an update to the market on that.
Real quick do you have a house view on how this year's hurricane season will shape up there was talk about average hurricane season now.
People are talking about above average how do you see that playing out this year.
What we don't have a view and the view that we have a view with centura, we added mineralogist.
Evaluates the sea surface temperature I'm sure everybody in those numbers.
We expect average maybe slightly above average last time, we gave us a presentation, but as you know Tracy it moves with two weeks and we will see when we get there we're a little bit almost starting the season. So we'll see how that develops but we tend to take a longer term view Tracy of the frequency and severity of the hurricane season.
So.
We believe that the pricing as it is right now accounts for a lot of deviation from our long term expected and even if you add a little bit above average I think that the market will be in a really really good place.
As the Argentina market is on the reinsurance side has priced the business.
That long term expected we've had as we all know is a bit less increased frequency and severity of late so that is reflected in a demanding that all companies are using.
Very helpful. Thank you.
Great.
Thank you one moment for questions.
Our next question comes from Jimmy Buhler with JP Morgan you May proceed.
Hey, Good morning, first just a question on your comments on supply demand in.
Besides the absolute price, obviously terms and conditions have improved as well.
And where we can see the data it seems like most of the primary insurers are absorbing more of the first dollar loss, but obviously if you don't see.
The data from all of them, but how broad based is this.
And do you think there's sort of been a little bit of a transfer of risk cat risks from the reinsurers through the primary companies given changes in terms of emissions.
I think the last part is is a true statement I think the Q2 numbers that you saw for some other some of our clients actually and competitors.
Demonstrate that that delivered more retain and distribute it to kind of a question.
The coverage you got to retain it yourselves.
The terms and conditions change this is what fastening, but this market is not only a property cat terms and condition change is very.
Very broad based property.
Terms and conditions and pricing improvement that is solid.
A lot of companies I think the market globally has.
The psychology is squarely in that guide.
Last quarter's quoting the camp of having to mend and optimize and reshape and re underwrite the portfolio and one of the key thing that we see that evidence of that is that our facultative team in our E&S property at an increased amount of submission.
First half of the year.
And what's interesting the E&S property on the insurance, obviously has some cat exposure fair amount of it but not only that our facultative book of business is not necessarily it's actually not cat heavy portfolio, which is an indication and cycles that it is typically in any market is a good indication for where the market psychology is so beyond that.
When you provide fire protection, the pricing and the conditions are improving there as well.
Very much a broad base and in the early stages and I will say and remind everyone that we have to remind ourselves of this is that this is the second or third year are property rates in terms of concern that material. So it's not the first shot at it as an ongoing process and I think that it's just Scott.
We.
And top of mind and certainly the second quarter. This year, we believe will help maintain a bit of that going forward.
Okay, and then on BMI business, you've had obviously very sizable reserve releases over the past couple of years.
How much of the forbearance related reserves that you put up are those mostly released or is there more room to go there.
Let me they are mostly gone and I think we've released a fair amount of the reserves that we put up in the early 2020 effectively during the early days of the pandemic as.
As I mentioned like a lot of the cures.
Cures that we're seeing now or from 'twenty, one and 'twenty two so that's that's good news.
And as you know the reserve base has shrunk.
Quite substantially from the peak of 2020 early 2020 so.
We were still very prudent we still look at the data every every single month.
The new delinquencies come in and how quickly we cure and all of that but.
So very comfortable with our reserve position there.
And if I could just ask one more on <unk>.
In the past when the market's been really good we have seen some companies go out and raise equity tried to take advantage of that in a couple of your peers have done that as well, obviously not do a very large extent, but what do you think about your sort of desire.
To do that.
The demand really picks up.
And your business continues to grow.
Well it'll be a function of the market.
We've been able to grow quite substantially in the last few years without raising any additional capital.
As I've told many people over the last few months.
We have the luxury of having a mortgage unit that provides a source of capital that we have been able to redeploy in the P&C space. So assuming similar conditions, where P&C start stays very hard.
And mortgage still does very well, but isn't growing substantially we still think there'll be.
We will be able to generate capital internally.
Yes.
Hard to have the Crystal ball on what 2024 will look like so we're as I mentioned, we got plenty of capacity, we have low leverage so that we got a lot of tools in the toolbox.
And we will react to the market as it presents itself.
Thank you.
Thank you.
One moment for questions.
Our next question comes from Michael Zaremski with BMO you May proceed.
Hey, great good afternoon.
Maybe just.
Wanted to learn more about market conditions in the primary insurance segments.
Definitely heard your comments about.
Rate change across trended.
