Q1 2025 Arch Capital Group Ltd Earnings Call
Good day, ladies and gentlemen, and welcome to the first quarter 2025 arch capital earnings Conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference call is being recorded.
Before the company gets started with its update management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward looking statements under the federal Securities laws.
These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.
Consequently, actual results may differ materially from those expressed or implied.
For more information on the risks and other factors that may affect future performance investors should review periodic reports that are filed by the company with the FCC from time to time, including our annual report on Form 10-K for the 2020 for fiscal year.
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 to forward looking statements in the call to be subject to the safe Harbor created thereby.
Management also will make reference to certain non-GAAP measures of financial performance.
Reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current reports on form 8-K furnished to the FCC yesterday, which contains the company's earnings press release and is available on the company's website at Www Dot arch group Dotcom and on the Sec's website at Www Dot S. P.
<unk> Dot Gov.
Speaker Change: I would now like to introduce your host for today's conference Mr. Nicholas Papadopoulos and Mr. First why Morin Sirs you may begin.
Speaker Change: Good morning, and welcome to <unk> first quarter earnings call.
Speaker Change: Pleased to report solid results for the quarter with $587 million after tax operating income for.
Speaker Change: Golar 54, and opioids still shale.
Speaker Change: Otherwise operating return on equity of 11, 5%.
Speaker Change: These results were achieved despite $547 million of catastrophe losses.
Speaker Change: A popular and casualty segment, primarily from the California wildfires.
Speaker Change: The market has become increasingly competitive however, we remain optimistic about our prospects as we continue to achieve.
Speaker Change: Active rates across the sectors, where we compete.
Speaker Change: And we believe that.
Speaker Change: Z expected profitability over market share.
Speaker Change: Any capital two lines of business with attractive risk adjusted returns and gives us the best opportunity to outperform for the cycle.
Speaker Change: This is what we mean by cycling management and we stand by the historical results of this approach.
Speaker Change: While the market may be more competitive ample growth opportunities remain.
Speaker Change: This is true despite microeconomic concerns, including the potential impact of tariffs, but that increase uncertainty for many of our insurers across the globe and raised efficiently risks for some of our businesses.
Speaker Change: During times, such as these which selection is critical as a growing number of our previously our collective accounts no longer meet our return criteria, we believe the acumen of our.
Speaker Change: Underwriting teams breadth of our platform investment in data and analytics and depth of our financial resources about well positioned to navigate the P&C cycle.
Speaker Change: No we don't do all segments, starting with reinsurance.
Speaker Change: Reinsurance results were solid despite sentinel should get us fulfill also rose in the quarter.
Speaker Change: A 91 combined ratio inclusive of 18 points of catastrophe losses demonstrates the strong underlying profitability of our diversified insurance portfolio.
Speaker Change: Gross and net premiums written in the quarter was modest due to an increased level of competition more risk retention by seeding companies and whether you're seeing your participation for <unk>, where margin no longer meet our hurdles in the first quarter. The reinsurance group deploy additional capacity into property catastrophe lines with opportunities.
Speaker Change: Attractive, particularly in loss impacted accounts Fisher.
Speaker Change: Specialty printing and writing decline, primarily due to non renewing a large structured transaction.
Speaker Change: We kill margin in cyber and part of our International Treaty business also led to reduced premium writings.
Speaker Change: 'twenty casualty lines experienced growth in the quarter as we capitalize.
Speaker Change: Capitalized on a handful of select opportunities.
Speaker Change: We are hopeful these slides, we continue to achieve rate and the treaty casualty market terms and conditions, we have continued to improve.
Speaker Change: As we look towards video and yours, particularly with coverage in Florida, and the Gulf, We expect additional demand from existing and new clients on the supply side. It is worth noting that so many reinsurers NBA restaurants. These all represent peak exposure as a result.
Speaker Change: Second the additional capacity may be harder to come by even if the market is more competitive on the margin.
Speaker Change: Moving to our insurance segment were the California wildfires led to a small underwriting loss for the quarter due impart to commercial risk from the recently acquired middle market commercial entertainment businesses, yes.
Speaker Change: The initial opinion generated from those businesses contributed to the insurance group $1 9 billion of net premium written in the quarter, a 25% increase from the first quarter of 2024.
Speaker Change: The integration of the middle market business is progressing well and we remain excited about the increased capabilities and his team brings to the us insurance platform.
Speaker Change: As we've said before there isn't one although I think cycle, but many in todays market, it's possible to deliver double digit growth in some lines, while experiencing similar declines in others.
Speaker Change: In the first quarter, we generated meaningful growth in casualty led sectors, including construction national accounts and international casualty.
Speaker Change: At the same time, we experienced premium reduction and other lines of business due to decreases in our desire to maintain margin in lines such as E&S property.
Speaker Change: Fishing lines, including cyber.
Speaker Change: We have seen competition, increasing in the London market specialty lines, which hasn't made profitable growth difficult.
Speaker Change: Looking ahead, we expect continued growth in casualty lines as well as the U S middle market opportunities remain for both rate and premium growth.
Speaker Change: We are well positioned to close the insurance group because of our market leading capabilities and our relevance with distribution partners that gives us a first look at many opportunities.
Speaker Change: This segment continues to provide a steady earnings stream.
Speaker Change: Contributing $252 million of underwriting income in the first quarter.
Speaker Change: Economic uncertainty limited housing supply and high quality mortgage rates continued to create headwinds for new mortgage originations, which resulted in modest new insurance written in U S and international and mortgage businesses.
Speaker Change: Well your semi <unk>.
Speaker Change: Mortgage interest rates and home price appreciation I've kept persistency around 82% and insurance in force relatively stable.
Speaker Change: As you can see rates of our enforced portfolio remains low and in the quarter below 2%.
Speaker Change: Near term outlook for the mortgage industry is unlikely to change significantly.
Speaker Change: Well recessionary trends.
Speaker Change: From tariffs and other economic policy could create headwinds we still expect the mortgage segment to continue generating attractive underwriting income given the high credit quality.
Speaker Change: The equity of our in force portfolio.
