Q2 2026 Arch Capital Group Ltd Earnings Call

Speaker #1: Good day, ladies and gentlemen, and welcome to the Q2 2026 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode.

Speaker #1: 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.

Speaker #1: 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.

Speaker #1: 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, including our annual report on Form 10-K for the 2025 fiscal year.

Speaker #1: 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.

Speaker #1: The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management will also make reference to certain non-GAAP measures of financial performance.

Speaker #1: The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K, furnished to the SEC yesterday, which contains the company's earnings press release, and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov.

Speaker #1: I would now like to introduce your hosts for today's conference: Mr. Nicolas Papadopoulos, and Mr. Francois Morin. Sirs, you may begin.

Speaker #2: Good morning, and welcome to ARCH's second quarter earnings call. We reported strong earnings this quarter, with solid underwriting performance from each of our three segments.

Speaker #2: After-tax operating income in the quarter was $893 million, or $2.56 of earnings per share. Slowing top-line growth and strong earnings freed up capital for additional share repurchases in the quarter, bringing the total for the first half of the year to $1.95 billion.

Speaker #2: Book value per share grew by 2.8% in the quarter, and has increased by 4.5% in the first half of the year. While the underwriting environment is increasingly competitive, it is important to note that we are still in the early stages of this softening market.

Speaker #2: Overall, fundamentals are attractive, with some line experiencing increased competition, while others continue to see rate increases. ARCH's diversified business model ensures that we can find opportunities to deploy capital that generate appropriate risk-adjusted returns.

Speaker #2: Our position as an industry leader in specialty insurance, reinsurance, and mortgage insurance provides us with a meaningful competitive advantage. Clients come to us not only for capacity but also for our underwriting expertise, claim capabilities, and valuable perspectives that help them better manage risk.

Speaker #2: Our commitment to cycle management is embedded in our culture and guides our underwriting approach. This is reinforced by a compensation structure that incentivizes quality underwriting by aligning performance with long-term profitability and shareholder returns.

Speaker #2: Let us now turn to our segment performance, starting with Insurance, where results were negatively affected by catastrophe losses related to the Iran conflict. Arch is a leading writer of political violence, terrorism, and marine war in the London market. So, while losses affected this quarter's results, we are seeing ongoing opportunities to support clients with assets in the region.

Speaker #2: Underwriting income of $27 million does not reflect the good underlying performance of the segment, which delivered a current exceedance year combined ratio XCAT of 91.6%.

Speaker #2: As reported by others, and consistent with our comments last quarter, competition is increasing, particularly in property and shorthand lines. That said, the middle market commercial business and casualty-oriented lines continue to experience rate increases.

Speaker #2: Additionally, pricing in Directors and Officers is rebounding slowly, while rate declines in cyber insurance have moderated. Our growth and net premium return were negatively impacted by the non-renewal of certain programs' business, as discussed in prior calls.

Speaker #2: And we are also impacted by reduced riding of our excess and surplus property business. We continue to see premium growth in casualty-oriented lines in North America including excess and surplus casualty, construction, and national accounts, and we also saw positive trends in certain specialty London market lines including war and terrorism.

Speaker #2: Looking ahead, our diversified platform provides us with the flexibility to grow in those areas where pricing supports our return objectives. Reinsurance underwriting results were excellent, aided by relatively light catastrophe losses, resulting in $410 million of underwriting income in the quarter.

Speaker #2: The current quarter XCAT combined ratio was 79.9%, a 270 basis point increase from last year due to changes in mix and lower pricing in property lines.

Speaker #2: Net premiums return were down 10% from the same quarter last year. As some of our clients opted to retain more risk, an increasing competition lowered rates particularly in property.

Speaker #2: We increased our cession to traditional reinsurance and third-party capital, which impacted our net-to-growth ratio. Our ability to leverage these capabilities enables us to provide solutions to our brokers and clients while maintaining flexibility to manage our net risk portfolio.

Speaker #2: Similar to insurance, casualty reinsurance is an area where we see attractive business. Opportunities remain, though competition is elevated due to abundant reinsurance capacity. Within our reinsurance business, our focus is on maintaining our position as a leading reinsurance partner for disciplined underwriting and by consistently delivering business expertise across market cycles.

Speaker #2: The market segment continues to provide strong stable results delivering $220 million of underwriting income in the quarter. Our mortgage portfolio performed well, driven by a resilient economy and high-quality risk enforce.

Speaker #2: Our US MI portfolio delinquency rate remained flat at 2.1%. Favorable reserve development continued although slower than in prior quarters. While affordability and housing supply constraints limit new mortgage origination, mortgage insurance remains a consistent contributor to earnings, as the strengths of the enforced portfolio and favorable credit characteristics continue to support steady profitability.

Speaker #2: Investment contributed $417 million or $1.20 of net investment income per share in the quarter. This is supported by our conservatively managed portfolio, which maintains an average credit quality of double A-.

Speaker #2: We continue to benefit from an asset base that has grown to $49.5 billion, supported by strong cash flows. Investments accounted for using the equity method, which are excluded from operating earnings, performed well, adding an additional $196 million, or $0.56 per share, to net income.

