Arch Capital Group Ltd.

writing so much business during the slumping years of pricing that you were better positioned than others. Brokers and customers like to know that there is a consistent market regardless of pricing available to them and companies that come in and out in a mercenary sort of way tend not to get the business. How can Arch come in and be competitive in these markets compared with the companies that have been willing to write policies at less margin?

As in, hi Josh, as in every market, I think that when there's a sort of a shift in capacity, some incumbents who have been providing continuity of coverage actually take a pause and they look around and say, well, maybe we don't want to do that risk or do that risk at very different terms and conditions. And we are not, we did not move away from all the markets. Actually, we were still very much present. I think that Our growth, or would I say we weren't as involved in the market for the last three or four years, I think you have to look at our trend rate of growth, which was less than what you would have expected the market to grow. So we tend to be below the long-term average. I think right now you see us be above the long-term average. And brokers, like everything else, when they need capacity, they have to look for capacity for good quality outfits. And we actually are growing in areas where we already are present, there's some risk that we did not see before, did not have a chance to quote or participate on, or frankly, we found the price to be inadequate for our liking. And now they're coming back to us and say, well, what about that risk, Mr. Arch? You know, you didn't write it before, and that's what happens. So the relationship is not solely client insured by insured. It has to do, as you know, we're a broker market company. So the relationship is through the broker channels across multiple lines of business. A company that writes over a $3 billion a year premium is not a maverick, or I'm not sure what word you use, but we're not a mercenary company.

I didn't mean to use that word in a pejorative way.

You did.

I wasn't talking about Arch. Sure, of course. And in terms of, I know that Nicholas has come in to run the insurance business. And I guess there's a non-time specific goal of getting combined ratio down to a 95%. If I look at the people you've had running the insurance business over the last 20 years or not quite 20 years, you've had some incredible talent running that business. And a 95% combined ratio has been a rare moment of success for that segment. What can Nicholas bring to the market that's going to help you get to those goals?

So the first thing that Nicholas is bringing to the insurance group is this little bit more proaction in terms of when a market transitions or shifts. And that's something that you could feel and experience when you talk to our underwriting team. That's number one. Number two is we also have different tools and than we had available to ourselves, say, 10 years ago. Predictive analytics comes to mind. This is really something that is relatively new, and we see the benefits of it on a daily basis and are embarked, as you know, Josh, on an across-the-board project to get everybody through predictive analytics, and that speaks to the segmentation and underwriting selection that we talked about. In addition, you see this through some of the numbers, on the IT, we do have a healthy amount of investment. We took a guy from our MI group, which was superb and best of breed in terms of IT development, and we sort of brought that there as well. So it's a combination of culture and really giving more tools and having access to more tools. So I'm not sure that, you know, it's really people-specific.

And do you have a time? I know you haven't given time, but when you say we're hoping to get to a 95, is that a three-year plan? Is there no time behind that? Is there any way of, like, sort of getting a little more specific?

Like I said on earlier calls, I'd like this to be yesterday, but I think we have to go through it in steps. I think that, Josh, I'm very encouraged by the development and the improvements that we've made in insurance, and certainly the pale green we have from the market is going a long way to get there quicker.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Elise Greenspan from Wells Fargo. Your line is open.

Hi, good morning. My first question, I guess tying into Josh's last question on the 95, you guys have always been a bit more tempered on where you see loss trends within the insurance market. Obviously, you gave us, you know, in your prepared remarks, Mark, you said rates up about 3.5%. Can you give us a sense of where you see loss trend today and kind of how that's changed over, you know, kind of the past last three to six months, if it has?

It hasn't changed a whole lot. We actually are going through a very deep dive in loss trend. I do think that we still have uncertainty around this. You know, we have very recent years. a different kind of economy over the last three or four years. It's going to take a while for us to finally determine what the trend is. I would just only tell you that it's not an exact science, so we try to look at discernible patterns. I think you've heard on other calls that there is a recognition that there is something afoot on the severity side of things, most specifically. On the frequency, it remains to be seen if that is going to compound for the prior premium, but for now, the severity is definitely picking up. So that's what has taken us – we still are very, very careful. So when I talk about the 3.5% lease, it's made up of a range, right, from minus 1 in certain lines of business to plus 12, 13. So those who are clearing plus 10, plus 15 obviously are clearing anything above what could be in terms of range of expectations on the loss trend, right? If you think the loss trend – is an expectation between two to four, you know, even at the higher end, if you clear a 10% rate increase, and if it's a second year of 10% increase, it gives you that much more comfort. That's how we think about it.