Speaker Change: Turning to our investment group, while invested assets increased by 4% from year end to $43 1 billion, providing a large sustainable contributor to both buildings.
Speaker Change: Market volatility increased broadly leading us to reposition our portfolio to a more market that whole position.
Speaker Change: To manage the cycle, it's important to understand that you cannot control the market, but you can control how you're underwriting teams respond to it.
Speaker Change: At arch, we manage the default cycle across our many lines for the ability of our underwriters to access analyze and ultimately select risk.
Speaker Change: Over time, although I think the teams have been strong relationship with our distribution partners.
Speaker Change: Which gives us an access advantage as they look to phase III with fewer what we did on carriers, including art.
Speaker Change: I just can't resist combines experience expertise and deep analytical insight to understand and assess the underlying risk and match it with the technical pies that reflect an adequate premium for that race.
Speaker Change: Typically with selection is what separates the winners from the losers.
Speaker Change: Return doesn't adequately account for the risk you must be willing to let others take their business.
Speaker Change: The P&C market and transition is one where I'll scan and has previously demonstrated his ability to find success.
Speaker Change: Premium growth may be more challenging than in recent years plenty of profitable opportunities remain.
Speaker Change: Finally, we have a strong underwriting culture. All accounts. This is a market where we can stand out and continue to maximize returns for our shareholders.
Scott: So Scott.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you Nicolas and good morning to all of last night, we reported our first quarter results with after tax operating income of $1 54 per share, resulting in an annualized operating return on average common equity of 11, 5% and growth in book value per share of three.
Speaker Change: <unk>, 8% for the quarter.
Speaker Change: At a high level, our three business segments delivered excellent underlying results with an overall ex cat accident year combined ratio of 81% and importantly, each of our segments showing an improvement for that metric over the same quarter one year ago.
Speaker Change: Our underwriting income included $167 million of favorable prior year development on a pre tax basis in the quarter or four points on the overall combined ratio, we recognized favorable development across all three of our segments and in many lines of our many of our lines of business, but the effect was most notable in.
Speaker Change: Short tail lines in our reinsurance segment, and then mortgage due to strong cure activity.
Speaker Change: The acquisition of the mid Corp, and entertainment insurance businesses continues to roll through our financial metrics within the insurance segment. This quarter. The net premiums written coming from the acquired businesses was 373 million contributing 24, two points to the reported year over year premium growth for the segment and.
Speaker Change: Generally consistent with last quarter.
Speaker Change: Also the inclusion of the acquired business in this segment's results lowered the current accident year ex cat combined ratio by one one points.
Speaker Change: This can be further broken down to include the current acts current quarter acquisition expense ratio that was lowered by 0.9 points due to the write off of deferred acquisition costs for the acquired business at closing under purchase gap.
Speaker Change: The other operating expense ratio that was lowered by 0.9 points and the accident year ex cat loss ratio that ended up being 0.7 points higher reflecting the underlying results of the acquired business.
Speaker Change: The quarter over quarter comparison of net premiums written for the reinsurance segment showing growth of two 2% was also impacted by a few items.
Speaker Change: Note. This quarter's net premiums written includes approximately $70 million of reinstatement premiums mostly related to the California, California wildfires.
Speaker Change: Offsetting this benefit was the non renewal of large structured transactions in the specialty line of business, which reduced our top line by $147 million in the quarter.
Speaker Change: There were also some timing differences in the recognition of certain treaty renewals, which resulted in lower net premiums written in the quarter of approximately $103 million.
Speaker Change: Our mortgage segment delivered yet again, another very strong quarter with underwriting income of $252 million.
Speaker Change: Even though the origination environment remains challenged the underlying fundamentals of the business are excellent as exhibited by most of our key metrics, including a very low delinquency rate for our U S semi business, which currently stands at 196%.
Speaker Change: On the investment front, we earned a combined $431 million pretax from net investment income and income from funds accounting using the equity method or one and $1 13 per share pre tax the.
Speaker Change: The reduction in net investment income relative to last quarter is attributable to a few items, including the impact of being a $1 9 billion special dividend in December the timing of incentive compensation expenses slightly lower interest rates in the quarter and the repositioning of our portfolio to a lower risk.
Speaker Change: Posture in light of the current macroeconomic uncertainty.
Speaker Change: Income from operating affiliates was down this quarter, mostly due to a lower level of affiliate income at summer's re in part as a result of the California wildfires.
Speaker Change: Cash flow from operations remains strong it was approximately $1 5 billion for the quarter.
Speaker Change: Our effective tax rate on pretax operating income was an expense of 11, 7% for the quarter and reflects a one time discrete benefit of four 6% related to differences in the expensing of noncash compensation.
Speaker Change: Also it is worth mentioning that we started to amortize this quarter the deferred tax asset we established at the end of 2023 related to the introduction of the Bermuda corporate income tax this benefit does not impact our operating or our net income effective tax rates in the period.
Speaker Change: As we mentioned previously will flow through our financials as a reduction to <unk>.
Speaker Change: Pay taxes.
Speaker Change: As of January one our peak zone natural cap probable maximum loss for a single event. One in 250 year return level on a net basis increased slightly and now stands at 9% of tangible shareholders' equity.
Speaker Change: <unk> remains well below our internal limits.
Speaker Change: On the capital management front, we repurchased $196 million worth of our common shares in the first quarter and an additional $100 million in April.
Speaker Change: Demonstrating our ongoing disciplined approach to managing our capital to Wednesday to enhance shareholder returns.
Speaker Change: In closing our balance sheet remains extremely strong with common shareholders' equity of $20 7 billion and a debt plus preferred to capital ratio remains low at 14, 7%.
Speaker Change: With these introductory comments, we are now prepared to take your questions.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: I would like to ask a question. Please signal by pressing star one on your telephone keypad.
Speaker Change: If you are using a speaker phone. Please make sure your mute function is turned off.
Speaker Change: All your signal to reach our equipment.
Speaker Change: Again question I wanted to ask a question and we'll pause for just a moment to allow everyone know Betsy.
Speaker Change: Just a couple quick questions.
Speaker Change: The first question comes from Mike Zaremski at BMO. Please go ahead.