Speaker #2: Reflecting strong returns across the portfolio. Over the last five years, we have enjoyed favorable market conditions, in property and shorthand lines, and consequently we now face the early stages of a competitive market driven by an influx of capacity.

Speaker #2: This part of the cycle is to be expected. Importantly, a more competitive environment doesn't mean a lack of opportunity. It simply requires greater discipline, in where and how capital is deployed.

Speaker #2: Our playbook is built upon our enduring strengths. A diversified platform, best-in-class cycle management, a strong brand that enhances our relationship with clients and distribution partners, as well as disciplined capital management.

Speaker #2: In sum, we remain well positioned to consistently deliver superior results for our shareholders. As Arch approaches its 25th anniversary, one thing is clear: while the company has evolved, the principles and playbook we rely upon create long-term shareholder value.

Speaker #2: With that, I will turn the call over to Francois. Francois.

Speaker #3: Thank you, Nicholas, and good morning to all. Before I provide some additional color on our results, I wanted to walk you through our capital allocation and management actions this quarter.

Speaker #3: Capital management is an essential tool to help us to manage our business through the insurance cycle. The latest hard market-provided ARCH the opportunity to generate significant excess capital that, as the market transitions, cannot be fully deployed into our business.

Speaker #3: Our preferred option has first been to return excess capital to our shareholders through share repurchases, and secondly, through special dividends. After considering the opportunities available to us to deploy capital in the business—both existing and new—we determined that share buybacks remain an accretive use of excess capital in enhancing shareholder returns at current prices.

Speaker #3: As a result, we repurchased 12.4 million shares at an aggregate cost of $1.2 billion in the quarter. Through the first half of the year, we have repurchased approximately 94% of our net income in our own shares.

Speaker #3: As you know, we also accessed the debt market in May, raising $2 billion in a combination of 10-year and 30-year senior notes. The proceeds from this issuance will be used to: one, redeem the $500 million of 10-year senior notes maturing later this year; two, purchase $418 million of our 2043 and 2046 senior notes through a recently completed tender offer; with the remainder for general corporate purposes.

Speaker #3: The tender offer was designed to replace debt that no longer meets updated regulatory capital requirements with fully compliant capital instruments. As a result of the debt raise, we expect our interest expense to be approximately $60 to $63 million for each of the next two quarters.

Speaker #3: As of the end of the second quarter, our debt plus preferred-to-capital leverage ratio stands at a conservative 18.1%. Turning back to our operating performance for the quarter, our three business segments delivered excellent underlying results, with an overall ex-cat accident year combined ratio of 82.5%, up 160 basis points from the same quarter last year.

Speaker #3: Our underwriting income included $165 million of favorable prior development on a pre-tax basis in the quarter, or 4.1 points on the overall combined ratio.

Speaker #3: We recognize favorable development in all three of our segments, and in many of our lines of business, but mainly in short-tail lines in our P&C segments and in mortgage due to strong queue activity.

Speaker #3: Current year catastrophe losses were $201 million, net of reinsurance and reinstatement premiums, and were a combination of losses from the year-on conflict and severe convective storms in the U.S.

Speaker #3: The insurance segment's net premiums written declined 5.1% year over year due in part to the non-renewal of certain program business. The XCAT action year loss ratio net of reinstatement premiums improved by 90 basis points to 56.4% compared to the same quarter one year ago, due primarily to strong performance in our international operations.

Speaker #3: The acquisition expense ratio for the current action year increased by 30 basis points, as the benefit we observed from the write-off of deferred acquisition costs for the MCE-acquired business rolled off.

Speaker #3: Our operating expense ratio was higher this quarter due to the transition of our middle market business to ARCH systems. As mentioned last quarter, we expect our operating expense ratio to revert back to historical levels during the second half of the year.

Speaker #3: Turning to the reinsurance segment, net premiums written were down 10.4% from the same quarter one year ago, reflecting reduced writings from lower rates and a higher level of retrocession purchases, primarily in the specialty and property catastrophe lines.

Speaker #3: Overall, our ex-catastrophe accident year combined ratio of 79.9% is up from last year, due to the shift in line of business mix and a more competitive rate environment for certain sub-segments.

Speaker #3: Our Mortgage segment produced another very strong quarter, with underwriting income of $220 million. Net premiums earned were flat from last quarter, with a reduction in our USMI business mostly offset by higher levels of earned premium in Australia.

Speaker #3: On the investment front, we earned a combined $613 million of net investment income and income from funds accounted for using the equity method, or $1.76 per share pre-tax up from the $1.57 per share we earned last quarter.

Speaker #3: We note that the returns of equity method funds contributed 340 basis points to our annualized net income return on average common equity in the quarter.

Speaker #3: Cash flow from operations remained very strong at $1.3 billion for the quarter. Income from operating affiliates was $46 million for the quarter, slightly higher than the $40 million from the same quarter one year ago.