Pieces of where overall we are in.
And the underwriting lifestyle clock, but.
Just curious we're seeing.
Kind of different data points from companies on on pricing power levels. Some are showing flattish pricing power. So we're showing deceleration.
I know you guys operate in lots of different pockets, but would you say overall pricing in the primary insurance.
Segment.
Is.
Is accelerating or maybe its worth bifurcated between casualty versus property as well.
Yes, you got to bifurcate the markets are good to your question, but I think the I think the overall statement I will say is that.
From our perspective, we look at our portfolio as you just mentioned by all these 50 nines and most of them.
We're still getting rate increases and actually get has a bit more pickup in rate increase over the last quarter.
Last quarter, or two which was a good.
A good good thing to see in the <unk> obviously.
But I think on workers comp is a good example for rates not going up still in as a reason for it has been.
Historically, well performing and performing better than all of the initial base from all of the folks up there. So I can see why.
There was some.
But <unk> or case reason behind that this is what I would tell you. The word that we used for the insurance industry right now in the U S. Specifically is rationality to very rational market as a reason for things to happen and the reason for things happened are economically based or not.
Growth in market share or making a splash of marketing driven companies are really doing the best they can to underwrite it at best and being appropriate right in getting price increase certain degree to lineup needed more than others. I think the market is fairly rational as we speak.
Okay.
Switching gears a bit to the reinsurance side of the marketplace.
No.
Would you say theres been a lot of terms and conditions changes.
And <unk>, just seen changes to especially in Florida.
Would you say that.
Yes.
If there is a major advance should we be looking at historical market shares.
And.
That the reinsurers and our chip had hair cutting it would that be like the right exercise to do given where we're kind of in.
In hurricane season.
I think we've grown our portfolio right. I mean, you can see that the exposure growth I think the proxy for market share is probably better to use the delta in the P&L, even though that 'twenty, one zone, but as <unk> mentioned in his remarks we.
We do have we have an increased.
Participation in a much more wider set of property cat exposure that we used to have before but the market share that we.
We said anywhere from historically from five to eight is gone up a little bit and I think I'll review the P&L as a proxy that's where that stands.
To tell you right now.
<unk> zone.
Okay that makes sense.
Out there thank you.
Thanks.
Thank you one moment for questions.
Our next question comes from Josh Shanker with Bank of America, You May proceed.
I've read the pole reinsurance.
Reinsurance clock, but it doesn't really relate to tongue at arch, we knew about which I don't which is how to make money in the late 19 seventies and the insurance industry.
Given where you see loss trends are and given that pricing is going up over extended period of time is there an element.
We just don't know really what the loss cost trend is and we need an extra padding in there.
Paired with our historical appraisals.
Is it possible to.
Two.
For the supplemental and <unk>.
Loss trend on top of what you think the loss runs currently and still get new business attractively.
Yes, so very good question I think.
Maybe break it breaking in parts I think that yes, we do as you know is our reserving practice, we're very keen on the reserving being prudent we do reserve to a higher level.
A trend that is embedded in the pricing or what you've observed in the data to make sure that we are accounting for this I think as a result of that uncertainty and the need to get a bit more cushion in the uncertain to generating some <unk> on the other call I think it does.
Generation that need to get higher price for that reason, but there is a need is a recognition in the industry that we need to be a little bit on the on this side of the decimal and to create some kind of margin of safety. So I do believe that.
Companies are pricing for a higher inflation ratio going forward and also having a little bit and that's what helps.
Sustained off the hard market as we speak.
It's arch padding more now than it has as a company standard practice in the past.
Not really I think we like what we've talked about this Joshua Oncall. So last two to three years and I think we've been consistent.
We it is deliberate as RFID this not only science.
Grandin Road as you might think it is.
Do the reserving process due to the reserving process and then look at what your expectation or versus what the actual is emerging and you adjust your loss ratio is two things all right now that has a tendency to sort of.
Pick a higher loss ratio than otherwise would be indicated because we have still see through that underwriting year develop.
And it's been very consistent if you look at our I mean, our ratios in that book of business on our insurance portfolio. It's been consistent for the last three years. So we tend to want to make sure that we sit data emerge and allows us to reduce some of that before we do so we have not changed a whole lot in it.
It's not.
So it is quite a bit of way above you.
Do you expect the.
Actual emergence of the losses, but inflation developed in the future.
The appropriate thing to do I think at the early stages, yes.
I'd add like Covid certainly.
Throw a wrench in the whole.
Process right I'd say it's.
Yes.
