Q1 2024 Arch Capital Group Ltd Earnings Call
Operator: and 2024 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode.
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.
Operator: 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. Such 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.
To remind everyone that certain statements in today's press release and discussed on this call may constitute forward looking statements under the federal Securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently actual results.
May differ materially from those expressed or implied.
Operator: 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 1995. The company intends for the forward-looking statements in the call to be subject to the safe harbor created thereby.
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 FCC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward looking.
Payments within the meaning of the private Securities Litigation Reform Act of 1995, the company intends the forward looking statements in the call to be subject to the safe Harbor created thereby.
Operator: Management will also make 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 8K, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin.
Management will also make reference to certain non-GAAP measures of financial performance. The reconciliation to GAAP for each non-GAAP financial measure can be found in the company's current report on form 8-K furnished to the FCC yesterday, which contains the company's earnings press release and is available on the comp.
These website at Www Dot arch group Dot com and on the Sec's website at Www Dot FCC Dot Gov I would now like to introduce your host for today's conference Mr. Mark Grandison and Mr. Francois Morin Sirs you may begin.
Marc Grandisson: Thank you, Gigi. Good morning, and welcome to Arch's first quarter earnings call. We are pleased to report a terrific start to the year. In the first quarter, we posted $736 million in underwriting income and a 5.2% increase in book value per share as we realized the benefits of several years of strong and profitable premium growth. Underwriters in our P&C units continued to lean into hard market conditions, writing $5.6 billion of gross premium in a quarter, a 26% increase from the same quarter last year.
Marc Grandisson: Thank you Gigi good morning, and welcome to <unk> first quarter earnings call.
Marc Grandisson: We are pleased to report that terrific start to the year in the first quarter, we posted $736 million in underwriting income and a five 2% increase in book value per share as we realize the benefits from several years of strong and profitable premium growth.
Marc Grandisson: Underwriters in our P&C units continued to lean into a hard market conditions rioting $5 6 billion of gross premium in the quarter, a 26% increase from the same quarter last year.
Marc Grandisson: Overall rate changes are exceeding loss trends and absolute returns remain above our long term targets positive indicators in our continued effort to deliver superior results to our shareholders.
Marc Grandisson: Overall, rate changes are exceeding lost trends, and absolute returns remain above our long-term targets, positive indicators in our continued efforts to deliver superior results to our shareholders. Broadly, we are seeing incremental signs of increased underwriting appetite in the market, but this is not surprising given the favorable conditions that exist. It is still an underwriting market where the arts can thrive.
Marc Grandisson: Broadly we are seeing incremental signs of increased underwriting appetite in the market, but this is not surprising given the favorable conditions that exist in there.
Marc Grandisson: There's still an underwriter's market.
Marc Grandisson: Arch can thrive.
Marc Grandisson: At the beginning of this hard market, as other providers pulled back, Arch sought to establish itself as a key trading partner, aiming to solidify relationships and remain top of mind when it comes to addressing our clients' increased needs. Our success in establishing deeper client connections continues to pay dividends in this extended yet increasingly competitive hard market. The first quarter served as a reminder of our risky world when an active catastrophe quarter concluded with a major industry loss as the Dali cargo ship collided with the Francis Kutkey Bridge in Baltimore.
Marc Grandisson: At the beginning of this hard market as other providers pulled back.
Marc Grandisson: Its sort to establish itself as a key trading partner.
Marc Grandisson: Aiming to solidify relationships and remain top of mind when it comes to addressing our clients' increased needs.
Marc Grandisson: Our success in establishing deeper client connections continues to pay dividends in this extended yet increasingly competitive hard market.
The first quarter served as a reminder of our risky world when an active catastrophe quarter concluded with a major industry loss.
Marc Grandisson: The value cargo ship collided with a Francis Scott key bridge in Baltimore.
Marc Grandisson: Although we recognized a loss related to this event the virtue of having multiple lines of business with improved and positive expected margins made this event manageable for arch.
Marc Grandisson: Incidents like this reinforced the importance of our core tenants.
Marc Grandisson: Although we recognize the loss related to this event, the virtue of having multiple lines of business with improved and positive expected margins made this event manageable for Arch. Incidents like this reinforce the importance of our core tenets.
Marc Grandisson: One we practice discipline underwriting that builds a meaningful margin of safety into our pricing to we take a long term view of risk and a conservative approach to reserving and three we operate a diversified global business that we believe maximizes our total return by mitigating volatility in <unk>.
Any one line of business.
Marc Grandisson: Capital management has been a key differentiator for arch and is integral to how we operate our company.
Marc Grandisson: <unk> capital management requires that we allocate resources to the most profitable underwriting opportunities while retaining the flexibility.
Marc Grandisson: We practice disciplined underwriting that builds a meaningful margin of safety into our pricing. 2. We take a long-term view of risk and a conservative approach to reserving. 3.
Marc Grandisson: To invest in our platform when we find attractive opportunities.
Marc Grandisson: One of those prospects came to fruition earlier this month, when we announced our intent to acquire <unk> U S Miller market and entertainment businesses.
Marc Grandisson: We see this as a unique opportunity to quickly build scale in the $100 billion plus U S middle market, a long time strategic area of underwriting interest for us <unk>.
Marc Grandisson: We operate a diversified global business that we believe maximizes our total return by mitigating volatility in any one line of business. Capital management has been a key differentiator for Arch and is integral to how we operate our company. Effective capital management requires that we allocate resources to the most profitable underwriting opportunities while retaining the flexibility to invest in our platform when we find attractive opportunities. One of those prospects came to fruition earlier this month when we announced our intent to acquire Allianz's U.S. mill market and entertainment businesses.
Marc Grandisson: Increasing our mila market presence will further diversify our north American insurance platform by adding by adding stable businesses with recurring premiums that can generate attractive returns over the cycle.
Marc Grandisson: The cycle manager, we like having many ponds to fish in and this acquisition will significantly expand our opportunities in the Midland market for years to come.
Speaker Change: I'll now share a few highlights from our segments.
Marc Grandisson: As you know the property and casualty market cycle is evolving but still offers attractive growth opportunities at good returns, particularly for our skilled specialty underwriters, who can use our expertise and experience to differentiate arch.
Marc Grandisson: The first quarter result from our reinsurance segment or outstanding underwriting income for the segment was $379 million, while gross premium written grew by 41% over the same quarter last year.
Marc Grandisson: While there was some developing competition, we are observing an increased flight to quality and fully expect to capitalize on that trend as the cycle ages.
Marc Grandisson: We see this as a unique opportunity to quickly build scale in the $100 billion plus U.S. middle market, a long-term strategic area of underwriting interest for us. Increasing our middle market presence will further diversify our North American insurance platform by adding stable businesses with recurring premiums that can generate attractive returns over the cycle. As a cycle manager, we like having many ponds to fish in, and this acquisition will significantly expand our opportunities in the Miller Market Pond for years to come. I'll now share a few highlights from our segment. As you know...
Marc Grandisson: Our reinsurance segment is in an enviable position the in force book constructed over the last several years is strong and allows us to exercise our underwriting acumen.
Marc Grandisson: When opportunities emerge whether from dislocation in the casualty market or by offering value that others cannot arches, there to provide solutions and financial strength to its clients.
Marc Grandisson: In our insurance segment growth tapered from the highs of the past few years as rate increase has slowed and some of the dislocations were met by additional capacity overall conditions remained strong and the market is behaving rationally.
Marc Grandisson: Important factors that continue to support growth and strong profit.
Marc Grandisson: In the first quarter, we find growth opportunities in several lines, including property and casualty E&S and other specialty lines across most of our specialty lines pricing remains very healthy and we are able to deploy capital in order to deliver attractive returns above our long term target of 15%.
Marc Grandisson: Like a reinsurance our insurance segment has made strong efforts to establish itself as a first choice provider for its clients and that manifests and seeing more opportunities in life you have to play to win in an insurance. If you don't see the business you can't write it and.
Marc Grandisson: And now, let's pivot from P&C to mortgage which to borrow from our famous AD campaign, just keeps on going and going and going.
Marc Grandisson: The property and casualty market cycle is evolving, but it still offers attractive growth opportunities and good returns, particularly for our skilled specialty underwriters who can use their expertise and experience to differentiate Arch. The first quarter results from our re-insurance segment were outstanding. Underwriting income for this segment was $379 million, while gross premium written grew by 41% over the same quarter last year.
Marc Grandisson: Our mortgage segment continues to generate solid underwriting income and risk adjusted returns from its high quality portfolio.
Marc Grandisson: While mortgage originations remain tempered by high mortgage interest rates the persistency of our in force book remains a healthy 83, 6%, while the delinquency rate is near all time lows.
Marc Grandisson: New insurance written is in line with our appetite given market conditions when the mortgage market picks up again, we are prepared to increase our production. However.
Marc Grandisson: The status quo persists, we're content with our current situation that has extended the duration over which we earned mortgage insurance premium.
Marc Grandisson: Competition within the MRI industry remains disciplined which means we are in a good place.
Marc Grandisson: Finally, our investment portfolio grew to $35 $9 billion generating 327 million of net investment income in the quarter.
Marc Grandisson: The extraordinary premium growth from our P&C segments continues to increase our float which provides a significant tailwind to our overall earnings through the next several quarters.
Marc Grandisson: While there is some developing competition, we're observing an increased flight to quality and fully expect to capitalize on that trend as the cycle ages. Our reinsurance segment is in an enviable position. The in-force book constructed over the last several years is strong and allows us to exercise our underwriting acumen. When opportunities emerge, whether from dislocation in a casualty market or by offering value that others cannot, Arch is there to provide solutions and financial strength to its clients. In our insurance segment, growth tapered from the highs of the past few years as rate increases slowed and some of the dislocations were met by additional capacity.