Speaker #3: Our effective tax rate on pre-tax operating income was 15.1%, reflecting the mix of income by tax jurisdiction. As of July 1, our peak zone natural gas probable maximum loss for a single event at a $1.250 year return level on a net basis is down slightly to $1.8 billion, and now stands at 8% of tangible shareholders' equity.

Speaker #3: With these introductory comments, we are now prepared to take your questions.

Speaker #1: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Speaker #1: Again, press star 1 to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from the line of Elise Greenspan, with Wells Fargo.

Speaker #1: Elise, your line is open. Please go ahead.

Speaker #2: Hi, thanks. Good morning. My first question is on the insurance segment. I was hoping to just get a sense of the sustainability of the underlying loss ratio you saw in the quarter. Francois, I think you pointed out strong international results for the second quarter in a row, so just trying to get a sense of the sustainability there.

Speaker #2: And then was there any change in your loss pick assumptions within your insurance book in the quarter?

Speaker #3: Yeah, two things or a few points on that, Elise. First, international as you know, it's more of a short tail book, so it's been running very well, and there's always potential volatility that we have to think about.

Speaker #3: So I mean, hard for us to know how that's going to play out, but the business is doing extremely well, so we're happy with that.

Speaker #3: On the North American side, I mean, what's also helped a little bit is the non-renewal of some of the programs that started out earlier this year. So, as those kind of earn in—right, the premium earns in or the lack of premium—I think that'll, that has brought down the loss ratio a little bit.

Speaker #3: So, I mean, where does it go from here? I think, at a high level, we think we're comfortable with the levels where we're at.

Speaker #3: And I think there's a good chance, or at least a possibility, that we stay at levels that are around this number.

Speaker #2: And no movement in loss trends?

Speaker #3: No movement in specific loss picks. I mean, it's really, I mean, absent just the normal adjustment of rate over trend that we go through in each of our lines of business, but we haven't systematically decided to move down the loss ratio pick from one line in particular or another.

Speaker #3: So nothing new there.

Speaker #4: And Elise, remember, in insurance, you can actually adjust the mix of the book. So most of our books today are split in what we call quartile or quintile, where some of the book is running at a lower expense, lower loss ratio, and the other side is running at a higher loss ratio.

Speaker #4: So the work of the underwriter is really to get pricing or manage a higher loss ratio out, so we have more propensity to keep the loss ratio where it is.

Speaker #2: Thanks. And then my follow-up was just on capital. Obviously, buybacks picked up in the quarter. I think you guys just mentioned slower growth, right?

Speaker #2: Obviously, strong earnings and capital position. How are you guys thinking about the level of buybacks from here, recognizing, obviously, we're in the midst of wind season?

Speaker #2: Would you expect a slowdown this quarter and then pick back up, or just—how are you thinking about the level of capital return going forward?

Speaker #3: Yes. We don't certainly don't have targets or plans to buy back a certain number or dollars of shares. We certainly thought that in the second quarter, the price of the stock was very attractive to us, so that's why we were able to certainly buy back more than we had done in the past.

Speaker #3: Does that stay at this level? I don't know. And the current prices, we like the stock still we think it's very attractive. And we have capacity to buy back more.

Speaker #3: So we'll see how that plays out. Yeah, wind season is always something that's a little bit in the back of our minds that we have to think about.

Speaker #3: But going forward, I think we're in a position where, again, the growth is going to be harder to come by, we think. And share buybacks will remain part of the arsenal that we have to manage our returns.

Speaker #2: Thank you.

Speaker #3: You're welcome.

Speaker #1: Your next question comes from the line of Pablo Singzon with JPMorgan. Your line is open. Please go ahead.

Speaker #4: Hi, good morning. Retention in the insurance business has ticked on over the past couple of years. Is there a approach to keep retention the same, or could you potentially increase that and internalize more of the underwriting income?

Speaker #4: I'm just not sure if seeding is economically more attractive like it is in reinsurance today. the question? Are you asking about retention of. In the insurance segment, your retention has been going down, right?

Speaker #4: You've been essentially seeding less, just not overgrowing, right? And I think in the soft market—yep, yep.

Speaker #3: Yeah. So I mean, again, it's a function of really the market we are in. So I think in reinsurance, we've seeded a little more because I think we if I remember, we placed a little bit more on the shorter lines because of as the rate was going down, and we also increased our capacity.

Speaker #3: As we increase our limits, we buy more insurance. So there's many factors that influence the net to growth. But the market is certainly a factor we look at as well.

Speaker #3: I said it in my—we’re here to solve the problem for the insured, and for our brokers. So, the reinsurance is a good tool to stay in front of the clients and ultimately figure out what we want to keep after it, so.

Speaker #2: Understood. And in insurance—in the insurance segment, what's your stance on net-to-growth there?

Speaker #4: The question I ask, you earlier was more on the it works on both the same way, but I answer more on the insurance side.

Speaker #4: I'm sorry. The line is really your line is really bad. So on the insurance, I probably gave you the answer. On the reinsurance, I think we are much more active, I would say, on the buying, especially because the property CAT business, specifically, we think is quite stressed.