Speaker Change: Okay.
Mike Zaremski: Hey, good morning. Thanks.
Speaker Change: Yeah.
Speaker Change: I guess, thanks for all the.
Speaker Change: Insightful market commentary on.
Speaker Change: The reinsurance group deploying additional capacity.
Speaker Change: Catastrophe lines, you said that loss impacted accounts.
Speaker Change: Remain particularly attractive.
Speaker Change: Should we be I guess, we'll think through kind of the.
Speaker Change: How to change our our loss ratio a bit.
Speaker Change: If you kind of feel like Youre going to continue leaning in any any kind of update update to your cat load got it believe it was 7% to eight points when you updated us.
Speaker Change: Last.
Speaker Change: Should we expect that number to move up a bit.
Speaker Change: I don't think so I think the number should be relatively stay.
Speaker Change: Stable I mean full year cat load, obviously, there's seasonality to it.
Speaker Change: As we look at market conditions, we certainly have thought that.
Speaker Change: After the California, wildfires, there might be a little bit of a.
Speaker Change: I think a more.
Speaker Change: Some stabilization in that market, which.
Speaker Change: We think what will happen, although as we touch on I think Florida has its own different market right. So a little bit early for us to notice actually healthy order has gone up ultimately performer where opportunities we're going to see there, but big picture I think what we saw at the start of the year seems to be holding up pretty well.
Speaker Change: Alright, great Okay. Thanks.
Speaker Change: The truly that Luke.
Speaker Change: As we see it is.
Speaker Change: For the reason I described in my comment is pretty flattish so I think.
Speaker Change: We like the business.
Speaker Change: I think there is.
Speaker Change: Teams again, we don't know, but if our teams find opportunities to grow and we expect more demand in the marketplace.
Speaker Change: For several reasons the thing that I think the FHA is raising the attention.
Speaker Change: And I have and I think they.
Speaker Change: We are seeing more cedent wanting to increase their limits and all the things that they haven't been able to do in the last few years because of the lack of capacity. So if you've got opportunity too to potentially do more if if the rates will go up.
Speaker Change: Got it okay.
Speaker Change: Switching gears to.
Speaker Change: Market competition outside of reinsurance I think.
Speaker Change: Common theme has been.
Speaker Change: In recent quarters that <unk>.
Speaker Change: Large account property.
Well priced and we're seeing some.
Speaker Change: More meaningful downward pressure.
Speaker Change: You mentioned in your prepared remarks, London specialty market.
Speaker Change: Well maybe.
Speaker Change: Can you kind of unpack.
Speaker Change: What you mean by the London specialty market.
Speaker Change:
Speaker Change: Maybe kind of help frame.
Speaker Change: Which which lines in particular are.
Our.
Speaker Change: The clock is and where you where you'd want it to grow as much.
Speaker Change: Yes, I think in London, what's what's happening I mean, it's too twofold is first I think we've seen.
Speaker Change: After years of good results.
Speaker Change: More appetite for people to expand in lines like Terror, Maui and ALG.
Speaker Change: Typical.
Speaker Change: Our species of typical lines of business that are returned as jointly out of Lloyd's and also I think what we are seeing is.
Speaker Change: London is it's kind of the excess and surplus markets of the rest of the world and so we're seeing as as companies in their local market become more comfortable with there is.
Speaker Change: The appetite to expand and so there is a little bit less business coming from Australia from.
Speaker Change: From the.
Speaker Change: The Asia from Julie addiction that historically relies on large as the appetite there.
Speaker Change: They are local companies get.
Speaker Change: Diminished so that's what we're seeing we're seeing the combination of the two.
Speaker Change: The the 10 wins for us and a few of our markets is that the market is consolidating around.
Speaker Change: Leaders and so I think we will lead in many of our lines of business. So it's difficult to predict so it's come out, but we feel we feel positive about how we are positioned to continue to take advantage of the market there.
Speaker Change: Thanks for the color.
Speaker Change: Okay.
Keith Montazeri: Thank you. The next question comes from Keith Montazeri at Deutsche Bank. Please go ahead.
Keith Montazeri: Thank you my first question is going to be on net premium growth in reinsurance.
Keith Montazeri: I think it's pretty clear that those are the days of 30% plus growth in MPW are all behind US now as you become more selective I.
Keith Montazeri: I am assuming also two 2% growth.
Keith Montazeri: A little bit too low to expect going forward. So can.
Keith Montazeri: Can you maybe unpack some of the key drivers of the deceleration you saw in the quarter maybe.
Keith Montazeri: Give us a bit more of the details on the impact of the structured yields.
Keith Montazeri: Just to give us help us understand where how we should think about that going forward in terms of premium growth.
Keith Montazeri: In reinsurance.
Keith Montazeri: Yeah, I mean I touched on in my comments right. There is a couple of items. If you adjust for what we mentioned and again, we're not trying to do the the platforms and adjust for everything but.
Keith Montazeri: You adjust for those two things you still get to a call it like 6% to 7% growth rate, which may be more.
Keith Montazeri: More consistent with what we see in the near future.
Keith Montazeri: But beyond that I'd say, there is really a separation like there is we had good growth in property other than property cap and in property cat and casualty, where we saw some decreases is on the specialty line beyond structured and the.
Keith Montazeri: The timing of accruals on written premium and there I would say, it's a function of some of the lines of some of the smaller specialty lines that we participate in where there's been more competition and cyber is a prime example of that it's a combination of of rates coming down a little and also some of our ceding companies retain.
Keith Montazeri: Maintaining more of the risk.
Keith Montazeri: So that's how I'd say like <unk>.
Keith Montazeri: Mid term, yes, youre right, the 30% growth is probably behind us, but for the for the near term at least but.
Keith Montazeri: Hopefully these couple of things help you kind of reconcile a little bit like from the two 2% to eight what you may proceed to be a more.
Keith Montazeri: Realistic expectation expected growth for the rest of the year I think in the specialty book you have a mix of lines of business I mean, it goes from credit to Ciber to agriculture and.
Keith Montazeri: And a few others.
Keith Montazeri: And our team already.