Marc Grandisson: In the U S. The NFL conducted its annual drop this past weekend.
Marc Grandisson: Traditionally the team that finished last season with the worst record gets to first pick a chance to select the best College player while the champions that collapsed the player selected with the topics are expected to be immediate difference makers, even though they are typically selected by a team with multiple deficiencies maker.
Marc Grandisson: <unk> success far from guaranteed.
Marc Grandisson: If you are talented quarterback as nobody to throw the ball to it can ruin the players confidence and a pressure can quickly sabotage a career.
Marc Grandisson: Compare this with teams drafting at the end of the round coming up successful seasons with talented roasters rosters in place.
Marc Grandisson: They often have the luxury of selecting an excellent player who doesn't need to contribute right away. Instead. These teams select players who can fill a specific short term role and be given time to grow into a difference maker.
Marc Grandisson: Our acquisition of the <unk> core business is like adding a solid player to a winning team. We already have established all stars a winning talent dense culture and a favorable schedule in the years ahead, adding the mid Corp team to our diversified franchise makes us better today and tomorrow and that's a winning proposition.
Marc Grandisson: Overall, conditions remain strong, and the market is behaving rationally. Two important factors that continue to support growth and strong profits. In the first quarter, we found growth opportunities in several lines, including property and casualty E&S and other specialty lines.
Marc Grandisson: <unk>.
Marc Grandisson: I'll now turn it over to Francois to provide some more color on our financial results from the quarter and then we will return to take your questions Francois.
Francois Morin: Thank you Mark and good morning to all as you will have seen we started out 2024 on a very strong note with after tax operating income of $2 45 per share for the quarter for an annualized operating return on average common equity of 27% booked.
Francois Morin: <unk> per share was $49 36 as of March 31.
Marc Grandisson: Across most of our specialty lines, pricing remains very healthy, and we are able to deploy capital in order to deliver attractive returns above our long-term target of 15%. Like re-insurance, our insurance segment has made strong efforts to establish itself as a first-choice provider for its clients, and that manifests itself in seeing more opportunities. In life, you have to play to win, and in insurance, if you don't see the business, you can't ride it.
Francois Morin: Five 2% for the quarter.
Francois Morin: Our excellent performance was again the result of outstanding results across our three business segments highlighted by $736 million in underwriting income.
Marc Grandisson: We delivered exceptional net premium written growth across our reinsurance segment, a 31% increase over the first quarter of 2023, driven by strong business flow in all our lines of business.
Marc Grandisson: Growth was also solid for our insurance segment.
Marc Grandisson: <unk> percent after adjusting for the impact of a large nonrecurring transaction, we underwrote in the first quarter last year, and our warranty and lenders business unit.
Marc Grandisson: Overall, the combined ratio from the group came in at an excellent 78, 8%.
Marc Grandisson: Our underwriting income reflected $126 million of favorable prior year development on a pretax basis or three seven points on the combined ratio across our three segments, we observed favorable development across many units, but primarily in short tail lines in our property and casualty segments and in mortgage.
Marc Grandisson: And now let's pivot from PNC to mortgage, which, to borrow from a famous ad campaign, just keeps on going, and going, and going. Our mortgage segment continues to generate solid underwriting income and risk-adjusted returns from its high-quality portfolio. While mortgage originations remain tempered by high mortgage interest rates, the persistency of our in-force book remains a healthy 83.6% while the delinquency rate is near all-time lows. New insurance written is in line with our appetite given market conditions.
Marc Grandisson: Due to strong cure activity.
Marc Grandisson: The collapse of the Francis Scott Key bridge in Baltimore last month has the potential to become the largest insured marine event in history.
Marc Grandisson: Both our insurance and reinsurance segments were exposed to this disaster in our current estimates represent an impact of two one and 3.0 points respectively on the combined ratio in these segments results this quarter.
Marc Grandisson: We note that the losses for this event were reported as non catastrophe losses in our ratios.
Marc Grandisson: <unk> loss activity was relatively relatively subdued and below our expectations across our portfolio with a series of smaller events generating current accident year catastrophe losses of $58 million for the group in the quarter.
Marc Grandisson: When the mortgage market picks up again, we're prepared to increase our production. However, if the status quo persists, we're content with our current situation, which has extended the duration over which we earn mortgage insurance premiums. Competition within the MI industry remains disciplined, which means we are in a good place. Finally, our investment portfolio grew to $35.9 billion, generating $327 million of net investment income in the quarter. The extraordinary premium growth from our P&C segments continues to increase our float, which provides a significant tailwind to our overall earnings through the next several quarters.
Marc Grandisson: Overall, our underlying ex cat combined ratio remained excellent with the increase this quarter relative to last few quarters, mostly due to the Baltimore bridge collapse.
Marc Grandisson: Despite the impact of this event our current quarter ex cat combined ratio is still improved by one four points from a year ago. As a result of earned rate changes above our loss trend in our P&C businesses and lower expense ratio was mostly from the growth in our premium base.
Marc Grandisson: These benefits were slightly offset by investments, we continue to make in people data and analytics and technology to improve the quality and resilience of our platform going forward.
Marc Grandisson: From a modeling perspective, I'd also like to remind everyone that our operating expense ratio was are typically at their highest in the first quarter of the year due to seasonality in compensation expenses, including equity based grants for retirement eligible employees that were made in March.
Marc Grandisson: As of April one our peak zone natural cap <unk> for a single event one in 250 year return level on a net basis remained basically flat from January one, but declined relative to our capital to 9.0% of tangible shareholders' equity well below our internal limits.
Marc Grandisson: In the US, the NFL conducted its annual draft this past weekend. Traditionally, the team that finished last season with the worst record gets the first pick, a chance to select the best college player, while the champions pick last. The players selected with the top picks are expected to be immediate difference-makers, even though they are typically selected by a team with multiple deficiencies, making success far from guaranteed. If your talented quarterback has nobody to throw the ball to, it can ruin the player's confidence, and the pressure can quickly sabotage a career.
Marc Grandisson: On the investment front, we earned a combined $426 million pretax from net investment income and income from funds accounted using the equity method or 112.
Marc Grandisson: <unk> 12 per share $1 12 per share.
Marc Grandisson: Total return for the portfolio came in at 0.8% for the quarter, reflecting the unrealized losses on the Companys fixed income securities driven by higher interest rates.
Marc Grandisson: Our growing investment portfolio keeps providing meaningful tailwind to our bottom line and remains of high quality and short duration.
Marc Grandisson: We have grown our investable asset base significantly over the last few years, primarily to significant cash flow from operations.
Marc Grandisson: This positive result, combined with new money rates near 5% should support further growth in our investment income for the foreseeable future.
Marc Grandisson: Income from operating affiliates was strong at $55 million of note approximately $14 million of this quarter's income is attributable to the true up of the deferred tax asset at our operating affiliate summers in connection with our Bermuda corporate income tax a nonrecurring item.
Marc Grandisson: Compare this with teams drafting at the end of the round coming off successful seasons with talented rosters in place. They often have the luxury of selecting an excellent player who doesn't need to contribute right away. Instead, these teams select players who can fill a specific short-term role and be given time to grow into a difference-maker.
Marc Grandisson: Our effects of effective tax rate on pretax operating income was an expense of eight 5% for the 2024 first quarter slightly below our current expected range of 9% to 11% for the full year, mostly as a result of the timing of tax benefits related to equity based compensation.
Marc Grandisson: As regards our announcement to acquire the U S mid Corp, and entertainment insurance businesses from Allianz, we are making progress in obtaining the necessary regulatory approvals and are targeting a third quarter close for the transaction.
Marc Grandisson: Our acquisition of the Allianz Midcorp business is like adding a solid player to a winning team. We already have established all-stars, a winning, talent-dense culture, and a favorable schedule for the years ahead. Adding the Midcorp team to our diversified franchise makes us better today and tomorrow, and that's a winning proposition. I'll now turn it over to Francois to provide some more color on our financial results for the quarter, and then we'll return to take your questions. Francois?
Marc Grandisson: At a high level. The agreement is structured around two related contracts a loss portfolio transfer of loss reserves for years 2016 to 2023, and a new business agreement for business written in 2024 and after.
Marc Grandisson: Overall, we expect to deploy approximately one $4 billion in internal capital resources to support both contracts. In addition to the cash cash consideration of $450 million.
Marc Grandisson: The overall transaction is expected to be moderately accretive to earnings per share and return on equity starting in 2025.
Marc Grandisson: It is important to note that even when reflecting the capital to be deployed for this transaction our capital base remains strong with along with the leverage ratio in the mid teen range, we maintain ample financial resources and remain committed and allocating our capital in the most optimal way for the long term benefit.
Marc Grandisson: Of our shareholders.
Speaker Change: With these introductory comments, we are now prepared to take your questions.
Francois Morin: Thank you, Marc, and good morning to all. As you will have seen, we started out 2024 on a very strong note with after-tax operating income of $2.45 per share for the quarter, for an annualized operating return on average common equity of 20.7%. Book value per share was $49.36 as of March 31, up 5.2% for the quarter. Our excellent performance was, again, the result of outstanding results across our three business segments, highlighted by $736 million in underwriting income.
Speaker Change: Thank you if you have a question at this time. Please press the star one one key on your Touchtone telephone.
Speaker Change: If your question has been answered or you wish to remove yourself from the queue. Please press star one one again and if you are using a speaker phone please lift the handset.
Speaker Change: One moment for our first question.
Speaker Change: Our first question comes from the line of Elyse Greenspan from Wells Fargo.
Elyse Beth Greenspan: Hi, Thanks, Good morning, My first question.