Speaker #4: So, we have to manage the net portfolio. The tool we've used relies on capacity out there that has a lower cost of capital to help, again, solve the problem for the clients or distribution partners.

Speaker #1: Your next question comes from the line of Andrew Kliggerman with TD Cowen. Your line is open. Please go ahead.

Speaker #4: Good morning. Nicholas, I was intrigued by your early comments, prepared remarks, where you talked about an influx of capacity. And that we're in the quote-unquote "early stages" of a soft market.

Speaker #4: So I'm hoping you can elaborate a little bit separately on property and casualty, do you think property rates could come down materially more? And to what potential degree?

Speaker #4: And you mentioned that casualty was decelerating. Do you think we could start to see that turn negative?

Speaker #3: Yes. First, I think we I truly believe that the market that we are trading in is a favorable market. So there are business that are teams can on the insurance side.

Speaker #3: And to a large extent, on the reinsurance side, there's new business that we can write. So, we were made to trade in this type of environment.

Speaker #3: So specific to property, yeah, it's a big headwind. Rates have been coming down, and there, I think we trade quite carefully. And you saw both on the insurance and reinsurance, the net premium going down.

Speaker #3: We are much more optimistic on the casualty side. I think there's more competition there. But the market is remaining disciplined especially on the insurance side.

Speaker #3: We haven't seen any. We've seen management of limits, which is a critical aspect of what we track. Our competition stays very disciplined.

Speaker #4: Yeah. And I'd say, too, I mean, property—I mean, the CAT activity will have an impact. I mean, it's still very early in the season so far.

Speaker #4: It's been quiet, but things could change depending on as we look into 2027.

Speaker #3: Got it. So in terms

Speaker #4: In terms of casualty—and maybe this is just kind of a two-part question—when you say you're disciplined, are you keeping up with loss costs on your rate?

Speaker #4: And then the prior-year development was $1.4 million favorable in insurance, $5.3 million favorable in reinsurance. And I know in the prepared remarks, you said it was mainly short-tail stuff.

Speaker #4: But could you give a little color on the amount and geography by accident year in casualty, or maybe it was just insignificant? But I'd be curious around how casualty played out in prior-year development.

Speaker #3: I think casualty at a high level is kind of neutral. I mean, so and there's some by year, by subline, there's some up, some down in total.

Speaker #3: It's about neutral. So yes, the short answer is most of the favorable is in the short-tail lines in the last two to three accidents slash underwriting years.

Speaker #1: Your next question comes from the line of Kavy Montesseri with Deutsche Bank. Your line is open. Please go ahead.

Speaker #5: Thank you. I just want to follow up on the $1.2 billion of share repurchases you did this quarter. I think it's the first time in a while we've gone over 100% of the operating income, and I know part of that's dictated by the stock price, but there's still a pretty meaningful gap between where you're trading and kind of the intrinsic value based on three-year forward book value.

Speaker #5: So at current levels, I'm trying to get a sense of how long you can sustain share purchases above 100% of the operating earnings you generate.

Speaker #5: So, you did mention you've built up a decent amount of excess capital during the hard market, and you displayed a bit more debt you can issue if you wanted to.

Speaker #5: Just wondering, could you give us a sense of whether you could sustain above a 100% payout throughout the soft cycle? Not knowing how long the soft cycle will last—do you view it as a multi-year striped pattern that you have?

Speaker #3: Yeah. You're asking me if we have a crystal ball, which we don't, but let's just say that, again, we are very confident in our ability to generate strong earnings through all phases of the cycle.

Speaker #3: We’ve got three kinds of pillars to our operations, three legs of the stool. They’re all performing well. So we believe strongly that we have an ability to generate earnings for, maybe not forever, right, but for the foreseeable future at a minimum.

Speaker #3: So you're asking me, are we able to return if we're not growing, could we return all those earnings in back to the shoulders? The answer is yes, we could.

Speaker #3: Could we do something else? Again, that's like I don't want to speculate what we're going to do in a year or two years because is there M&A?

Speaker #3: Is there other things that we where we need the capital for? What we deployed differently. But again, the quarter, second quarter was again, hopefully a good demonstration that we are active and like the stock and think it's it's an attractive way to return to shareholders and we'll keep doing the same as long as unless things change materially.

Speaker #5: And I guess linked to this, through PML went down a bit, this quarter, I guess not as much as your premium on a net basis.

Speaker #5: Can you maybe give us some color? What kind of business are you sending to the retro market? And should we expect your PML to go down over time as the cycle softens?

Speaker #5: And I guess, because I guess that could be an additional source of capital, there'll be releases that you could use for share repurchases or whatever else you want to do with it.

Speaker #3: So the PML that you look at, I think, is Florida Tri-County. So it's one of the 50 zones that we monitor. So, I mean, Florida business is our peak zone.

Speaker #3: So, it's a peak zone for most of the reinsurers in the field. So, that historically has had the highest margin. So that's why. So, I think the rate reductions are pretty much across the board.

Speaker #3: On the property CAT, we would expect that the PML could reduce, but think of Florida as the highest margin business in our property CAT books.