Keith Montazeri: Scouting the world to find the opportunities we had a great opportunity in Brazil last year on the agriculture side then.
Keith Montazeri: Sure the <unk> within more of the business I think you have to be opportunistic in those lines of business to make money. So yes, you've got the big book, the ups and downs offset each other in the last few years. It grew together because it was it was what the market does I think we should be prepared to see more ups and downs quarter by quarter.
Keith Montazeri: Going forward in that particular book.
Keith Montazeri: That's why we want to do.
Keith Montazeri: Yeah.
Keith Montazeri: I think that's very very helpful color.
Keith Montazeri: Question is on casualty.
Keith Montazeri: Last year <unk> was just a strengthening in our casualty reserves at the industry level.
Speaker Change: Haven't seen much of that so far in 2025, and I think some people are thinking maybe we might be passed the point of maximum fear with regards to social inflation of just wondering what your thoughts are do you agree with that what do you think we're just in the eye of the storm and Theres more pain to come in second half of 2025.
Speaker Change: My prediction is I don't know we're independent we come.
Speaker Change: It will come there's more pain thats would be my.
Speaker Change: In our people manage the pain.
Speaker Change: I can tell but.
Speaker Change: We think the casualty.
Speaker Change: So showed inflation story as not fully played out I think that is.
Speaker Change: As all of you and we are still.
Speaker Change: We were getting definitive right above trend on the casualty line, and and where we feel comfortable with the exposure jurisdiction the type of.
Speaker Change: The the the terms and condition that we get I think we are willing to lean in but I don't think we see that the case.
Speaker Change: It's a market that you can take a.
Speaker Change: Shale and guarantee that you're going to make adequate returns. So I think there's more there's more to come.
Speaker Change: We'd be all general underwriting.
Speaker Change: Very clear thank you.
Speaker Change: Welcome.
Speaker Change: Thank you. The next question comes from Elyse Greenspan at Wells Fargo. Please go ahead.
Speaker Change: Hi, Thanks. Good morning, My first one I think is a quick one francois.
Elyse Greenspan: 7% adjusted growth in reinsurance that you were talking about in the quarter is that excluding reinstatement in the structured deals I just want to make sure I understand what you are backing out.
Elyse Greenspan: No I'm just pulling back in the two to two items I mentioned that's all.
Elyse Greenspan: So.
Elyse Greenspan: Got it.
Elyse Greenspan: I'm not backing out the reinstatement on just adding back the <unk>.
Elyse Greenspan: The.
Elyse Greenspan: The non renew deals on the timing of the accruals on some business.
Elyse Greenspan: Okay got it.
Elyse Greenspan: And then my.
Speaker Change: Second question is on the commentary around the mid years.
Elyse Greenspan: It sounds like you're expecting perhaps some opportunity.
Speaker Change: On the demand side, what about pricing I guess are you guys expecting that prices, probably down but that it could be some growth opportunities just with demand can you help me think through those two pieces.
So clearly as it is at that point that full one where.
Speaker Change: Single digit down most places maybe a bit more than that in Japan due to I think one of the players.
Speaker Change: Nonetheless, which the markets crumble around that but.
Speaker Change: But I think the dynamic in Florida.
Speaker Change: As I said in my <unk>.
Speaker Change: Remarks.
Speaker Change: A little different because its peak zone for most market.
Speaker Change: <unk>.
Speaker Change: You know.
Speaker Change: The dynamic is people like the top players, but not that many players and people didn't like the bottom of the program does not as much and what we've seen in the past and we're seeing students today is.
But some of the programs which have been impacted.
Speaker Change: By the last last year, the hurricane last year Milton.
Speaker Change: So we would expect those.
Speaker Change: Good to see some price increase.
Speaker Change: And what would that be compensated by price decrease at the top of the market.
Speaker Change: I don't know, but I think that's why I think our view is you think plays out the way they should which they never ever do.
Speaker Change: We would expect something more flattish for Florida.
Speaker Change: At that point, we feel that based on our positioning and we.
Speaker Change: We should be able to at least two.
Speaker Change: To keep our share of the programs that.
Speaker Change: Buy more and therefore, we may have opportunity to deploy more capital.
Speaker Change: Okay, and then one last one insurance, if I kind of X out mid Corp.
Speaker Change: Is that I think around like 56, seven underlying loss ratio that was slightly below the Q4 is that about like Ron radio shack at Suncor arch by it and then we think about bringing in mid Corp on top or anything else, we need to think about just with pricing.
Speaker Change: Pricing pricing and loss trend and dynamics on the margin as we go through the year.
Speaker Change: Yeah, well I mean.
Speaker Change: For the legacy Orange book.
Speaker Change: Yes, I mean, it's.
Speaker Change: Yes.
Speaker Change: At a high level, we'd say that our margins are holding up in terms of.
Speaker Change: Right above trend and kind of being kind of.
Speaker Change: Keeping us steady.
Speaker Change: The one thing, though that you would have to factor in somehow is the mix is changing right as we pivot a little bit more into casualty you might see that.
Speaker Change: That underlying loss ratio go up a little bit.
Speaker Change: As we see more competition on the property and we mentioned that like a lot of our growth was in the casualty led kind of lines of business or profit.
Speaker Change: Units for us so that.
Speaker Change: That might be the only thing, but big picture, we still think the loss ratio that we were we had this quarter has seen there is no reason why you can't hold up at that level.
Speaker Change: Thank you.
Speaker Change: Youre welcome.
Speaker Change: Thank you. The next question comes from Andrew Click Aman at TD Securities. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: First question is around the reserving it looked like you had some nice favorable development, particularly in reinsurance, but could you call out anything around commercial auto and other liability.
Speaker Change: Net plus or minus in both insurance and reinsurance how did that perform and how do you feel about the reserving in those lines going forward.
Speaker Change: Great question.
Speaker Change: Our reserves are something we again, we mentioned before we look at it every quarter.
Speaker Change: Actual versus expected that we monitor very carefully is looking good but for us it's a little bit early to call victory. So we're we're monitoring everything pluses or minuses, yes, theres always going to be the finer.