We think about the business today the way that the environment is today is different than it was five years ago is different than it was 10 years ago. So great question, Josh but it's.
No two periods are alike, and right now back to Mark's point, I would say that the <unk>.
Reaction or how do we how do we think about <unk> closing in courts, reopening and coverages and everything that came with.
With Covid I think.
I mean, we're still kind of working through that so that's why I think you would see.
Suggest that work so we're we.
We'd like to be pruned, and maybe even more so in this environment.
And then on <unk> PMO question.
Ribbon to pre-empt Swan down on this a little bit, but the corporate charter says youre willing to put 25% of the company's equity capital at risk for one and 250 year event, you are nowhere near that and I don't really expect any market where art at this point given how big is this would really put 25% of its equity capital at risk for one and $2 50 year event.
How.
What's the reasonable ceiling on how much cat risk you'd be willing to take in the best cat market ever.
I'd say I mean, we think we're in a good market. We know we're in a good market but.
We don't know what tomorrow holds so I mean, the rates could go up again by a factor of <unk>.
Quite substantially next year.
I guess I don't want to speculate, but there could be some some markets kind of pulling back and then.
I think I agree that in what we know today, it's unlikely that we would hit 25%, but we just don't know what the future holds so I think we're.
We're cognizant that there could be better opportunities at some point down the road.
Okay. Thank you for all the answers.
And do they work.
Thank you one moment for questions.
Our next question comes from Ryan Tunis with Autonomous Research you May proceed.
Yeah.
Hey, Thanks, Good morning, I guess my first question is and it's kind of a follow up on Jimmy's, but.
So on page 21 in the supplement it looks like you guys give reserves loss reserves like by vintage year.
And eat.
The dollar amount of reserves in 'twenty.
'twenty, one 'twenty two looks pretty similar to what it was at the end of last year against that.
And to release quite a few over 100 mill.
So.
I guess I was just trying to square that a bit like where exactly how these released has been coming from.
Well just to clarify I'd say Ryan that the reserves, we don't disclose the reserves by year. We showed the risk in force. We give you the total dollar amount of reserves as of.
$403 million at the end of the quarter and.
And the same at the end of the year, but there are some shifts between.
Just wondering what that was at year end versus now I will say that most of the reserves that we have.
The reserve releases in the first success.
Six months of the year have been coming primarily from the 21 22 years.
A little bit of 'twenty, as well and Ryan what you're seeing is also recognition by the Eni grew.
<unk>.
There were more uncertainties.
Potential recession fears with other things going on so.
The assumptions when you do reserving in the long term.
At that time, and you'll simply increased could it be increased level of risk. So I think that.
That also would explain why well after two or three quarters, what we don't need them. All this because things are also as we don't changing for.
For the better as we speak on BMI, so that could explain a little bit why it took a bit higher this quarter.
Got it and maybe just some perspective on kind of where the ultimate loss ratios on those years are now trending yet.
Well they are I mean, they turned out to be really really good I mean, the reality is with the with even with Covid and kind of what transpired after that in a forbearance et cetera.
I would say again, we've talked historically about.
Call. It a long term average loss ratio in the 20% to 25% range.
Certainly going to be below that.
So.
Yes, I mean, theres still has to be we need more clarity on how the remaining delinquencies are going to settle or whether theyre going to cure or not but.
Where we're at today I'd say, we're going to be below the long term average.
Got it and then just a follow up.
Go ahead, sorry, sorry, just let you know in terms of in terms of loss emergence in NII. It takes a little while I think two or three years ago for Lora for losses to start emerging so it takes a little while to get to know what the ultimate is going to be I just want to make sure you know, it's not like a one and done.
<unk> generated an underwriting year takes two or three years for.
For losses start to emerge right situations family situations economic interest in the borrower's evolve over time I just want to make sure you know that it's not just.
And nothing has happened yet.
Trying to figure this business out so I appreciate it.
Yes.
A follow up I guess for Mark just on P&C.
Yeah.
I'm not sure there's ever been a cycle, where like when rates started to decelerate the re accelerated.
Yes.
Why isn't that happened before and you all know it's happening.
In the quarter and something before from 99 to 2001, we had 2234 actually we had a <unk>.
<unk> market our lives will decide in the U S. We had.
New lines of business, such as terror in aviation going through the Ringer. So we have that going and I remember a period of time with Orange was underweight cat for the first two or three years of its existence, and we were sort of going against the grain and most people were shying away from casualty and doing more property and then we ran into a K R. W. <unk>.
And then we had a hard market as well in.