Speaker #4: Right. The percentage of shareholders' equity, we're at 8%. We've been in the soft market the last soft market. We were at 4%. So we're a different animal.

Speaker #4: We're much more relevant. We're a much bigger partner to many of our clients and brokers. So, yes, could our PML come down?

Speaker #4: Absolutely. Does it go down to the same level back that we said? We don't know.

Speaker #3: Yeah.

Speaker #1: Your next question comes from the line of Rob Cox with Goldman Sachs. Your line is open. Please go ahead.

Speaker #5: Hey, thanks. Yeah, my first question is just on casualty reinsurance. I think you all had taken maybe a somewhat differentiated view on casualty re versus peers in 2025 by leaning in with some of these selective seed-ins.

Speaker #5: As we think about the deceleration in casualty reinsurance growth year to date, is that reflective of those outperforming seed-ins choosing to retain more risk, or has ARCH changed its view on casualty re returns?

Speaker #3: No, I don't think we've changed our view. I think we, as I mentioned in my prepared remarks, still think it's an attractive line of business.

Speaker #3: We like the fundamental of the underlying business in the specialty casualty area. The issue it's not new. It's too much capacity reinsurance capacity chasing too little business.

Speaker #3: And the way we see it is hit or miss on the terms and conditions. So, there are certain terms and conditions that work, and for others, we think that sometimes—mostly on quota share contracts—the ceding commission is too high.

Speaker #3: So I think we're still looking for the right opportunity to add reinsurance casualty to our books, in the right lines of business and with the right ceding companies.

Speaker #5: Okay, thank you. I just want to follow up on the Middle East. There were some losses this quarter from a CAT perspective, but it also seems like there are some incremental opportunities to write new business.

Speaker #5: Could you just give us some sense of what the strategy is to write new business and how you go about managing that and determining what's a good risk?

Speaker #3: Yeah. So, obviously, following the losses in the Ireland region, that we're all aware of, prices have adjusted, and for us, prices at some point were multiples of what they were before the conflict.

Speaker #3: And so we decided to deploy a bit of capacity and stay with our insureds. Some of our insureds, we may do a one-liner business.

Speaker #3: Now they suddenly figure out that the war, which was excluded from their property policies, they'd like to buy some coverage. And so, selectively, we've deployed more capacity in the region, making sure that we avoid concentration.

Speaker #3: So, we have a careful approach to continuing to service our distribution partners and our clients in the region.

Speaker #1: Your next question comes from the line of David Motamayden with Evercore. Your line is open. Please go ahead.

Speaker #4: Hey, thanks. Good morning. I'm wondering if you guys could just quantify the Iran losses this quarter that impacted the insurance segment, and then maybe just elaborate on how you're thinking about them and the CAT load within insurance going forward.

Speaker #4: I'm interested also in any sort of IBNR versus actual loss detail you could share.

Speaker #2: Well, but I mean, the majority of the insurance CAT losses come from EMEA. CAT load going forward, I mean, we quoted the 6% to 8%, kind of, on an annual basis for the group.

Speaker #2: That hasn't changed. I think the losses that we the Iran conflict is more is actual refineries. It's actual claims. So case reserves have been set up.

Speaker #2: It's not a hypothetical IBNR. We'll put it up in case something happens. And those are large refineries, etc., that people are well aware of.

Speaker #2: They've been kind of hit, and there's damage associated with them. There are always questions around business interruption, and so we don't know the magnitude of the outcome, but the claims are real and tangible.

Speaker #2: So that's how we think about it. I mean, again, we Nicholas mentioned it. We are at a London at Lloyd's. We are a leaders in the political violence, terrorism kind of market.

Speaker #2: And that's the losses, when they happen. We expect them, and we think the pricing supports it. That's why we've been in that space in a more meaningful way the last few years.

Speaker #2: And we're still in it.

Speaker #4: Got it. Thanks. No, that makes sense. And then maybe just on the reinsurance segment, the accident year loss ratio XCAT, deteriorated 370 basis points year on year.

Speaker #4: Sounds like that's well within expectations that you guys have had, just given the mixed shift away from property, and then also the pricing pressure there on that line.

Speaker #4: I mean, is that the same sort of deterioration we should expect as we head throughout the rest of this year? I’m just wondering how you guys are thinking about that.

Speaker #3: Yeah.

Speaker #2: Yeah. As we said before, David, I think we—I mean, our view is we look at trailing 12 months as, first of all, through the kind of lens we like to put on our results, specifically on reinsurance, because there's going to be a little bit more volatility in the ex-cat loss ratio, no matter what.

Speaker #2: So that's the first thing we'd say. Two, you're right. I think the mix has changed a little bit less short tail, which is reflected in that increase in the loss ratio.

Speaker #2: Three, yeah. The market is a little bit more competitive—the rates are down a little bit more. That hasn't fully earned in.

Speaker #2: So that may earn in kind of over time. So you put it all together like the last kind of quarter, if you focus on the quarter, we'd say it's probably a little bit higher than we would than we would think the run rate is or kind of reflecting all these moving parts.