Speaker Change: You slice that down to a very fine levels.
Speaker Change: There are some pockets, where we took out a little bit of adverse which were offset by others, where we had some good favorable coming through but big picture I would say, we're flattish I mean everything on the casualty kind of long tail side auto and some of the more difficult lines as you mentioned umbrella et cetera.
Speaker Change: We're we're comfortable with what the reserve what the indications are.
Speaker Change: Okay and so that's good to hear and then maybe shifting this is sort of.
Speaker Change: Two part question.
Speaker Change: Being clearly.
Speaker Change: <unk> cycled manager that you are could you could you share a little color on and maybe and I know I know Nicolas you mentioned, many different cycles, but maybe very broadly two cycles casualty and property, maybe we'll even skip professional or you could throw that in a few lines.
Speaker Change: But how do you see those cycles playing out as we sit here today, how much longer will we see property pricing come down how much longer can.
Speaker Change: Casualty pricing hold up.
Speaker Change: I know, it's a really tough question, but.
Speaker Change: Be really interested in your response on that and then the second part is just.
Speaker Change: What are you seeing with MGH today are they still proliferating and a still very competitive.
Speaker Change: And I'll stop there that was a lot of questions sorry for that.
Speaker Change: The two are intertwined.
Speaker Change: Just a quick question.
Speaker Change: I'll stop and start on the <unk> side and I'll start on the.
Speaker Change: I mean on the reinsurance side I think.
Speaker Change: No.
Speaker Change: My view is that the market is more disciplined so I think we've seen the rate decrease.
Speaker Change: But from the peak.
Speaker Change: The other market. So I think the markets remain attractive we haven't seen any reactors behaving.
Speaker Change: The new guys are coming but they're small and.
Speaker Change: So I think.
Speaker Change: <unk>.
Speaker Change: We remain very optimistic about the appropriate teach at and the way the industry behaves in general.
Speaker Change: On that aspect if you move to the.
Speaker Change: To the.
Speaker Change: To the cat property in general and especially in the E&S property in North America, and there's properties. I think you have there you are a tale of two markets I think you have the.
Speaker Change: The middle market more.
Speaker Change: Immediate retail well convicted storm in and some of the.
Speaker Change: Recent catcher demand, which would include the Wi Fi to certain extent keep putting pressure on the on the on the companies.
Speaker Change: They have to keep on getting rates to be sure that they cover the cat load, which has gone up in the in the last few years and then you have the more of the E&S.
Speaker Change: Cat coastal maybe quick.
Speaker Change: Quick driven risk.
Speaker Change: That's where the MGH play play a bigger role so I think I think.
Speaker Change: The market has responded.
Speaker Change: Too much surprise very very quickly, giving up double digit rate increases we went through in and everybody was surprised big limits.
Speaker Change: Was really something that people.
Speaker Change: Delight and took a ton of losses, so I think the market became.
Speaker Change: In 2023, much more discipline and kept limits, which really push when people when the capacity withdrawal.
Speaker Change: That's where you see rates going up so we get the huge upswing re underwriting terms and conditions.
Speaker Change: And I think.
Speaker Change: And a half later I think we've seen mgs, which kept US you had been choked out coming back with much bigger limits and.
Speaker Change: Yes.
Speaker Change: If you think of a typical risk, it's a 200 million square.
Speaker Change: Good.
Speaker Change: <unk>.
Speaker Change: 20 markets or more to complete.
Speaker Change: And let's say all else was doing the first <unk> doing the 10 extend and then an MGA come in in the.
Speaker Change: And they do 40 it creates it creates a complete.
Speaker Change: Completes a run for their here in terms of if you just say asked was 10 extend and then NGL, yes $10 million capacity and then.
Speaker Change: And now at the $40 million. So what do we do we run for the heat and we're trying to reposition of 10 million.
Speaker Change: Elsewhere in the program and that creates the huge pressure on the rates that we've seen and I think TD of Ngls have gone up this year. So I think they play a big role in my view in quickly the market too.
Speaker Change: On the two <unk> to be much more competitive and that's what I see.
And same thing on casualty.
Speaker Change: So in casualty there is lessons years I think on casualty I think what you've seen is in.
Speaker Change: And good luck going to pop out to you I think when you see markets that give us increasing capacity, maybe we increased capacity for 10 to 15. We don't go from 10 to 40 I think so if you go into the casualty side of the house now whether it's E&S so yeah.
Speaker Change: <unk> seen the same thing Youre seeing.
Speaker Change: Since two typical losses as reduction of limit.
Speaker Change: You want prices to be applied to multiple risk of business to create the diversification and the law of large number looks better. So I think that's what we've seen in the reduction of the capacity and the usual limit from 50% to 25% to <unk> I've created this opportunity, especially on the exercise for fill rates too.
Speaker Change: To go up I think we haven't seen it.
Speaker Change: Kind of people in fact, we're seeing people still reducing reducing limits. So this tells me that the.
Speaker Change: One way to to a more competitive marketplace is going to be longer.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from David motivated at Evercore ISI. Please go ahead.
David Evercore: Hey, good morning, I had a question on the <unk>.
David Evercore: <unk> hundred $47 million of structured deals that were non renewed.
David Evercore: Just so I'm thinking about it correctly were there any other chunkier quarters in 2024 that we should think about.
David Evercore: We're like there were chunky structured deals that might not renew.
David Evercore: As we go through the rest of 2025.
David Evercore: I mean.
David Evercore: Yeah.
David Evercore: Sure.
David Evercore: There is always some chunky business books or deals that we right throughout the year.
David Evercore: I mean, what we don't know what their adult <unk>. They may renew at the same thing at the same level of any kind of structure for another year or so.
David Evercore: Hard to know what the impact may or may not be for the rest of the year.
David Evercore: Again, we're just trying to.
David Evercore: Give you a bit a bit of.
David Evercore: Additional information on how the premium is why it's going up or down.
David Evercore: Sometimes it works in our favor in the sense that yes, we write new deals that are.
David Evercore: Significant and improve or increase or the growth or the reported growth, but in this case it was different so.