In property and I think it helped maintain even the business on the liability lines a bit longer if you look back a year or 6%, 7% or eight we're still very very good and the price decrease were not as albeit higher than it would've been otherwise I think the one factor with these kinds of hardening market properties headed of competing competition for capital.
And I think it also helps.
Buffer or paying.
Paying down the rate decrease that would've otherwise have had and thats an important ore or a brief stabilizing more than just going out for it. So we've had this before we've had this before.
And then so after Katrina correct me if I'm wrong, there was like one year at a good rate and there was quite a bit of supply that came in that was kind of it I'm just kind of trying to contrast from a reinsurance standpoint out of the supply and demand.
Balance looks today sort of a year after Ian versus how it did a year after Katrina.
It Hasnt changed a whole lot we hear from our third party capital team and in the market. I mean, you hear from other markets I think that there is a general more leveling off of capacity has been deployed than we would've expected from the existing incumbent which helps explain a lot of the price increase that we've seen in our.
82 flex incidents.
We're not seeing or hearing.
Supply increasing for a while I think that there is still a very much.
The money that was there before that Brazil was requiring lower returns has not returned back to the table and even if they were to come back to the table. What we hear is their return expectations like ours has increased dramatically.
So we'll see what that towards that Hamzah I guess, that's why realignment really even on that side.
But what are you paying the Roes just attention to thinking like looking forward into one one.
What what might drive pricing when you get to the end of the year.
Well activity cat activity of course in demand increasing demand people like we said before needing to buy more or having to bite the bullet and do the right thing at the same time as theyre improving their insurance portfolio.
Thats, a big tail for us.
Thank you.
Thank you one moment for questions.
Our next question comes from Brian Meredith with.
UBS you May proceed.
Hey, Thanks couple of questions here for you first just on your P&L. What is your peak zone right now is it still northeast.
Okay.
Florida.
Whereas it pardon me.
Political Laura My Tri County, Dade, Miami Dade and.
Broward.
Okay and then on the PMO question just curious.
You gave us one and $2 50, but how has your kind of one in 15, one on one hundreds.
Increase.
Over since call it the beginning of the year or is it the.
More or less about the same amount I'm, just trying to get a sense of where you're playing in programs.
Yes someone from a diesel perspective, it's gone up similarly in terms of percentage, it's a very similar increase.
Got you that's helpful and then Mark just curious.
I know there was a lot of one off type transactions top up programs that happened.
In the second quarter can.
Can you give maybe some perspective on how much of that contributed to your growth here in the second quarter and how much is kind of continuing here going forward. Just so we can get a get a sense of how is this growth sustainable here for the remainder of the year maybe in the 24.
And we don't think we've got a couple of we've had a couple of programs frankly on the issue that we won and we've got a couple of big trends, but I don't think this quarter is necessary.
A large <unk>.
Transaction quarter, Brian will you make it sound I think it was more.
More regular growth a couple of transactions here and there, but nothing to the extent that when we talked on the call <unk> mentioned in his remarks that it has to ask.
I'll highlight a specific before I don't think there's nothing really to highlight in this quarter actually.
Okay. Thanks, and then I guess last one just quickly here.
One of your competitors talked about reducing market share in the semi business because there's some concerns about continuously recession youre going forward, maybe give us your perspective on what Youre seeing right now in your mind and kind of outlook and potential for.
Some higher loss ratios there if we do go into recession as you look into 'twenty four.
Yes, I think pricing has improved over the last two years and credit quality stays really beautiful.
As soon as this one among the best.
If we go back to 2013 2012 in terms of quality of origination so.
As you know credit is not readily available and the ability of credit is still pretty tight out there. So from a credit quality perspective, Brian is it's a good it's a really really solid marketplace I think the.
The market share question, which we never we don't lose sleep over this as you know Brian I think a couple a couple of things in the market share that we're trying to do.
In terms of shaping the portfolio and Eni is trying to get the higher quality.
Like I mentioned in my remarks, lower FICO of high FICO low LTV and also geographically go to the places where there's less perceived inflation or overvaluation.
And also there are some different programs that have different returns.
Meaning they are less than we would've hoped for them to be.
They just don't meet our threshold and especially Brian if you overlay the opportunity set.
We said that we have in our property side.
It just makes for.
Our fellow folks.
Willing to take the earnings that they generate and give it to us on the P&C side.
To generate even better returns so really good return business. Brian is just also for us mater of comparative ROE as well as.
Absolute.
Great. Thank you.
Sure.
Thank you.
One moment for questions.
Our next question comes from Meyer Shields with Keefe Bruyette <unk> Woods you May proceed.
Thanks.