Speaker #2: But we're we're not surprised by it. We think it's again, to your point, it's very kind of very much within our expectations. But we'll see how things play out going forward.

Speaker #1: Your next question comes from the line of Tracy Banjiji with Wolf Research. Your line is open. Please go ahead.

Speaker #5: Do you quantify the prop CAT rate decreases you saw at mid-year renewals, and can you share your view of rate adequacy? Looking at one broker survey, it looks like pricing is back to 2021 levels, but a competitor had said it looks more like 2023.

Speaker #5: Where in the spectrum is your view?

Speaker #3: Yeah. So I think I concur with what other people have said. On other calls, I think the rate reductions were in the mid-teens. That's what we saw.

Speaker #3: And I think in terms of rate index, I think we're not back to the pre-hurricane hint. I think 2022, I think we think the market traded above that.

Speaker #3: So are we in 2023? Maybe. But I think we depends it really depends on the region. So I think that's what you as I said earlier, we have 50 zones.

Speaker #3: So, some zones are still green—above and provide adequate return. And some zones are now red, and some zones are in orange. So, I think that's why we actively manage a portfolio.

Speaker #3: But in terms of index, I think our view is that we're still above the in prior in hurricane in rate index.

Speaker #5: Great. Can you touch on your appetite to reinsure MGAs? I realize you're the lead reinsurer in at least one of the fronting companies. What structural safeguards do you have in place?

Speaker #3: So our involvement on the reinsurance regarding MGAs has been mostly on the property side. So, short tail—I think we've been a significant player and supported by the pricing on the primary side.

Speaker #3: It was one way our reinsurance team was able to access business that otherwise they could not access. So, again, the fact that it's short-tail maybe limits some of the risk we see with working with MGAs—which is, down the road, who's going to pay the claims and who's going to be there if the MGA is no longer there.

Speaker #3: So I think, as far as a reinsurer, you don't have as much of an issue. The issue is more, I think, with the insurer.

Speaker #3: The insurance company—sorry, the insured. I'm sorry. The insured or the broker, if you deal with an MGA, especially as it relates to long-tail lines—five years, six years from now—you don't have visibility. If the MGA no longer exists, who is going to pay your claims?

Speaker #3: And will the reinsurance capacity still be there? So I think it's more of an issue on the insured broker E&O than it is for the reinsurer in my mind.

Speaker #1: Your next question comes from the line of Yaran Canard with Mizuho. Your line is open. Please go ahead.

Speaker #6: Thank you. Good morning. Two questions on the reinsurance segment and opportunities there. First, it sounds like you are still seeing an attractive environment for casualty there.

Speaker #6: That does sound a little bit different than what we've heard from other executives this earnings season. So, I understand from your earlier comments that it is a lot about partnering with the right underlying risk, but maybe you can offer some additional color as to what really makes this a more attractive opportunity for you.

Speaker #6: When you look at this market,

Speaker #2: I mean, what makes

Speaker #3: the opportunity interesting to us is the underlying insurance casualty, which we think in certain specialty areas are is a profitable. So I think we are trying to through reinsurance access those companies that we think are good underwriter and do business in those specialty casualty areas.

Speaker #6: Okay. And then on the property side, maybe following up on Tracy's question, I think we heard from another broker yesterday talking about how southern Florida is back to 2017 property CAT levels.

Speaker #6: I think one of your reinsurance competitors talked about lightening up the load a bit in Florida, so I'm curious as to what you're seeing in Florida.

Speaker #6: I realize there are a lot of zones there, but maybe you can give us a little more color and detail on Southern Florida versus Northern Florida, West versus East.

Speaker #3: I mean, what I can tell you, what we saw at 61 is a reductions of the rates were across the board. Historically, they were higher reduction at the top end of the program and lower reduction in the frequency layer this time around.

Speaker #3: I think the appetite has been more across the board, and the tri-conti area is the peak zone. So, I would say usually it attracts the higher pricing.

Speaker #3: I think if you are in the Galveston area or the Orlando area, the pricing would be less because it's probably not the peak zone for everyone.

Speaker #3: So, then the market is efficient. The pricing reflects more the abundance of capacity and the new insurance capacities that are chasing the business. But the differentiation in the pricing between zones, I think, is efficient; people are using models.

Speaker #3: So I think that we don't see a huge red flag there.

Speaker #1: Your next question comes from the line of Roland Mayer with RBC Capital Markets. Your line is open. Please go ahead.

Speaker #7: Hi, good morning. Do you expect continued benefits from higher investment yields to add pressure to casualty competition over time? And, I guess, do you guys embed some view of investment yields in your rate adequacy decisions on long-tail lines?

Speaker #3: We don't. We're very clear on that. We only ask our casualty underwriter to write for an underwriting profit, and we credit them with a risk-free rate.

Speaker #3: So, we require an underwriting profit. I think that's very clear for us.

Speaker #7: Thank you. And then as my follow-up, you mentioned buyback as part of the arsenal. Are we at all close to the point where special dividends make more sense than buybacks?