Elyse Beth Greenspan: <unk> is on the reinsurance market Mark I think on your own.
Elyse Beth Greenspan: <unk> comments, you mentioned something about potential dislocation in the casualty market.
Francois Morin: We delivered exceptional net premium written growth across our reinsurance segment, a 31% increase over the first quarter of 2023, driven by strong business flow in all our lines of business. Growth was also solid for our insurance segment, 12% after adjusting for the impact of a large non-recurring transaction we underwrote in the first quarter last year in our Warranty and Lenders business unit. Overall, the combined ratio from the group came in at an excellent 78.8%.
Elyse Beth Greenspan: Are you starting to see casualty market just opportunities emerge there I know you've highlighted this I think starting in the third quarter of last year or is this something that you still think might.
Elyse Beth Greenspan: Might take a couple of quarters to kind of fully.
Elyse Beth Greenspan: Presented opportunities for arch.
Elyse Beth Greenspan: Yes.
Elyse Beth Greenspan: Agency market is going through I wouldn't say repricing, but not re underwriting as thorough because it has has been already.
Elyse Beth Greenspan: Getting was hard getting harder for the last several several years.
Elyse Beth Greenspan: We may have had some respect in terms of price increase.
Francois Morin: Our underwriting income reflected $126 million of favorable prior year development on a pre-tax basis, or 3.7 points on the combined ratio across our three segments. We observed favorable development across many units, but primarily in short daylines in our property and casualty segments and in mortgage due to strong cure activity. The collapse of the Francis Scott Key Bridge in Baltimore last month has the potential to become the largest insured marine event in history.
Elyse Beth Greenspan: Middle of last year, but I think that the development of the prior year as we all know has created a little bit more uncertainties and inflation is not ebbing.
Elyse Beth Greenspan: Right now what we're seeing is people still being very very careful and disciplined into and how they underwrite the business.
Elyse Beth Greenspan: Which leaves us arch gives us opportunity to lean into this even more so we have grown our casualty book of business on the instrument side.
Elyse Beth Greenspan: Quite a bit our casualty book is E&S as you as we all know and very specialized in specialty.
Elyse Beth Greenspan: But.
Speaker Change: Sorry, I thought there was some technical difficulties here.
Speaker Change: At least are you still there just want to make sure that you can hear me.
Speaker Change: Yes, we can hear you okay. Thank you said youre at Cumulus.
Francois Morin: Both our insurance and reinsurance segments were exposed to this disaster, and our current estimates represent an impact of 2.1 and 3.0 points, respectively, on the combined ratio in these segments results this quarter. We note that the losses for this event were reported as non-catastrophe losses in our ratio. Catastrophe loss activity was relatively subdued and below our expectations across our portfolio, with a series of smaller events generating current accident year catastrophe losses of $58 million for the group and the quarter.
Speaker Change: Youre trooper.
Speaker Change: So the casualty market on the insurance side, we are growing but I think now we're having more opportunities to grow I think that there is some.
Speaker Change: I'm kind of not repricing, but definitely a.
Speaker Change: The focus on that line of business on the insurance side on the reinsurance side I think.
Speaker Change: We're starting to see some of the renewals that came through in one one hunting totally.
Speaker Change: Creating a little bit more friction in terms of renewals casualty quota share for instance, so what we expect right now is the early stages. We don't know how long it's going to last at where it's going to go but there's clearly a psychological.
Speaker Change: Believes belief within the human system in the human interactions in the casualty that people need and know that we need to get more rate to make up for all the risks and potentially some of the misses that we had in the past.
Speaker Change: And then you guys mentioned right the middle market opportunity you saw with this with this early on steel.
Speaker Change: After this transaction or the other.
Speaker Change: There are things on the list like when you think about.
Speaker Change: Insurance reinsurance now middle market and mortgage.
Francois Morin: Overall, our underlying X-Gap combined ratio remained excellent, with the increase this quarter relative to the last few quarters mostly due to the Baltimore Bridge collapse. Despite the impact of this event, our current quarter XCAT combined ratio is still improved by 1.4 points from a year ago as a result of earned rate changes above our loss trend in our P&C businesses and lower expense ratios mostly from the growth in our premium base.
Speaker Change: There are other things that you guys think that maybe down the road do you would you would need.
Speaker Change: Or want to potentially add to the platform.
Speaker Change: Yes, we have we have a long list of things, we'd like to acquire or have part of our Arsenal.
Speaker Change: Sure.
Speaker Change: We talk about <unk> as an acquisition and that's an important one and significant one and very good one for US we're very pleased without one but what we also would want to tell our shareholders is as you know releases. We've also added teams along the way. So acquisition is a pure acquisition of a company is not the only thing.
Speaker Change: We were able to do it and we've acquired some teams to do contingency some more terror and everything in between so we're always on the look out again as a psycho manager or at least what you want is as many areas to deploy capital depending on the market conditions create a much more stable enterprise much less volatility to the bottom line.
Francois Morin: These benefits were slightly offset by investments we continue to make in people, data, and analytics, and technology to improve the quality and resilience of our platform going forward. From a modeling perspective, I'd also like to remind everyone that our operating expense ratios are typically at their highest in the first quarter of the year due to seasonality and compensation expenses, including equity-based grants for retirement-eligible employees that were made in March. As of April 1, our peak zone natural cap PML for a single event one in 250-year return level on a net basis remained basically flat from January 1, but declined relative to our capital to 9.0% of tangible shareholders' equity, well below our internal limit.
Speaker Change: And again the more.
Speaker Change: The size of the market cycles are not monolithic multi.
Speaker Change: Multi to comfort and multi faces and multi places. So we also have as a little bit of an inside baseball, we our executive team as always.
Speaker Change: Almost every other month, we have a list a wishlist that I will now share with you on this call, but so wish list of things that we know for effect would be accretive and additive to our diversification of our portfolio and we're always on the lookout for those mid.
Speaker Change: Mid market was on the list and this is what so opportunities met met.
Speaker Change: Met the willingness to do it and this is where we are.
Speaker Change: Okay. Thank you.
Speaker Change: Please.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Jimmy bowler from J P. Morgan Securities LLC.
Jimmy Bowler: Hi, Good morning, So just a question on the Baltimore Bridge laws that you reported in insurance and reinsurance and I recognize your results were pretty strong overall, but the number seems fairly high that you reported relative to what some of your.
Francois Morin: On the investment front, we earned a combined $426 million pre-tax from net investment income and income from funds accounted for using the equity method, or $1.12 per share. However, total return for the portfolio came in at 0.8% for the quarter, reflecting unrealized losses on the company's fixed income securities driven by higher interest rates.
Jimmy Bowler: Peers have talked about and also what the industry's losses seem to be so I'm just wondering I'm assuming most of this is <unk>.
Jimmy Bowler: Just wondering.
Speaker Change: Sort of.
Jimmy Bowler: Is this because of.
Speaker Change: How much conservatism is baked into the number or maybe the market's underestimating what the losses from the event.
Speaker Change: So you're going to end up being.
Francois Morin: Our growing investment portfolio keeps providing meaningful tailwinds to our bottom line and remains of high quality and short duration. We have grown our investable asset base significantly over the last few years, primarily due to significant cash flow from operations. This positive result, combined with new money rates near 5%, should support further growth in our investment income for the foreseeable future. Income from operating affiliates was strong at $55 million. Of note, approximately $14 million of this quarter's income is attributable to the true-up of the deferred tax asset at our operating affiliate Summers in connection with the Bermuda corporate income tax, a non-recurring item.
Speaker Change: Well, Jimmy just at a high level right I'll, let francois talk about the reserving level, but we have been a participant in marine liability for quite a while I used to underwrite the Iga and the reinsurance group way back you know with two or three this is nothing new to US. We also acquired nor Barbican in 2019, So we have and we have a stronger presence than we ever had in.
Speaker Change: In the London market, which again is another marine market positioning. So we do also we do insurance reinsurance and some retro actually so it's nothing new to us.
Speaker Change: We like that business quite a bit money over the years.
Speaker Change: The rates and the returns are at were and are still acceptable, but sometimes a loss occurs I am not sure about what the other ones are thinking about but we definitely think that this is pretty much in line with what we would've expected the market share to be or what we think the presence in the marketplace would be I'll, let <unk> talk about.
Speaker Change: Yes.
Speaker Change: We can't speculate or comment on how others are maybe or may not be reserving for this event.
Speaker Change: For us it is not unusual and I would say that we've taken a very conservative view of.
Speaker Change: The loss.
Speaker Change: And still a lot to be determined obviously in terms of who is going to end up paying for it but.
Speaker Change: The last point you asked last question is yes for US right now it's all it's <unk> I mean, we don't really have all the specifics to establish case reserves. So we booked at <unk>, we'll see how things develop.
Speaker Change: And then on casualty reserves.
Speaker Change: Overall development was favorable but was there any buckets of unfavorable within the overall number and then if you could talk specifically about how your casualty reserves trended for pre Covid and post Covid era.
Francois Morin: Our effective tax rate on pre-tax operating income was an expense of 8.5% for the 2024 first quarter, slightly below our current expected range of 9 to 11% for the full year, mostly as a result of the timing of tax benefits related to equity-based compensation.
Speaker Change: Well part one of your question there was really no material developments on long tail casualty lines of business across all years. So both pre the two.
Francois Morin: As regards our announcement to acquire the U.S. Midcorp and Entertainment Insurance Businesses from Allianz, we are making progress in obtaining the necessary regulatory approvals and are targeting a third quarter close for the transaction. At a high level, the agreement is structured around two related contracts. A loss portfolio transfer of loss reserves for years 2016 to 2023 and a new business agreement for business written in 2024 and after. Overall, we expect to deploy approximately $1.4 billion in internal capital resources to support both contracts, in addition to the cash consideration of $450 million.