David Evercore: These are I would say, though they are on on the larger side I mean, it is unusual that we don't have that many deals that are that have that much premium associated with them.
Speaker Change: Yeah got it okay, thanks, and thanks for that color.
David Evercore: And then on.
David Evercore: On the insurance underlying loss ratio I think last quarter, you spoke about it running at around the 58 level going forward.
David Evercore: It obviously came in nicely below that this quarter I'm wondering.
David Evercore: Was there anything that drove that it sounded like you split it out between the legacy arch and MGE.
David Evercore: Was there more improvement on the MGE side is that something we can expect to continue some maybe some some color around that would be helpful.
Yeah hard to say I think.
David Evercore: I would say.
David Evercore: Yes.
David Evercore: The quarterly numbers or matter, but we don't overly put too much weight on them I would say we want to make sure. We have a longer term view of what the underlying profitability of the book is so I would not factor in or expect any significant move mt movements up or down let's say.
David Evercore: For either with EMC or the legacy business.
David Evercore: And.
David Evercore: As you know in the <unk>.
David Evercore: Last year, we have the Baltimore bridge, which impacted the loss ratio upward. We then have that this quarter. So theres always going to be the random element of a couple of large claims here and there that may have an impact ultimately on the quarterly loss ratio. So big picture, we want to we call. It a fairly stable environment than we are.
David Evercore: We always expect a little bit of volatility from quarter to quarter, depending on what happens.
David Evercore: Yeah.
David Evercore: Understood. Thank you.
David Evercore: Yes.
David Evercore: Thank you. The next question comes from Alex Scott <unk> Barclays. Please go ahead.
Alex Scott: Hi, good morning.
Alex Scott: If you could provide a little more commentary on what you're seeing in the property cat reinsurance market I guess specifically.
Alex Scott: No.
Alex Scott: What's your view of the impact of ILS.
Alex Scott: Yes, the pricing pressure more at the top of the tower.
Alex Scott: Any commentary on sort of the way it's affecting.
Alex Scott: These towers, where you play in them.
Alex Scott: Yes.
Alex Scott: What we've seen so it seems to continue to happen is what you described more pressure at the top.
Alex Scott: <unk> seen.
Alex Scott: The cat bond market being repriced two.
Alex Scott: Our lower margin. So I think that does put pressure also to the <unk> the cat bond market.
Alex Scott: And obviously, there hasnt been any losses on those layers.
Alex Scott: But under the program between the California wildfire on the under nationwide account and some of the.
Alex Scott: Storms that we've seen we have added also so I think the the.
Alex Scott: The.
Alex Scott: The more I would say.
Alex Scott: The place where price decrease seems to be the focusing is really at the top of the program. So I think we.
Alex Scott: Florida is going a bit more complicated because.
Alex Scott: I think again theres not that much supply in the marketplace. So we would expect it to.
Alex Scott: Maybe not be as strong as maybe in the <unk> phase III <unk>.
Alex Scott: Haven't had a loss.
Alex Scott: Any of the.
Alex Scott: Top layers middle to top players for a long time and people.
Alex Scott: We'll see that so I think.
Alex Scott: But yes, I think the.
Alex Scott: What you described.
Alex Scott: We expect it to.
Alex Scott: He is going to happen in my view is that's what's going to happen in this probably.
Speaker Change: Well for sure the top of it.
Alex Scott: And maybe let's put added pressure on the bottom.
Alex Scott: Got it that's helpful.
Alex Scott: Next one on capital management, I mean, you guys have very strong capitalization growth slowing a little bit.
Alex Scott: Given the environment.
Alex Scott: How do you think about priorities there.
Alex Scott: How quickly might ramp up.
Alex Scott: Capital return.
Alex Scott: If you don't get the opportunity to grow in the mid year.
Alex Scott: Yes, I mean, it's something we look at it.
Alex Scott: Constantly.
Alex Scott: The same framework.
Alex Scott: We've always had no question.
Alex Scott: If the growth moderates, which is starting to and we still have solid earnings coming through will probably be in a position, where we accumulate a bit more excess capital and we will probably be looking to return most of it back to our shareholders. So there could be some small M&A there could be some other things that come our way but.
Alex Scott: At a high level you could certainly I think it's reasonable for us to think that we'd be returning a significant amount of capital as we move forward.
Alex Scott: We had our special dividend late last year, we obviously like share buybacks, a lot and given the.
Alex Scott: If the pricing and the metrics work for US we're happy to do that.
Alex Scott: Thank you.
Alex Scott: Yes.
Speaker Change: Thank you. The next question comes from Michael at Autonomous Research. Please go ahead.
Speaker Change: Hey, good morning in reinsurance I think you mentioned a couple of times primary companies retaining more risk just hoping you could provide a little more color on what you're seeing from primaries, and maybe where that's most pronounced.
Speaker Change: I think it's most pronounced in the.
Speaker Change: The other other property, where we see some of the other lines of business that may be an LG and where.
Speaker Change: <unk>.
Speaker Change: The results have been good seeing commissions of good but the companies feel more comfortable with.
Speaker Change: Our results.
Speaker Change: That's a normal trend that you see as the as the.
Speaker Change: As you go through the whole market and you can go for the English clock is that.
Speaker Change: People tend to retain more of the risk.
Speaker Change: The board the reinsurance because.
Speaker Change: They wanted to devote at TVT.
Speaker Change: They were a portion of the business he will ensure the performance as they as we don't do it in their book.
It's not unusual for people to feel more comfortable I know ill show on so that's what we do and we are more comfortable we've always we never buy more reinsurance. So we move the insurers is we would buy to an excess of loss.
Speaker Change: More of the premium so I think we haven't seen a ton of.
Speaker Change: Quota share going through excess of loss.
Speaker Change: And if you see companies as they feel more comfortable with though is feeling better about their financial situation and maintaining moderate Ken certainly on the structure. If you issue related to the structure on the structure side structural data. This should each be totally new deals. So I think those deal last as long as the company has needs.
Speaker Change: The surplus relief if you go into a situation, where they don't need a surplus relief anymore than the data goes away. So.
Speaker Change: Thanks, that's helpful.