Speaker #7: In 2024, I think that was when you were above 1.8 times book, but I would also assume ROE expectations were higher when you made that decision.

Speaker #2: Yeah. I mean, back in '24, we were at two times book. So it was very much—to us, it was very clear that buybacks did not make sense.

Speaker #2: And dividend, the special was the answer. Right now, we're trading in the $1.50, $1.60 range—$1.45, whatever. So I think it still makes more sense to do buybacks, but our preference, obviously, is it's one or the other.

Speaker #2: And right now, we're in the buybacks range. We'll see, again, how things play out, but that's kind of how we think about it.

Speaker #2: Like dividends, as long as we—again, I said it earlier—I think we're positive in, or our visibility in terms of forward-looking earnings is very positive.

Speaker #2: So to us, that supports value creation and strong returns for the next three years. And that's a big part of how we look at the economics of the share buybacks.

Speaker #1: Your next question comes from the line of Brian Meredith with UBS. Your line is open. Please go ahead.

Speaker #6: Yeah. Thanks. Nicholas, first question—I just want to focus a little bit on mid-corp. If we think about that business, and the program business that I know you're intentionally running off, how has the growth been?

Speaker #6: How has retention been? Has it been more challenging, maybe, to keep the business you thought, given the competitive market? And then, how should we think about it going forward?

Speaker #3: I think we've been positively surprised. I think that our goal was really—the first goal was to move the business over to ART.

Speaker #3: So, we did this a year ago, and the second goal was to move the policy administration systems from Allianz to us. So, that created some disruptions for underwriters.

Speaker #3: I mean, it made their life much more difficult. But I think the value of the brand and the relationship worked out for us.

Speaker #3: I think we are in a good place. I think, looking ahead, we now have the underwriting team and the policy administration system.

Speaker #3: On the art, using art paper, it's ours. And so we are actively moving to the phase where we can provide them with better tools, better analytics, triage, and improve the claims.

Speaker #3: So I think there are a lot of things we want to do that will lead to more growth in the future.

Speaker #6: And do you see better market dynamics in that segment where mid-corp is, compared to some of the other areas?

Speaker #3: Yeah. I think it's muted compared to the large property and ENS. I think we still see overall on the package rate increase that are positive in mid-single digits and I think the property itself is flat-ish.

Speaker #3: It used to be up 5%. But we don't see the double-digit decrease that we see elsewhere on the excess and surplus property or large account property.

Speaker #1: Your next question comes from the line of Chris Hartwell with Autonomous Research. Your line is open. Please go ahead.

Speaker #5: I could good morning, gentlemen. Quick question, first of all, just on the mid-year renewal conversations you're having with your seeding clients. Over the last few months, I guess what I'm trying to understand and to some extent also looking forward into January.

Speaker #5: I mean, obviously, there’s a lot of focus on price. I’m trying to sort of understand what the clients are really pushing for in terms of rate versus risk transfer.

Speaker #5: From their reinsurance protection. So I wonder if you could comment on that, please.

Speaker #3: Yeah, I think so. The primary message that we got from our brokers and students is price. Right now, I think we have a little bit of a slippage in terms and conditions for clients, because they save a significant amount of money looking to see if they could add the margin by an underlying layer.

Speaker #3: So we're starting to see this, but it's really at the margin right now. So it's mostly price.

Speaker #5: Okay, thank you. And I guess, if I may, can I ask just on the mortgage business? I mean, so far it hasn't had any attention today.

Speaker #5: So, I'll give it a go. There's a decent bit of growth, sort of quarter on quarter, in terms of new insurance written. I was wondering if you can help just provide some color on what's driving that.

Speaker #5: And I guess a part B to the question is, profitability has obviously been very, very strong for the last few years, but growth has not really been apparent.

Speaker #5: And I guess as we look forward, and as that back book matures, how should I see the trade-off between margin versus growth opportunity?

Speaker #5: How should that develop as we look forward?

Speaker #3: So on the mortgage side, I think this quarter, we signed up a new client in Australia. That helped us, as the new premium influx benefited our growth.

Speaker #3: And the second factor was, I think, we reduced some amount of quota share insurance that we bought. So that really helped the net as well.

Speaker #3: I think those are the two elements, I believe. And in terms of the profitability, I think it's steady as you go. My view is that this is an interesting market where we talked about a rate decrease of 15%.

Speaker #3: In property cat or in mortgage, it's 1%. And the market reacts. So I think people react very quickly to maintain their market share.

Speaker #3: And I think the six actors have been maintaining the pricing where it is, so I think the variations there are much smaller.

Speaker #1: Your next question comes from the line of Mayor Shields with KBW. Your line is open. Please go ahead.

Speaker #4: Great. Thank you so much. I want to talk about casualty loss trends, but from a different perspective. I know, obviously, we're well into social inflation.

Speaker #4: As an external issue, but I'm wondering whether you can talk about how Arch and maybe the company that you're reinsuring on the casualty side—are they getting any better at pushing back to the extent that what I would call net loss trends aren't as...

Speaker #3: What do you mean by net loss trend?