Speaker Change: 2015 to 19 years in 'twenty, one to 'twenty three so we're very comfortable with that and I think our reserves are holding up nicely.
Speaker Change: And I know theres been some concerns around.
Speaker Change: The more recent years, where there's been some signs of adverse in the industry, we're not seeing that actually our metrics or our actuaries are commenting that.
Speaker Change: Our actual development is coming in more favorable than expected.
Speaker Change: Again, very early to declare victory, but certainly for US a positive sign and we will keep monitoring and then see how things develop for the rest of the year.
Speaker Change: Thank you.
Speaker Change: Youre welcome.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of Andrew Klingerman from TD Cowen.
Andrew Scott Kligerman: Thank you and good morning.
Andrew Scott Kligerman: You mentioned that the.
Andrew Scott Kligerman: BMI market is.
Andrew Scott Kligerman: Going and going and going.
Andrew Scott Kligerman: How do you think about the favorable prior year development I mean last year in the first quarter was 25 points this year.
Andrew Scott Kligerman: In the first quarter, it's another 25 points I mean does that.
Andrew Scott Kligerman: Is that still continue going forward as well.
Andrew Scott Kligerman: Okay.
Speaker Change: Well I don't have a crystal ball for the future, but we're.
Speaker Change: Like everybody else, we're just on the receiving end of a market that's.
Operator: The overall transaction is expected to be moderately accretive to earnings per share and return on equity starting in 2025. It is important to note that, even when reflecting the capital to be deployed for this transaction, our capital base remains strong with a leverage ratio in the mid-teen range. We maintain ample financial resources and remain committed to allocating our capital in the most optimal way for the long-term benefit of our shareholders. With these introductory comments, we are now prepared to take your questions.
Andrew Scott Kligerman: Turing better.
Andrew Scott Kligerman: The borrower is in good conditions Theres there are programs from the <unk>.
Andrew Scott Kligerman: To help the borrowers staying in their homes.
Andrew Scott Kligerman: Most of those up even would have a delinquency as we speak would have a much lower mortgage rates. So they have a lot of incentive to stay in the home and not having to do anything with it plus there's a lot of equity being built up in their homes. So people have are sitting on because as you know has been.
Andrew Scott Kligerman: Significant increase in property valuation or that three to four years, so everything is really indicating that.
Operator: Thank you. If you have a question at this time, please press the star 1 1 key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star 1 1 again. And if you are using a speakerphone, please lift the handset.
Andrew Scott Kligerman: We have a lot of.
Andrew Scott Kligerman: A lot of alignment between starting from from the borrower all the way through the mortgage insurer in the mortgage and revision.
Andrew Scott Kligerman: Our mortgage origination of the mortgage companies too to make sure that.
Andrew Scott Kligerman: Borrowers can can make the payment you can refinance delay or attached to it there's a lot of things a lot of tooling toolbox that warrant there frankly.
Andrew Scott Kligerman: 700, <unk> when the crisis happened, so, but what does that mean in terms of development.
Andrew Scott Kligerman: Have to see what happens, but again, it's been more favorable than we would have said probably two or three years ago and we're just when we see the data we just react to it.
Operator: One moment for our first question. Our first question comes from the line of Elyse Greenspan from Wells Fargo. Hi, thanks. Good morning.
Andrew Scott Kligerman: Pretty amazing stuff and then my follow up question is around the <unk>.
Andrew Scott Kligerman: Acquisition.
Marc Grandisson: My first question, you know, is on the reinsurance market. Marc, I think in your opening comments, you mentioned something about, you know, potential dislocation in the casualty market. You know, are you starting to see casualty market opportunities? I know you highlighted this, I think, starting in the third quarter of last year, or is this something that you still think, you know, might take, you know, a couple quarters to kind of present itself at?
Andrew Scott Kligerman: I Love your analogy about.
Andrew Scott Kligerman: The NFL draft and picking the high quality players. Some have criticized Allianz is maybe not.
Andrew Scott Kligerman: Maybe I'll say they were in the first round draft choice. So.
Andrew Scott Kligerman: With that.
Andrew Scott Kligerman: Okay.
Andrew Scott Kligerman: <unk> been able to do to kind of turn them into a first round type player I mean, I know ive heard about data and analytics.
Andrew Scott Kligerman: Alright, good can that help overnight, so I would like to know what youre going to do there to to really enhance that operation.
Speaker Change: Well, there's a lot of things going on to the thorough and very complete planned by our unit two to first integrate them and make them part of our.
Marc Grandisson: Yeah, the casualty market is going through, I wouldn't say repricing, but not re-underwriting as thoroughly because it has been already getting harder for the last several years. We may have had some respite in terms of price increases in the middle of last year, but I think that the development of the prior year, as we all know, has created a little bit more uncertainty, and inflation is not ebbing.
Speaker Change: Company and our culture.
Andrew Scott Kligerman: And we'll have to look at everything that we can do to help them out.
Andrew Scott Kligerman: There is an okay, okay business very decent business.
Andrew Scott Kligerman: But we will have to make it more of an orange business, but recognizing some of the cultural differences and the distribution is a little bit of a different business.
Andrew Scott Kligerman: Data analytics is certainly one of them. We also bring to bear we believe <unk> is a big company and they did and a lot of work on this.
Andrew Scott Kligerman: Where we have a strong presence in the U S. As well we also already do some middle market business. So we already have experience in that space and so we have a we have a couple of things a couple of tricks up our sleeve. If you will to make it better I won't go into all the details obviously, but I think we are.
Marc Grandisson: So right now, what we're seeing is people still being very, very careful and disciplined in how they underwrite their business, which leads us arch, gives us an opportunity to lean into this even more. We have grown our casualty book of business on the insurance side quite a bit. Our casualty book is ENS, as we all know, and it's very specialized in specialty. Sorry, I thought it was some technical difficulties here. Elyse, are you still there?
Andrew Scott Kligerman: We're pretty excited about what we can do with the asset and I think like I said all the time.
Andrew Scott Kligerman: And this is not a comparison with allianz for us, but truthfully, that's the same thing to the to the mortgage UGG.
Andrew Scott Kligerman: They are relatively a bigger piece of our overall enterprise and perhaps there would be some other company. So that makes it for a little bit more excitement a bit more.
Andrew Scott Kligerman: Willingness from our part obviously to invest right I'll remind everyone that some of the earnings that we make it we put aside to invest for the future. So we have a lot of things going on and we're pretty excited.
Andrew Scott Kligerman: It's a lot.
Andrew Scott Kligerman: Yes.
Speaker Change: Thank you.
Marc Grandisson: I just want to make sure you can hear me. Yes, we can hear you. Okay. Thank you. Thank you. Thank you, Elyse. You're a trooper.
Speaker Change: One moment for our next question.
Andrew Scott Kligerman: Our next question comes from the line of Michael Zaremski from BMO.
Michael David Zaremski: Hey, Thanks, good morning.
Michael David Zaremski: On the.
Marc Grandisson: So, the casualty market on the insurance side, we're growing, but I think now that we're having more opportunities to grow. I think that there's some kind of, not repricing, but definitely a focus on that line of business on the insurance side. On the reinsurance side, I think we're starting to see some of the renewals that came through at 1.1. Anecdotally, it's creating a little bit more friction in terms of the renewal of the casualty quarter share, for instance.
Michael David Zaremski: Insurance segment.
Michael David Zaremski: The underlying loss ratio.
Michael David Zaremski: 57, five I know I'm, probably just nitpicking.
Michael David Zaremski: But.
Michael David Zaremski: I hear the.
Michael David Zaremski: The commentary about the impact from the Baltimore Bridge, but.
Michael David Zaremski: Just curious your current property, which.
Michael David Zaremski: It has a lower loss ratio.
Michael David Zaremski: Attritional loss ratio I believe so.
Michael David Zaremski: Is there anything going on there that maybe you are putting in more conservatism on the casualty growth or anything we should be thinking about there.
Marc Grandisson: So, what we expect right now is the early stages. We don't know how long it's going to last and where it's going to go, but there's clearly a psychological belief within the human system and the human interactions in the casualty that people need and know that we need to get more rate to make up for all the risks and potentially some of the misses that we had in the past. And then, um, you guys mentioned, right, the middle market opportunity you saw with this Allianz deal. Um, you know, after this transaction, are there other things on the list, like when you think about, you know, you know, insurance, reinsurance, now middle market, and mortgage? There are other things that you guys think that, you know, maybe down the road, you would need or want to potentially add to the platform?
Speaker Change: Well, Mike I'd say, it's just the nature of the business. We're in I think there's going to be some ebbs and flows are going to be some.
Speaker Change: <unk> got some unusual or unexpected developments there could be one or two claims that.
Michael David Zaremski: Surfaced in the quarter, we book them, we were we.
Michael David Zaremski: <unk> adverse or bad news early on and see how things play out so.
Michael David Zaremski: Theres really nothing to say that.
Michael David Zaremski: We want that needs to be highlighted it's really par for the course and yes, absolutely. This quarter. It turns out that the <unk> gap kind of underlying loss ratio was up I'd say 30 bps.
Michael David Zaremski: And that's just a reality of the world. We're in and we think it's there is still an excellent result.
Speaker Change: Okay got it.
Speaker Change: Second question is probably a quick one but.
Speaker Change: You all are kind enough to give us guidance on the cat load I know last quarter. I think you said it was in the six to seven range for I believe it's just the.
Michael David Zaremski: Premiums ex the mortgage.
Michael David Zaremski: <unk>.