Quick question to start the level of reserve releases in reinsurance was lower than its been in recent quarters.
I was hoping you give us some color is that because you're assuming higher loss trends or are there. Other factors that may have played into the quarter's results.
No I'd say it's.
We will look at the data right. So I think some quarters there is.
Evidenced that we can release a bit more this quarter, maybe not as much.
It's a process that we go through every quarter. So I think our underwriters and our actuaries kind of sit down and take a look at their respective <unk> and come up with a point of view on whether there is.
And enough evidence to release reserves, so I wouldn't read too much into it right now I think its a dope.
Another quarter still we think healthy reserves healthy reserve releases, but not as much as as you said this in prior quarters.
Okay, No that's fair.
Second question and I'm really not sure how the asset, but there's a lot of chaos right now in U S personal lines.
And that's always been really opportunistic I was wondering if there's a way that.
A line of business is so dominated by major players, but you do have this level of instability there opportunity for arch.
I think it's a hard one Laurie I think that our shareholders. I mean, we can always see what we could do that but from my perspective, I think we're more of a fee to be in more of a commercial provider of insurance and specialty provider of insurance.
Certainly on the reinsurance side would helpful.
Companies a lot of companies are homeowners homeowners that writers and we do we do provide significant capacity for them.
Share basis, so excess of loss and also the on property. So I think our game plan on the homeowners is more too to support clients that we have.
Because I think a long term basis. It has a set of characteristics as we all know and.
And focus that is not necessarily core to what we do every day rate filing and everything else in between a bit of a different animal for us.
Okay understood. Thanks, so much.
<unk>.
Thank you one moment for questions.
Our next question comes from your own Qunar with Jefferies. You May proceed.
Thank you good morning.
Most of my questions already asked and answered.
I figured I'd, maybe focus on a couple of more esoteric items.
Yes.
So first on AG covers.
Can you maybe talk about how much you're still writing in 'twenty three versus 22.
We've cut our AG book significantly over the last 12 months, you'll see even into 'twenty. Two we started to cut already as we as we saw this and again, it's a matter of opportunity right. I mean, we do some we do some but we've cut the book heavily because of the better frankly better opportunities on the excess of loss occurrence much better yes.
And.
As the client base there has that changed at all can you maybe talk about the mix between large globals smaller regionals.
And we said well we had to.
We grew our core is in Florida was as you know is a different kind of animal because of all the pump cell that small companies out there, but in general I would say that our portfolio, while opportunistically grow opportunistically grow into the larger the larger global companies.
We tend to think that.
The relatively not as.
Transparency or visibility into what the right. So our tendency is to be more of a superregional.
Businesses and more than once.
The lesser footprint in terms of safety, we think we can better allocate capital. This is sort of a high level philosophy that we've had for years that hasnt really changed and I think that we are.
We prefer to grow with these with these clients over time, but having said all this opportunistically being on a quota share basis of excess of loss at this large corporate we definitely we're able to provide more capacity because they needed.
As we speak and that price we believe reflected.
Inc, a higher level of risk that they have so.
So I think I would say same as before with a little bit opportunistically on a larger and larger companies.
Got it and.
And then if I put this together then we look at the very large cat activity that has really been incurred much more by the primaries here.
With the changes in terms of conditions and maybe tighter.
More limited cover per apparel.
Ultimately how does that impact AD covers have later in the year.
Let's say the primary has had a lot of cat losses Unparallel secondary barrels that are now no longer covered by reinsurers not per event.
Does that also flow into the AD covers that will not be breached.
On a reinsurance level because of that so yeah. So I think that excess of loss is very similar to the occurrence. If you do change terms and conditions and cut the coverage at the underlying portfolio level.
It will have a leverage impact into your aggregate excess or occurrence, meaning you will definitely we cut down the loss expectations Anthony.
Here's what I would tell you everyone is we're not there yet but this is the early innings like I mentioned to you before the call is that.
We're going to have the phenomenon just talked about will have a much better perspective and view on this and the impact is going to have all the losses next year into 25, I think right now we still have a portfolio that hasnt gone through quite a 100% right of all of these things that you and I expect to happen I think in the March.
So the aggregate losses for that reason, probably still a bad debt in 2023, alright, So we probably need to see this underlying change in terms and conditions of the insurance portfolio before would you see as being a potential viable product.
Makes sense great I appreciate the answers.
Sure.
Thank you and I'm not showing any further questions. At this time I would now like to turn the conference over to Mr. Mark Grandison for closing remarks.
So from a mortgage Bermuda I want to wish everybody a good month of August and we'll see you in the fall. Thanks for your support.
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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