Speaker #4: So, sort of, call it the trial attorneys are pushing for, and then that's offset by more successful defense on the part of the insurance industry.

Speaker #3: Yeah. So I think I'd love to see more, we'd love to see more of that. I think there is a bit more pushback, but in the numbers, too, we don't see yet—or we don't see the impact of tort reform or different behavior by the defense attorneys and so on.

Speaker #3: So I think it's not reflected in our last trend, because we just don't see it in the numbers yet.

Speaker #4: Okay. No, understood. And then, I apologize if this has been covered before, but I remember a couple of years ago there was a little bit more caution on mid-year renewals because there were very negative forecasts for hurricane activity.

Speaker #4: And I'm wondering, this year, the forecasts are benign. When there are below-average forecasts, does that increase your appetite for property cat? Obviously, given the rates that are available.

Speaker #3: It's a factor, I think. Like most companies, we have a meteorologist on staff that gives us the outlook. But we look at the correlation in the past.

Speaker #3: There are some positive correlations, but it's one of the factors we take into account. That's not the main factor, though.

Speaker #1: Your next question comes from the line of Mike Zaremsky with BMO. Your line is open. Please go ahead.

Speaker #4: And thanks. Good morning. On the mortgage segment where the growth popped and you called out non-renewing some of the Bellamy and less reinsurance, can you quantify what that impact was and if we should be run-rating that for the next three quarters as well?

Speaker #5: Yeah. I mean, I think the current quarter is a good starting point, right? Some of these agreements were effectively on the Bellamy side. I mean, they're canceled.

Speaker #5: So the benefit we got—because it's, again, a monthly pay or monthly kind of premium—the benefit we’re getting is both on the Bellamy and the quota shares.

Speaker #5: Again, it will continue on. So I would not—I mean, I would expect at this point kind of a relatively flat premium on the USMI side. Australia, to Nicolas's point.

Speaker #5: It's a new relatively large new client. So which just started in Q1. So as we move throughout the rest of the year, we should see more and more of that business coming in.

Speaker #5: So when you're doing kind of year-over-year growth, I think I would expect to see a bit more growth out of our international book.

Speaker #4: Got it. That's helpful. And just switching gears to the war in the Middle East, I'm not sure if you did quantify the exact cat loss to David's question, but just if you don't mind, that's fine.

Speaker #4: But to the extent the war endures or ebbs and flows, should we have any color on what loss industry estimates are using, or is this very kind of idiosyncratic to you all because it's specific to certain areas that were hit? Or any color you could add to how we should think about it to the extent the war endures?

Speaker #4: Thanks.

Speaker #5: Yeah, I think there could be more. I mean, obviously, what we saw in Q2 was a direct reflection of certain risks that we insure that were hit.

Speaker #5: If that kind of — if we have the same in Q3 or Q4 as the war persists, yes, we could have more of that. But that's right.

Speaker #5: It's more case by case. It's more property by property specific and not like a ongoing thing like COVID might have been where it was kind of more a aggregate view of the exposure.

Speaker #5: So, this is more kind of case-by-case specific. And, yeah, we'll react to it if we hear the news that there's some damage.

Speaker #3: I think the estimate for the industry loss since the last earnings call has not changed, because I think the event that happened just before the earnings call.

Speaker #3: So I think we are still—I think the industry in general is still around $3 billion for the Middle East war losses.

Speaker #1: Your next question comes from the line of Brian Meredith with UBS. Your line is open. Please go ahead.

Speaker #4: Hey, thanks for letting me get one more question. So, I was just curious—you've been talking a lot about share buyback capital, but the one thing I'm curious about is M&A, and kind of how you're thinking about M&A in this environment right now.

Speaker #4: I mean, typically, we've seen as the market rolls into a soft market, M&A actually picks up. Maybe give us your perspective—and are you seeing any of that in the marketplace?

Speaker #3: Yeah. So we don't think of M&A as an alternative to organic growth or buying back shares or returning capital to shareholders. We think M&A as more of a strategic way of building versus buy.

Speaker #3: If we want to be in a line of business and we don't have the scale, M&A could be a path to get us there faster.

Speaker #3: And think of the Alliance transaction is we want it to be in the middle market, property. We've tried to get there. And ultimately, this opportunity came.

Speaker #3: And we paid a decent amount of money to have a franchise to be able to operate in that business. So we're looking at M&A for what it adds to what we have, more so than to gain market share and my honest view on M&A in this market is it's expensive.

Speaker #3: The price is expensive. And maybe the price comes down, but as the market gets more competitive, maybe the balance sheet gets weaker. So I think there's—you have to think—the timing of M&A is tricky.

Speaker #3: And a successful M&A, it's difficult. Historically, a lot of the M&A has created the issues for companies. So we're very careful in the way we approach it.

Speaker #4: Thank you.

Speaker #1: I'm not showing any further questions. I would now like to turn the conference over to Mr. Nicholas Papadopoulos for closing remarks.

Speaker #3: Yeah. Thank you for the time today. And another good quarter for ARCH. And we're looking forward to talking to you next quarter.