Michael David Zaremski: Is that expected to change or maybe be towards the high end of that range on a base case scenario as you kind of continue to lean into the hard market conditions as we think about 'twenty four.
Marc Grandisson: Yes, we have a long list of things we'd like to acquire or have part of our arsenal. We talk about Allianz as an acquisition, and that's an important one and a significant one and a very good one for us. We're very pleased with that one.
Michael David Zaremski: Well the comment I made last quarter was for the full year on the overall ACG L premium 68%.
Michael David Zaremski: We don't see that changing at this point I think that was based on our view of how the year. They all had a chance to play out Thats why we gave you a range.
Michael David Zaremski: We were very happy with the one one renewals.
Marc Grandisson: But what we also would want to tell our shareholders is, as you know, Elyse, we've also added teams along the way. So a pure acquisition of a company is not the only thing that we're able to do. We've acquired some teams to do contingency, some more terror, and everything in between. So we're always on the lookout.
Michael David Zaremski: <unk> hundred one's went pretty much as expected and.
Michael David Zaremski: Six one so far are holding up nicely I mean still a little bit of time to go before that gets finalized but.
Michael David Zaremski: Big picture again, that's the 6% to 8% range for the year in terms of cat load is holding up nicely.
Speaker Change: So first of all sorry.
Speaker Change: Is that six to eight on.
Speaker Change: All insurance premiums ex mortgage or just with our with our total company with with more total companywide ACG all total.
Marc Grandisson: Again, as a cycle manager, Elyse, what you want is as many areas to deploy your capital, depending on the market conditions. It creates a much more stable enterprise, much less volatility at the bottom line. And again, the market cycles are not monolithic; they come in many forms and in many places. We also have, as a little bit of an insight, Baseball. Our executive team is always, every other month, we have a list, a wish list that I will not share with you on this call, but it's a wish list of things that we know for a fact would be accretive and additive to our diversification of our portfolio Mid-market was on the list, and this is what opportunities met, met the willingness to do it, and this is where we are. Okay, thank you.
Speaker Change: Thank you.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Dan Dean Kris Kris CLO from K B W.
Speaker Change: Hi, My first question was on the net to gross ratio in reinsurance I saw that it ticked down about five points year over year. I was wondering is that a function of buying more reinsurance or is there anything else going on there.
Speaker Change: No I think if you look at the it's a good question. If you look at the last four or five years in the first quarter Youll see that our net to gross ratio offers between 65 to 70.
Speaker Change: Last quarter last year was 70% because we had a larger transaction that came through that was that.
Speaker Change: Not ceded so it's really just a comparison thats not.
Speaker Change: One just one periods comparison is not reflective of what's going on if you look at the longer term youll get to the $65 70, So nothing changed there.
Speaker Change: Okay. Thank you for that.
Speaker Change: And then next thing shifting back to the insurance business was a bit surprised to see solid growth within professional lines given the rate environment. There. So can you maybe talk about the market dynamics of the opportunities that youre seeing in that and is that growth coming from DN hours that within other professional lines.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Jimmy Bhullar from JP Morgan Securities LLC. Hi, good morning.
Marc Grandisson: So just a question on the Baltimore Bridge loss that you reported in insurance and reinsurance, and I recognize your results were pretty strong overall, but the number seems fairly high that you reported relative to what some of your peers have talked about and also what industry losses seem to be. So I'm just wondering, I assume most of this is IBNR, but I'm just wondering, Is this because of how much conservatism there is baked into the number, or maybe the market's underestimating what the losses from the event are eventually going to end up being? I am just at a high level, right?
Speaker Change: Yes, so the.
Speaker Change: It's.
Speaker Change: <unk>.
Speaker Change: Our professional liability has many things to intuit.
Speaker Change: At large not large large company large public company D&O, we've got some smaller private also has cyber and it and some professional ability.
Speaker Change: So agents stuff like this thats more based I think that the growth is largely attributed to a cyber.
Speaker Change: Our teams.
Speaker Change: Are leaning a little bit more into it and we've also acquired a couple more team or developing a team in Europe, because there's a big need for what we realize is a need for cyber in Europe, and that's something that we're starting to grow and see more of.
Speaker Change: And the reason it's grown in cyber is because even though some of the rates as we all heard.
Speaker Change: Went down slightly it's still a very very favorable we believe very favorable proposition for us to to underwrite also helps us doing other lines of business because it creates value for our clients and so there's still a little bit harder to get in terms of coverage on the D&O, we would have decreases and increases depending on whether rates are or where we see the relative.
Marc Grandisson: I'll let Francois talk about the reserving level, but we have been a participant in marine liability for quite a while. I used to underwrite IGA, the reinsurance group, way back in 2002 or 2003.
Marc Grandisson: This is nothing new to us. We also acquired North Barbican in 2019. So we have, and we have a stronger presence than we ever had in the London market, which, again, is another marine market positioning. So we do also, we do insurance, reinsurance, and some retro, actually. So it's nothing new to us.
Speaker Change: The relative valuation or profitability of our portfolio on that note.
Speaker Change: Great at the rates and D&O went down about 8% in this quarter not as bad as it was you and a half ago.
Speaker Change: You heard the comment that the <unk> are down so there's there's still we believe there's still a lot of favorable.
Speaker Change: Opportunities in that segment as well, we just have to be a little bit more.
Marc Grandisson: We like that business quite a bit, and we've made money over the years. The rates and the returns are, were, and are still acceptable. I mean, but sometimes a loss occurs.
Speaker Change: Circumspect when we do this.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from the line of David <unk> from Evercore ISI.
Francois Morin: I'm not sure about what the other ones are thinking about, but we definitely think that this is pretty much in line with what we would have expected a market share to be or what we think that, you know, a presence in the marketplace would be. I'll let Francois talk about that. Yeah, I mean, again, we can't speculate or comment on how others are maybe or may not be reserving for this event. You know, for us, it's not unusual.
David: Alright, Thanks, Mark you mentioned in your prepared remarks that youre seeing increased underwriting appetite and developing competition specifically within reinsurance.
David: Could you just talk about where youre seeing that elaborate on that a little bit.
David: And what specific lines youre seeing that in and how you guys are responding to that.
Speaker Change: Yes, I think I think right now what we're seeing is more.
Speaker Change: The higher appetite for cyber is one of them that's for sure on insurance and reinsurance I would also can run the gamut because many of them typically right now, but we are the lines that are more short tail in nature, you can talk a little bit more willingness to take some more risk from the from the competition and how we react to it as.
Francois Morin: And I'd say that we've taken a very conservative view of the loss and still a lot to be determined, obviously, in terms of who's going to end up paying for it, but and to you know the last point you asked, the last question: yes, for us right now, it's all you know it's IBNR. We don't really have all the specifics to establish case reserves, so we booked it as IB And then on casualty reserves, your overall development was favorable, but were there any pockets of unfavorable within the overall number?
Speaker Change: We have many things we do we typically will tend to first look at the overall no.
Speaker Change: If the rates go down or if it if the rates stay as is with the new conditions, you actually price the business as if it's a new piece of business and what kind of return.
Speaker Change: It will it will get to you and if it's a little bit not as much.
Speaker Change: To close two for comfort, we might just decrease our participation and we also might just stay on the clients that we believe have a better chance to really know.
Speaker Change: <unk> through debt.
Speaker Change: Little bit sideways market, if you will.
Speaker Change: It's a very an underwriter's market at this time.
Speaker Change: Got it thanks.
Francois Morin: And then, if you could talk specifically about how your casualty reserves trended for pre-COVID and post-COVID years. Well, part one of your question, there was really no material development on long tail casualty lines of business across all years. So, both pre, you know, the 2015 to 19 years and 21 to 23.
Speaker Change: Just within reinsurance.
Speaker Change: The underlying margins there.
Speaker Change: We're <unk>.
Speaker Change: Strong and even better if I exclude the bridge loss.
Speaker Change: Can you talk about if there was anything in there that would flatter the results or.
Speaker Change: Is it more just sort of the earn in of the property.
Speaker Change: More short tail lines and these results are fairly sustainable I guess, how should how should I think about the sustainability of the results on the reinsurance side.
Francois Morin: So, we're very comfortable with that. I think our reserves are holding up nicely. And I know there's been some concerns around the more recent years where there's been some signs of bad news in the industry. But we're not seeing that actually, or, you know, metrics, or, you know, actuaries are commenting that our actual development is coming in more favorable than expected. Again, very early to declare victory, but that's certainly a positive sign for us, and we'll keep monitoring and see how things develop for the rest of the year. Thank you. You're welcome.
Speaker Change: Yes.
Speaker Change: It's a great market rate than we've been saying that for a few quarters I think we said it before I think we encourage you all to look at results on a trailing 12 month basis, I think it's a bit more.
Speaker Change: Reliable I think less prone to volatility that has some sometimes hard to predict but yes. I mean, we may mark set up I think the quality of the book that's enforced right now is excellent.
Speaker Change: And we're going to earn that and but whether how.
Speaker Change: Was this quarter a little bit.
Speaker Change: Better than maybe the long term run rate may be we don't know but.
Speaker Change: As you try to look ahead I would say more of a trailing 12 month again view is probably a bit more reliable.
Speaker Change: Understood. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of Josh Shanker from Bank of America.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Andrew Kligerman from TG Cowen. Hey, thank you, and good morning.
Joshua David Shanker: Yes. Thank you very much for taking my question on the other income which doesn't get enough attention.
Speaker Change: Summers in Copa.
Marc Grandisson: You mentioned that the MI market is going and going and going. What do you think about the favorable prior year developments? I mean, last year in the first quarter, it was 25 points.