Speaker Change: I think in mortgage prepared remarks touched on headwinds of origination can you maybe just talk about what behavior, you're seeing in that business.
Speaker Change: Are you seeing any potential leading indicators of recessionary activity at this point.
Speaker Change: Too early I mean really too early I mean, we can speculate we do the work we certainly.
Speaker Change: A view that yes.
Speaker Change: If recession, and we have a severe recession and that impacts unemployment then.
Speaker Change: Home prices go down a little bit that that may have an impact on the performance of the book, but we keep going back to the strong fundamentals.
Speaker Change: Higher credit quality of the borrowers home prices are theres a lot of equity that's been built up.
Speaker Change: Homeowners and their own so it's a it's a vastly different situation than what we had back in 2008. So.
Speaker Change: Sure.
Speaker Change: Not to say that we don't worry about it because we do but we're a lot more comfortable with our position and.
Speaker Change: For a stress scenario to generate or create significant hardship on arch would take it would have to be very very severe so we're on.
Speaker Change: At this point.
Speaker Change: We think in a very good place.
Speaker Change: Okay. Thanks, so much.
Speaker Change: Yes.
Speaker Change: Thank you. The next question comes from Josh Shanker at Bank of America. Please go ahead.
Thank you for taking my question good morning, everybody.
Speaker Change: Hello.
Speaker Change: No.
Back in the fourth quarter, you paid a big special dividend you bought back a little stock.
Speaker Change: You bought back more stock this quarter.
Speaker Change: I tend to find it difficult to parse paying special dividends and buying back stock at the same time, either the return on the stock's attractive work you need to give money back to shareholders promptly because it's not so attractive.
Speaker Change: A couple of things there one can you talk about the about your philosophy, which is about three year ahead book value, but I talked a little bit of the math and if.
Speaker Change: The three year had book value rule of thumb applies.
Speaker Change: The market is very much underestimating your earnings power for the next couple of years can you talk about the philosophy of buybacks versus dividend and what that means for this year and what you think about the attractiveness of the stock.
Speaker Change: While we like the stock that's for sure but.
Speaker Change: I mean the.
Speaker Change: Biggest obstacle Josh is is truly the level of.
Speaker Change: At the with the speed at which you can execute share buybacks.
Speaker Change: Limits on daily trading volume et cetera. So the main reason if you put aside even if the price was right and you say well, it's really attractive to buy at a certain level. The advantage of a dividend as you can execute a much bigger.
Speaker Change: Return of capital I mean instantly versus over a long period of time, so for us to buyback a $1 billion $9 1 billion of stock at the rate at which we can actually do it because of the restrictions we have would take a long time at which point, we would accumulate more excess capital and you never catch up so.
Speaker Change: That is.
Speaker Change: I think important to realize that there is only so much we can do with share buybacks.
Speaker Change: When you get into what's the three year payback of three years.
Speaker Change: <unk> is a good metric for us that we follow.
Speaker Change: Do we have a different view of what the book value might be out in three years out.
Speaker Change: Then you do maybe an hour and we take a hard look at what we know about our business.
Speaker Change: But we're still within that roughly that three year payback period, then and.
Speaker Change: We still think there's a lot of good runway for us to keep growing book value at a good clip for the next little while so that gives us a lot of comfort that buying back stock at this price has been.
Speaker Change: Good good good way to return capital to shareholders.
Speaker Change: If you started now do you think you could execute $2 billion buyback before year end and preclude the need for a special dividend.
Speaker Change: It would be hard.
Speaker Change: Would be heart.
Speaker Change: Okay.
Speaker Change: Ways, you can kind of create some programs, but we like to retain the flexibility we like to have optionality, so locking ourselves in and Thats true in everything we do so to lock yourself into.
Making it public that we're buying back a certain amount at a certain price is something we try not to do we like to be.
Speaker Change: Opportunistic.
Speaker Change: And.
Speaker Change: It's something that we again thats constantly something we we.
Speaker Change: We look at and try to optimize as best we can.
Speaker Change: Well, thanks for being transparent about the behind the curtain.
Speaker Change: How the sauces made happy to do it.
Speaker Change: Thanks.
Speaker Change: Operator.
Speaker Change: Thank you. The next question comes from Andrew Anderson at Jefferies. Please go ahead.
Speaker Change: Hey, good morning, just saw the income from operating affiliates I think it was $17 million in the quarter. It was down a bit year over year, I think that summers and Coface can you maybe just talk about the moving pieces, there and perhaps how youre thinking about full year.
Speaker Change: Yes, <unk> has been.
Speaker Change: Very good so it's been a great story for US we're extremely happy with it.
Speaker Change: There could be some pressure with trade credit going forward, but that's again.
Speaker Change: Something we're keeping an eye on we don't have visibility or a ton of clarity on it so that the really the drop in operating income from operating affiliates was mostly almost exclusively due to the summers and let's remember that summers is effectively a sidecar to arch re so you have wildfires this quarter or the impact.
Speaker Change: <unk> asked and they impacted summers as well, there's a little bit of a kind.
Speaker Change: Kind of a.
Speaker Change: A one off on the Bermuda tax.
Speaker Change: This was reflected in the summers financials Q1 of 2024 that maybe makes that drop more significant than you would think otherwise but.
Speaker Change: As you look for the run rate.
Speaker Change: I'd say this quarter is a bit lower than what we would normally think.
Speaker Change: Sure.
Speaker Change: Operating affiliates in general and.
Speaker Change: I think we're still looking when you think about our returns, we think plus or minus like where we're earning well into all of it.
Speaker Change: At 10% range on these investments if not more than.
Speaker Change: Let's just say we have over $1 billion in.
Speaker Change: Assets there. So hopefully you can do the math from there.
Speaker Change: Thanks, That's helpful. And then just insurance expense ratio, there wasn't proven and opex, but as full year 'twenty four is still a good way to think about the rest of the year for the Opex or is there still some head count costs coming on.
Speaker Change: Sure.
Speaker Change: I mean thats.
Speaker Change: It's a good place we are no question I mean, as we think about our growth and how we need to manage our expense base.