Joshua David Shanker: The weak quarter for cobalt in stock returning for Q 'twenty three yet the other was quite strong and maybe I'm misunderstanding how to model. This but I bring this up just cobalt has had a excellent quarter. This past Q4, and I'm wondering if that presages, a very very strong other income return.
Marc Grandisson: This year, in the first quarter, it's another 25 points. I mean, does that still continue going forward as well? Well, I don't have a crystal ball for the future, but we're, like everybody else, we're just on the receiving end of a market that's healing better, the borrower is in good condition, and there are programs from the GSEs that help the borrower stay in their homes. Most of those that even would have a delinquency as we speak would have a much lower mortgage rate, so they have a lot of incentives to stay in the home and not have to do anything with it, plus there's a lot of equity being built up in the home.
Joshua David Shanker: The company as we head into 2024.
Speaker Change: Yes, so just to be.
Speaker Change: Make sure. We're on the same page there is a lag right. So coface is booked on a one lag one quarter lag basis. So what they just reported for Q1 will show up in our Q2 numbers summers is on a real time basis.
Speaker Change: And as we know right summers should follow relatively closely the performance of our reinsurance book, because it's effectively a sidecar or there are some nuances to it but big picture.
Speaker Change: That is booked on a real time basis and Shouldnt. There are fairly closely our reinsurance book, but to your point, yes, I mean, if if if.
Speaker Change: Colfax reported a strong Q1, you should see the benefits of that flow through in our second quarter.
Speaker Change: In theory, there should be I guess as youre, saying some correlation between.
Speaker Change: Reinsurance segment underwriting income.
Marc Grandisson: So people are sitting on because, as you know, there's been a significant increase in property valuation over the last three to four years. So everything is really indicating that we have a lot of alignment between starting from the borrower all the way to the mortgage insurer and the mortgage origination or the mortgage companies to make sure that the borrowers can make the payment; you can refinance, delay, or attach it. So a lot of things, a lot of tools and a toolbox that weren't there, frankly, in 07 or 08 when the crisis happened.
Speaker Change: <unk>.
Speaker Change: And summers, which appears in that other line.
Speaker Change: Correct, yes, it's not perfectly correlated because it's not the whole segment, it's mostly the Bermuda reinsurance unit that we.
Speaker Change: That they follow not the entire business, but big picture is still I mean, if the market conditions are good in reinsurance.
Speaker Change: <unk> will benefit from that.
Speaker Change: On a similar basis.
Speaker Change: And one of them.
Speaker Change: Other numbers question.
Speaker Change: Post the S&P model change from a few months ago is there any way to think smartly about how much excess capital. You think you are sitting on or the possibility. If you find other interesting M&A item the ability to quickly deploy.
Marc Grandisson: But what does that mean in terms of development? We'll have to see what happens. But again, it's been more favorable than we would have said probably two or three years ago, and we're just, when we see the data, we just react to it; pretty amazing stuff. And my follow-up question is around the Allianz acquisition. And I love your analogy about, you know, the NFL draft and picking high-quality players.
Speaker Change: Yes, I mean, thats always an evolving topic right I think we.
Speaker Change: We are always focused on putting the capital to work in the business, where we can I think we've done a fair amount of that obviously this quarter with the reinsurance growth that we saw.
Speaker Change: The 1 billion eight that will support the ASEAN transactions. Another example.
Speaker Change: We will see how the year plays out no question that we are we are generating significant earnings so that that goes to the bottom line.
Speaker Change: We'll be patient with it until we can't really find other ways to deploy it but for the time being it's we're in a really good place in terms of capital in and gives US a lot of flexibility.
Speaker Change: Thank you very much.
Speaker Change: Youre welcome.
Speaker Change: Thank you one moment for our next question.
Marc Grandisson: Some have criticized Allianz as maybe not, maybe I'll say they weren't a first round draft choice. So, you know, with that, what will Arch be able to do to kind of turn them into a first round type player?
Speaker Change: Our next question comes from the line of Brian Meredith from UBS.
Brian Robert Meredith: Yes. Thanks, a couple quick numbers and one big picture question for you all.
Brian Robert Meredith: The first one just quickly.
Brian Robert Meredith: On the Ali on steel as it is it possible to give us how much cash you're expecting to come in from the I guess, the <unk> and the reserve assumption.
Marc Grandisson: I mean, I know I've heard about data and analytics, but can that help overnight? So I'd like to know what you're going to do there to really enhance that operation. Well, there are a lot of things going on. There is a thorough and very complete plan by our unit to first integrate them, make them part of our company and our culture.
Brian Meredith: Net cash position you're expecting.
Speaker Change: And then obviously well.
Speaker Change: Yeah Big picture, it's a 2 billion dollar LPT.
Speaker Change: With dollar for dollar right. So so we get 2 billion cash and we were spending $4 50 that goes out back to them for the cash consideration. So net net that's a $1 billion of half of incremental cash step.
Marc Grandisson: And we'll have to look at everything that we can do to help them out. It's an okay business, a very decent business, but we'll have to make it more of an upscale business. But recognizing some of the cultural differences and the distribution, it's a little bit of a different business. Data analytics is certainly one of them.
Speaker Change: We will we will gap.
Speaker Change: And the rest on the new business then it's call it it's the premium flow with.
Speaker Change: As we write that business. That's the overall over time that will be the incremental investment income are invested assets that we will get.
Speaker Change: That's helpful.
Speaker Change: Quick question here.
Speaker Change: Referenced in your commentary higher contingent commissions on ceded business and your reinsurance what exactly is that.
Speaker Change: Or is that a lot of it is third party capital right.
Marc Grandisson: We also bring to bear, we believe, Allianz is a big company and they did a lot of work on this. We have a strong presence in the U.S. as well. We also already do some middle market business, so we already have experience in that space. And so we have a couple of things, a couple of tricks up our sleeves, if you will, to make it better. I won't go into all the details, obviously, but I think we're pretty excited about what we can do with the asset.
Speaker Change: Last year was a very.
Speaker Change: Very light or a good year for the performance of that book So.
Speaker Change: Some of those agreements many of them actually pay US a commission that is Theres a base and then theres a variable.
Speaker Change: Aspect to it and that was kind of.
Speaker Change: A lot a large part of that so effectively performance based commissions on.
Speaker Change: Property cat or property business.
Speaker Change: Makes sense and then one bigger picture question here I'm just curious on your reinsurance business. Obviously during the first quarter you are getting a lot of border rows coming in from clients what.
Marc Grandisson: And I think, like I said all the time, and this is not a comparison with Allianz or us, but truthfully, I'd say the same thing to the mortgage company, UG. They're relatively a bigger piece of our overall enterprise, and perhaps they would be at some other company.
Speaker Change: What are you seeing with respect to reserve development at your clients and how you kind of protected against that and not potentially seeing some of that adverse development.
Marc Grandisson: So that makes for a little bit more excitement, a bit more willingness on our part, obviously, to invest. I'll remind everyone that some of the earnings that we make we put aside to invest for the future. So we have a lot of things going on, and we're pretty excited. Thank you.
Speaker Change: Clients are you seeing on your kind of casualty quota share business.
Speaker Change: Yes, so I think the fast fashion.
Speaker Change: Also mentioned the actual was as expected, which is sort of consistent in both insurance and reinsurance on the more recent.
Speaker Change: Policy or accident year.
Speaker Change: Which.
Speaker Change: Having the right starting point means that you don't really have to correct frequently so I.
Operator: One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO. Hey, thanks. Good morning.
Speaker Change: We said it would not surprise on the reinsurance of but what we see.
Speaker Change: As I said.
Speaker Change: Earlier I think there is.
Speaker Change: There is anecdotally in.
Marc Grandisson: On the Transcribed by https://otter.ai, underlying loss ratio of 57.5. I know I'm probably just nitpicking.
Speaker Change: Some heavy no a lot more.
Speaker Change: More friction I would say between insurance and reinsurance companies to make sure that people will get to an agreement as to what the ultimate is going to be so we're hearing this going in the marketplace.
Marc Grandisson: I hear the commentary about the impact of the Baltimore Bridge. I'm curious, you know, you've grown into property that has a lower loss ratio, traditional loss ratio, I believe. So, you know, is there anything going on there, Mick, that maybe you're putting in more conservatism on the casualty growth or anything we should be thinking about there? Well, Mike, I'd say it's just the nature of the business we're in.
Speaker Change: Of course, we participate in that but we're not seeing this as being a big issue for us in the other years that would have been pre 2020 in 2021 I want to remind everyone that.
Speaker Change: We were very defensive we do not have a whole lot of those premium.
Speaker Change: And always you know harder and developing areas that people are talking about so.
Speaker Change: I will say that we see opportunities to buy more of those and we expect to see more obviously more of these or those types of deals this year, but.
Speaker Change: I wouldn't say that we are the most the most.
Marc Grandisson: I think there's going to be some ebbs and flows, there's going to be some, you know, I wouldn't call them unusual or unexpected developments, there could be one or two claims that surface in the quarter. We book them, we recognize adverse or bad news early on and see how things play out. So there's really nothing to say that we want, that needs to be highlighted.
Speaker Change: Present in that in those.
Speaker Change: Worse years, if you will.
Speaker Change: Great. Thank you.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Cave Montazeri from Deutsche Bank.
Cave Mohaghegh Montazeri: Good morning Ali.
Cave Mohaghegh Montazeri: One question today.
Cave Mohaghegh Montazeri: On the Florida market.
Cave Mohaghegh Montazeri: Reform implemented over a year ago.
Marc Grandisson: It's really par for the course. And absolutely, this quarter turned out that the XGAT and underlying loss ratio was up, I'd say 30 bps. And that's just the reality of the world we're in.
Cave Mohaghegh Montazeri: Had some positive impact on the primary carriers.
Cave Mohaghegh Montazeri: <unk> reinsurance capital seems to be coming back.
Cave Mohaghegh Montazeri: This is a market that you guys know very well do you have any color you can share with us on the state of the market in Florida.
Speaker Change: No I think it's to your point as some of the adjustments are coming through but inflation is also picking up and there is also as we all here, there's potentially more activity in the southeast.
Marc Grandisson: And we think it's still an excellent result. Okay, got it. Second question is probably a quick one, but you all are. Give us guidance on the cat load for the last quarter. I think you said it was in the six to seven range for, I believe it's just, premiums x mortgage segment. Is that expected?
Cave Mohaghegh Montazeri: In the southeast of the U S in terms of activities and storm, So I think that.
Cave Mohaghegh Montazeri: People are trying to sort out what they will do at this point in time I think we.
Cave Mohaghegh Montazeri: We have already existing relationships that we think.
Cave Mohaghegh Montazeri: We will get us a little bit ahead of the game in terms of participating in getting our participation in the marketplace, but.
Cave Mohaghegh Montazeri: Bottom line is we expect our Florida market to be to be well priced and very good from a risk adjusted basis, nothing indicating anything else other than that.
Francois Morin: Well, the comment I made last quarter was, yeah, for the full year on the overall, you know, ACGL premium, 68%. We don't see that changing at this point. I think that was based on our view of how the year, you know, had a chance to play out. That's why we gave you a range. We were very happy with the 1-1 renewals. 4-1s went pretty much as expected, and 6-1s so far are holding up nicely.
Cave Mohaghegh Montazeri: Even.
Cave Mohaghegh Montazeri: Of course the.
Cave Mohaghegh Montazeri: Everything thats been done to take care of the <unk> and whatever else in between I think is helpful.
Cave Mohaghegh Montazeri: But it's still the largest property cat exposure for everybody around the world. So even if you make some corrections and they have made some corrections I think we still have a couple of years before we start thinking about.
Cave Mohaghegh Montazeri: Having a heavy softening in the market there might be some human there, but we still believe the market will be healthy as a reinsurer.
Speaker Change: Thank you.
Cave Mohaghegh Montazeri: Thanks.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Cave Mohaghegh Montazeri: Our next question comes from the line of Bob <unk> from Morgan Stanley.
Francois Morin: I mean, still a little bit of time to go before that gets finalized, but big picture, again, that's the 6-8% range for the year in terms of cat load is holding up nicely. First of all, sorry, is that six to eight on the phone?
Bob: Good morning quick.
Bob: Quick question is on M&A side.
Bob: Obviously, you have historically generated a very durable underwriting returns mainly because the cycle management you might view I was just curious as you move into M&A and diversify your business mix.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Dean Chris Citello from KBW. Hi, my first question was on the net to gross ratio in reinsurance. I saw that it ticked down about five points a year.
Bob: Does that impact your cycle management ability or retention level.
Bob: About M&A or potential M&A down the road.
Speaker Change: No. It doesn't change I mean cycle management is a core principle of ours and if anything.
Francois Morin: I was wondering, is that a function of buying more reinsurance, or is there anything else going on? No, I think if you look at the, it's a good question. If you look at the last four or five years in the first quarter, you'll see that our net to gross ratio averaged between 65 to 70. Last quarter last year was 70% because we had a larger transaction that came through that was actually not seeded. So it's really just a comparison that's not, you know, one comparison is not reflective of what's going on.
Speaker Change: We'd like to be able to do this.
Speaker Change: Is going to be a matter of degree perhaps some lines of business have more acute cycle management knee because it probably more heavily.
Bob: Heavily commoditized.
Bob: I would expect a cycle minded to be much softer than the alagoas net in the U S. <unk> core business and that's also what's attractive about it right because it creates more stability.
Bob: For the portfolio.
Bob: Okay.
Speaker Change: Got it that's very helpful. Thank you.
Speaker Change: And then.
Speaker Change: Thank you.
Speaker Change: In that case, when we think about M&A or future M&A.
Speaker Change: Is it the first preference to use the excess capital where excess cash you're generating from that business to do the M&A deals or is that more preferable to use some of the stocks given where the valuation is and things of that nature.
Marc Grandisson: If you look at it over a longer term, you'll get to 65 or 70. So nothing has changed there. Okay, thank you for that. And then the next thing, shifting back to the insurance business, I was a bit surprised to see solid growth within professional lines, given the rate environment there. So can you maybe talk about the market dynamics or the opportunities that you're seeing in that? And is that growth coming from D&L, or is that within another company?
Speaker Change: I mean, there is no one answer to that I think there's always I mean.
Speaker Change: And we talk about M&A, but.
Speaker Change: M&A doesn't happen that often so right so.
Speaker Change: There are signs that matters, how much how much.
Speaker Change: Could we need would we need to raise in terms of using our own stocking certainly in terms of dilution is always can we think better to kind of use your cash but.
Speaker Change: Theres many consideration as we look at.
Speaker Change: I'm trying to optimize as best we can all the all the all the options, we've got plenty of capacity and raising debt to if if need be.
Marc Grandisson: Yeah, so the thing is, a professional liability has many things to it, you know, it's got large companies, large public companies, you know, it's got some, you know, smaller private, also has cyber in it and some professional liability like, you know, agents, you know, stuff like this that's more E&O based.
Speaker Change: So it's very much a function of each specific circumstance each specific opportunity.
Speaker Change: We look at it on its own and go from there.
Speaker Change: Sorry, if I can just have a little bit of clarification is it fair to say that any of that cash and that is more preferable on that equity maybe a little bit less around I think two assumptions out there. So im sorry, just maybe a little bit clarification on that I mean, that's been that's been our preference historically, but I mean again.
Speaker Change: It's hard to speculate on what could be the next thing so, yes, historically, but things change over time too.
Marc Grandisson: I think that the growth is largely attributed to cyber. Our teams, you know, are, you know, leaning a little bit more into it, and we've also acquired a couple more teams or, you know, developing a team in Europe is a big need for what we realize is a need for cyber in Europe, and that's something that we're starting to grow and see more of. And the reason it's grown in cyber is because even though some of the rates, as we all heard, went down slightly, it's still a very, very favorable, we believe very favorable proposition for us to underwrite. It also helps us do other lines of business because it creates value for our clients. So it's still a little bit harder to get in terms of coverage.
Speaker Change: Okay. Thank you very much.
Speaker Change: Yep.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Michael Zaremski from BMO.
Michael David Zaremski: Okay, Great just quick follow up.
Michael David Zaremski: You mentioned fee income earlier.
Michael David Zaremski: <unk> has a lot of.
Michael David Zaremski: Diversified sources.
Speaker Change: In comment.
Speaker Change: Aye.
Speaker Change: Is there a way you can update us on kind of what percentage of your earnings maybe last year.
Speaker Change: It was derived from these kind of fee income type arrangements at a high level.
Speaker Change: I mean, it's grown over the years for sure I think that the difficulty or the reality. We face is some of these fees are somewhat.
Speaker Change: Expense the revenue we get to have some expenses that go with it then those are kind of co mingled with our own internal expenses, so isolating ill call. It the margin on those contracts is a little bit kind of.
Speaker Change: Cloudy.
Marc Grandisson: On D&O, we would have decreases and increases depending on where the rates are or where we see the relative, you know, high, relative valuation or profitability of a portfolio. On that note, you know, the rates in D&O went down about 8% in this quarter, not as bad as they were a year, year and a half ago. You heard the comment that the SEAs are down, so there's still, we believe, there's still a lot of favorable opportunities in that segment as well. We just have to be a little bit more, you know, circumspect when we do this.
Speaker Change: But yes, it's grown its part of what we do its part of the leveraging of our platform leveraging our underwriting capabilities and all of our segments right. All three segments have some some fee income that comes in to the arrows, obviously summers as part of that as well.
Speaker Change: But yes, that's become a bit more sizable for us.
Speaker Change: Okay I tried thank.
Speaker Change: Thank you.
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Speaker Change: Thank you I would now like to turn the conference over to Mr. Mark Grandison for closing remarks.
Marc Grandisson: Thank you very much for a hearing or our earnings great start of the year. We look forward to see you all in July.
Marc Grandisson: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.
Operator: Thank you. Thank you. One moment for our next question. Our next question comes from the line of David Motemaden from Evercore ISI.
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Marc Grandisson: Marc, you mentioned in your prepared remarks that you're seeing increased underwriting appetite and developing competitiveness. Could you just talk about where you're seeing that? Elaborate on that a little bit, you know, in what specific lines you're seeing that in and how you guys are responding to that? Yeah, I think that I think right now what we're seeing is a higher appetite for cyber is one of them. That's for sure.
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Marc Grandisson: On insurance and reinsurance, I would also, I mean, can run the gamut as many of them. Typically, right now, what we are lines that are more short-tail in nature, you can see a little bit more, you know, willingness to take some more risks from the competition. And how we react to it is, we have many things we do; we typically will tend to, you know, first look at the overall risk.
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Marc Grandisson: If the rates go down or if the rates stay as is with the new conditions, you actually price the business as if it's a new piece of business. Then, what kind of return will it get you. And if it's a little bit less or not too close for comfort, we might just decrease our participation.
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Marc Grandisson: And we also might just stay on the clients that we believe have a better chance to really maneuver through that little bit sideways market, if you will. It's really an underwriters' market at this time. Got it.
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Francois Morin: Thanks. And just within reinsurance, you know, the underlying margins there were strong and even better if I exclude the bridge loss. Can you talk about if there was anything in there that would flatter the results or... Is it more just sort of the earn-in of the property? uh... you know more short-tail lines. How should I think about it?