Speaker Change: We are being very thoughtful and diligent about.
Speaker Change: Do we need to replace people that <unk>.
Speaker Change: Resigned due we have retirements et cetera. So.
Speaker Change: We.
Speaker Change: I think we're going to get some benefits from the IMC acquisition like scale brings a little bit of Av.
Speaker Change: A bit of leverage a bit of a kind.
Speaker Change: Ken.
Speaker Change: We can scale better but no question that we're trying to hire is still on the <unk> side, we want to staff up with data scientists and we need a few more actuaries et cetera, but big picture I think were.
Speaker Change: Sure.
Speaker Change: We are watching our expenses and thats something that will be a focus as we move forward.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. The next question comes from Meyer Shields at <unk>. Please go ahead.
Meyer Shields: Great. Thanks, I hope to have the same question in two contexts.
Speaker Change: I think.
Speaker Change: Nicolas started or comments talking about the preference of brokers to work with fewer.
Speaker Change: Bigger insurers and I'm wondering if you could talk about the.
Speaker Change: Volume versus profitability implications of that to companies like ours.
Speaker Change: So I don't think the two necessarily linked I think I think in my view the.
Speaker Change: No.
Speaker Change: The best place to talk about this reportable in the market in the London market.
Speaker Change: The brokers because of business come to London.
Speaker Change: The <unk> controller have access to the business. We write so I think it's more of a.
Speaker Change: Yeah.
Speaker Change: Supporting them, where they need you to be supported and playing the role that you have to play that.
Speaker Change: You can align with our own strategy and I think.
Speaker Change: If you think of the way there.
Speaker Change: The markets were having their own facilities. They need leaders, we don't need. It was nothing works then they have some photo of facilities and then typically they have the.
Speaker Change: The open market remains I think you need to find a.
Speaker Change: Place.
Speaker Change: Yeah. So this is just one I think if you survey just one year you'd be the so you have to be able to to figure out a distribution strategy is a key component of our future success Thats, what I am saying.
Speaker Change: And I think we spend a ton of time thinking out.
Speaker Change: How do we align better and where where do we bring value to the distributors.
Speaker Change: It varies.
Speaker Change: The bigger distributors.
Speaker Change: Maybe one thing for a smaller distributor mid market distributor, whether rely better on the expertise of art. It maybe something different so I think I think you have to really.
Speaker Change: To be successful going forward do you really have to question the value you bring in the transaction you cant just underwrite business. So the two components is that you have to do the <unk> I think the cycle thoughtfully and but you have also to figure out what's your place in the in the food chain.
Speaker Change: And what value you bring so thats really the so we've done a lot of work and we're still thinking of this in a way that's less so thats about <unk>, but it is about the intimacy with customers.
Speaker Change: Customers, we don't exist, but we need to we need to.
Speaker Change: To provide value to the ultimate customer.
Speaker Change: And that dynamic is playing out in London, North America, you can't just be.
Speaker Change: Sitting at your box in Lloyds and waiting for the business to come to you and underwrite. The because you are not even sure that the business youre going to see is that when you want to right. That's the issue I think it's very slight people in front of you that are picking up the goods business. Now you are picking up from a thought that by definition.
Speaker Change: So I think you have to you have to work hard and size matters and relationship matters and being able to you you can see the business you really you're really targeting and that's where our distribution strategy matter.
Speaker Change: Okay perfect that's very helpful.
Speaker Change: Second on reinsurance when you have seen in retaining more business.
Speaker Change: How do you deal with the risk of adverse selection when the season kind of decide.
Speaker Change: Beside.
Speaker Change: A more educated feed because of the experience decides what they're going to keep them, what theyre going to be sure.
Speaker Change: So none of the businesses about diversity.
Speaker Change: And as Ive insights into the business to to understand why people are buying and does it make sense do you can you have a need.
Speaker Change: And you have to we we spent a lot of time and creating inside to figure out yes. It needs that we are willing to to ensure reinsurance.
Speaker Change: That we are unwilling to do it because it's.
Speaker Change: This.
Speaker Change: I said before I think we're looking for is square.
Speaker Change: Have upside.
Speaker Change: Outweigh the downside so that's one way to look at it when you have only downside usually don't want to do those risk and so I think that there is always that choice selection its a very dynamic market.
Speaker Change: And especially in Asia.
Speaker Change: As everywhere. So I think you you have to factor that in into <unk>. So I think it is.
Speaker Change: Yes, she felt.
Speaker Change: If you're on the right risk.
Speaker Change: No.
Speaker Change: None of what we you get tool as an underwriter.
Speaker Change: As more of like a fairly Ted I used to.
Speaker Change: So if you'd actually test.
Speaker Change: And the very successful underwriting shop. So I think you have to that's part of the job. The job is to have the insight to be able to soi questions in and get to the answer.
Speaker Change: And build a relationship with our clients, where they come to you to four legitimate for legitimate.
Speaker Change: The concern that they have and where you can really provide value bye bye.
Speaker Change: Showing or issuing them.
Speaker Change: Okay understood. Thank you so much.
Speaker Change: But you can't.
Speaker Change: We are both side of the house I mean on the insurance side.
Speaker Change: Yes.
Speaker Change: Yes, yes, those people that we tried to tell our guys to do the right thing.
Speaker Change: Is there a risk as good try to we tended to have conviction about.
Speaker Change: So while youre on a tool so you buy reinsurance on a quota share basis and intimately you over time, you build conviction that John Doe hygiene guidelines royalty of pricing is okay. At that point, you don't need though insurance uhm net.
Speaker Change: That is nothing worrying about that my view is that we should.
Speaker Change: That's all the insurers play.
Speaker Change: Thank you I'm not showing any further questions would you like to proceed with any further remarks.
Speaker Change: No I think thank.
Speaker Change: Thank you.
Speaker Change: I think another good quarter for us.
Speaker Change: Little bit more difficult a more competitive market, but I think we remain bullish about.
Speaker Change: As I said in my.
Speaker Change: In my in my remarks to stand out so I think we'll see you guys next quarter.
Speaker Change: Oh.
Speaker Change: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.
Speaker Change: [noise].