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Francois Morin: Yeah, I mean, it's, it's, it's a great market, right? And we've been saying that for a few quarters, I think, and we said it before, I think we encourage you all to look at results on a trailing 12 month basis. I think it's a bit more, you know, reliable, I think less prone to volatility, which is sometimes hard to predict. But yeah, I mean, we, and Marc said it, I think the quality of the book that's in force right now is excellent.
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Francois Morin: And, you know, we're going to earn that back. But whether, you know, how, you know, was this quarter a little bit better than maybe the long-term run rate? Maybe we don't know.
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Francois Morin: But again, as you try to look ahead, I'd say, you know, more of a trailing 12 month view is probably a bit more reliable. Thank you. Our next question comes from Josh Shanker from Bank of America. Yeah, thank you very much for taking my question. On the other income, which doesn't get enough attention, that's Summers and COFA.
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Francois Morin: It was a weak quarter for Cobas's stock return in 4Q23, yet the other income was quite strong. And maybe I'm misunderstanding how to model this, but I bring this up because Cobas had an excellent quarter this past 1Q24, and I'm wondering if that presages a very, very strong other income return for the company as we head into 2Q24. Yeah, so just to make sure we're on the same page, there's a lag, right?
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Francois Morin: So COFAS is booked on a one-lag, one-quarter-lag basis. So what they just reported for Q1 will show up in their Q2 numbers. Summers is on a real-time basis and, as we know, right, Summers should follow relatively closely the performance of our reinsurance book because it's effectively a sidecar. There are some nuances to it, but big picture, that is booked on a real-time basis and should mirror fairly closely our reinsurance book.
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Francois Morin: But to your point, yes, I mean, if... Cofast reported a strong Q1, you should see the benefits of that flow through into our second quarter. In theory, there should be, I guess, as you're saying, some correlation between the reinsurance segment underwriting income and Summers, which appears in that other line. Correct. It's not perfectly correlated because it's not the whole segment.
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Francois Morin: It's mostly the Bermuda reinsurance unit that we, you know, that they follow, not the entire business, but the big picture still. I mean, if the market conditions are good and reinsurance is available, the summers will benefit from that on a similar basis. And one other number question, post the S&P model change from a few months ago, is there any way to think smartly about how much excess capital you think you're sitting on or the possibility, if you find other interesting M&A items, the ability to quickly deploy? Yeah, I mean, that's always an evolving topic, right?
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Francois Morin: I think we are always focused on putting capital to work in the business where we can. I think we've done a fair amount of that, obviously, this quarter with the reinsurance growth that we saw. The billion eight that will support the Allianz transactions is another example. We will see how the year plays out.
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Francois Morin: No question that, you know, we're generating, you know, significant earnings. So, yeah, that goes to the bottom line. And, you know, we'll be patient with it until we can't really find other ways to deploy it. But for the time being, we're in a really good place in terms of capital and give us a lot of flexibility. Thank you very much.
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Operator: Thanks. Thank you. One moment for our next question. Our next question comes from the line of Brian Meredith from UBS. Yeah, thanks.
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Francois Morin: A couple quick numbers. The first one, just quickly, on the Allianz deal, is it possible to give us how much cash you're expecting to come in from the, I guess, the UEP and the reserve assumption, kind of net cash? Well, the big... Yeah, the big picture, it's a $2 billion LPT and, you know, dollar for dollar, right. So, we get $2 billion in cash, and we're spending 450 that goes out back to them for the cash consideration.
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Francois Morin: So net net, it's a billion and a half of incremental cash that we will get, and the rest on the new business, then it's called it it's the premium flow with you know as we write that business, that's the overall, over time, that would be the incremental investment income or invested assets that we will get. A second quick question here. You referenced in your commentary higher contingent commissions on seeded business and your reinsurance. What exactly is that? Well, a lot of it is third-party capital, right? We, you know, last year was a very, you know, very, you know, light or good year for the performance of that book.
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Francois Morin: So, you know, some of those agreements, many of them actually pay us a commission that is, you know, there's a base, and then there's a variable aspect to it. And that was kind of a lot, a large part of that. So effectively, performance-based commissions on, you know, PropertyCast or PropertyBiz, etc., you're in the first quarter, you're getting a lot of, What are you seeing with... And how are you kind of protected against that and not potentially seeing some of that adverse development?
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Francois Morin: So I think Francois mentioned the actuals as expected, which is sort of consistent in both insurance and reinsurance on the more recent policy or action of the year, which, you know, having the right starting point means that you don't really have to correct frequently. So I would say that we're not surprised by the reinsurance about what we see. But as I said earlier, I think there is anecdotally, some heavy, you know, a lot of more friction, I would say, between insurance and reinsurance companies to make sure that people get to an agreement as to what the ultimate is going to be.
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Marc Grandisson: So we're hearing this in the marketplace. Of course, we participate in that, but we're not seeing this as being a big issue for us. And the other years that would have been before 2020 and 2021, I want to remind everyone that we were very defensive; we do not have a whole lot of those premium, and those, you know, harder in developing areas that people are talking about. So I will say that we see opportunities to write more of those, and we expect to see more opportunities to write more of these, you know, those types of deals this year. But, you know, I wouldn't say that we're the most present in that in those, you know, worst years, if you will.
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Marc Grandisson: Great, thank you. Thank you. One moment for our next question. Our next question comes from the line of Cavey Montazeri from Deutsche Bank. Good morning.
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Marc Grandisson: I only have one question today on the Florida market. The tort reform implemented over a year ago seems to have had some positive impact on the primary carriers, and reinsurance capital seems to be coming back. This is a market that you guys know very well. Do you have any color you can share with us on the state of the market in Florida?
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Marc Grandisson: No, I think it's to your point that some of the adjustments are coming through, but, you know, inflation is also picking up, and there's also, as we all hear, potentially more activity in the southeast of the U.S. in terms of activities and storms. So I think that people are trying to sort out what they will do at this point in time. I think we have existing relationships that we think will get us a little bit ahead of the game in terms of participating and getting a participation in the marketplace. The bottom line is we expect the Florida market to be well-priced and very good from a risk-adjusted basis. Nothing indicates anything else other than that.
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Marc Grandisson: Everything that's been done to take care of the AOB and whatever else in between, I think it's helpful. But it's still the largest property cap exposure for everybody around the world. So even if you make some corrections, and they have made some corrections, I think we still have a couple of years before we start thinking about, you know, having a heavy softening in the market. There might be some here and there, but we still believe the market will be healthy as a reinsurer. Thank you. Thank you.
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Operator: One moment for our next question. Our next question comes from the line of Bob Huan from Morgan Stanley. Good morning.
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Marc Grandisson: Quick questions on the M&A side. Obviously, you have historically generated very durable underwriting returns, mainly because of cycle management, in my view. I'm just curious, as you move into M&A and diversify your business mix, does that impact your cycle management ability or retention levels when we think about M&As or potential M&As down the road? No, it doesn't change.
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Marc Grandisson: I mean, cycle management is the core principle of ours, and if anything, um, we'd like to be able to do, you know, it's going to be a matter of degree. Perhaps some lines of business have more acute cycle management needs because it's probably more heavily commoditized. I would expect the cycle market to be much softer in the U.S. mid-corp business, but that's also what's attractive about it, right?
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Marc Grandisson: Because it creates more stability for the portfolio. Got it. No, that's very helpful. Thank you. In that case, when we think about M&A or future M&A, Is it the first preference to use the excess capital or excess cash you're generating from the business for the M&A deals? Or is it more preferable to use some of the stocks given where the valuation is and things of that nature?
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Francois Morin: I mean, there's no one answer to that. I think it is always, I mean, you know, and we talk about M&A, but you know, M&A doesn't happen that often. So, right, there's size that matters, you know, how much, you know, how much, you know, could we, you know, need, would we need to raise in terms of using our own stock? You know, certainly, in terms of dilution, it's always, we think, better to kind of use your cash.
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Francois Morin: But, you know, there are many considerations we look at, trying to optimize as best we can all the, all the, all the options. You know, we've got plenty of capacity for raising debt, too, if need be. So, you know, it's very much a function of each specific circumstance, each specific opportunity. We look at it on its own and go from there. Sorry, if I can just have a little bit of clarification, is it fair to say that in that case, cash and debt are more preferable, and then equity may be a little bit less, or I might be too assumptuous there?
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Francois Morin: So sorry, just maybe a little bit of clarification on that. That's been the preference historically, but I mean, again, it's hard to speculate on what could be the next thing. So yes, historically, but things change over time, too.
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Francois Morin: Okay, thank you very much. Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO. Oh, great. Just a quick follow up. You mentioned fee income earlier. Arch has a lot of... Diversified Sources. Is there a way you can update us on what percentage of your earnings maybe last year was derived from this fee income type of arrangement? at a high level.
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Francois Morin: I mean, it's grown over the years for sure. But I think that the difficulty or the reality we face is some of these fees are somewhat, you know, the expense. The revenue we get has some expenses to go with it, and those are kind of commingled with our own internal expenses. So isolating, you know, calling it the margin on those contracts is a little bit kind of cloudy. But yeah, it's grown.
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Francois Morin: It's part of what we do. It's part of, you know, leveraging our platform, leveraging our underwriting capabilities in all our segments, right? All three segments have some fee income that comes into their own.
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Francois Morin: Obviously, Summers, you know, is part of that as well. But yeah, it's become a bit more substantial for us. I tried, thank you. Thank you. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks. Thank you very much for hearing our earnings. Great start to the year. We look forward to seeing you all in July. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program.
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Francois Morin: You may all disconnect. ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? [inaudible] Thanks for watching! ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? [inaudible] In the name of the Father, and of the Son, and of the Holy Spirit. Amen. [inaudible]
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