Okay. And then could you also, in terms of pricing, could you give us a sense of – you know, what you're seeing within the ENS market? Are more risks going to the ENS market? How is the price there compared to the standard market? And what does the trajectory look like on the ENS side of things?

So, yeah, on the ENS side, I think it's sort of if you look in terms of steps, a lot of things were written, you know, in Lloyds and other admitted markets. A lot of business is thrown back into the U.S. ENS market, which we're a participant of, as you know. And so it's coming to us. It's coming to other ENS carriers around the country. We're not solely benefiting from this. But clearly the rates coming in were, you know, as expiring, they were lower than what we would like to have. Otherwise, we would have written those deals. And it's mostly property, I would say, at this point in time because of the certainly not helped by the recent CAT losses. So if you look at it from some total position, clearly ENS is getting traction. It's coming back to us. We're looking at it, and we're able, as I said in my remarks, some of them are getting substantial rate increases, and they need to. They need to get those rate increases to get to the level of returns that we are seeking. And we think that this is, specifically in the property side, our team is seeing some legs to it. They're really seeing an increased number of submissions, and we see some legs to it for the next several quarters, which is encouraging, which is the first time I could really say that to you.

Okay, great. And then, you know, there was some, you know, potential regulation out last week in terms of the potential for the patch rule to go away. I was just wondering, I know that that would be kind of a 2021 event, but could you just comment on ARCH's exposure on the MI side if, you know, there was a change and just give us, you know, a little bit of an understanding on how that could, you know, could impact your mortgage insurance business?

Well, it could definitely impact not only ours, but the overall MI segment, right? About a 30% share of the GSE patch. It's a big deal. I think we're communicating with them. We're talking to the GSEs and the CFPB and trying to, you know, give them our comments and our view on this. At a high level, it could go, you know, multiple ways. But, you know, the best ways for us would be, and this is certainly what we would advocate, is that that business could also find its way onto the private market, right? I mean, there's clearly a path for this to be more in a private placement as well. Going the way of the FHA, I mean, it's certainly something that they can decide to do, but that would be, you know, sort of a choice that they would have to do politically. I think at this point in time, at least, it's too early. We definitely are involved in this. The encouraging words from the CFPB were that trying to, you know, leveling the playing field across all participants, which means, you know, the GSEs and the private capital markets. This is how we want to and wish to interpret it. We'll be in touch with them, and we are hopeful that there will be a transition or there will be some very thoughtful and deliberate way to resolve that. So we're not overly excited at this point in time, but we certainly are looking at it intently.

Okay, thank you. I appreciate all the color.

Great. Thanks, Elise.

Thank you. Our next question is from Daniel Baldini from Oberon.

Your line is open. Hi, good morning. Thanks for taking my call.

You're welcome.

It seems like it's increasingly likely that there'll be a hard Brexit at the end of October. And I was wondering if you could talk about the effects on your business, and specifically your ability to do business from London, where you mentioned earlier you've increased activity. The ease of moving your London-based people around the continent to do business, and what exposure do you have to a further weakening in the domestic economy there?

Okay, so let me take the Brexit question. We already, as is everybody else in the industry, we have repositioned our European operation into Dublin. So this is where we are currently doing non-UK business. As of the end of March, I believe, is the timeframe. And we also have, through Lloyds, Brussels is the establishment for Lloyds within the EU. So we're also a participant in that marketplace. And we carry on with the UK business. And actually, we are, to answer your last question, we're very keen on developing a bit more of the retail. And we did the acquisition last year, end of last year, of the Ardenal Retail Network. So that's actually going very, very well. So, you know, it creates some barriers to entry for possibly other participants, but I think everybody has been pretty good, including ourselves, and established, you know, setting ourselves up for being able to write the business, whatever happens, whether it's hard Brexit or negotiate Brexit. So we are already well ahead of whatever could happen. So a little bit more expensive because you tend to have a bit less, right, concentration of back office and underwriting support. But by and large, it's not a, you know, hopefully that will presumably find its way to pricing anyway. And so we're very relaxed with Brexit, I mean.

Okay. Well, thanks very much.

Thank you.

Thank you. And our next question comes from Jeffrey Dunn from Dowling & Partners. Your line is open.

Thanks. Good morning. Good morning. Just a couple number questions first. Can you disclose the aggregate ILN cost running through your premium line this quarter? It's about $18 million. $18 million, okay. And with respect to the 19-3, what was it about the 16 book that you didn't do it back then, you went back and did it now? Obviously, it was the one piece of the back book not covered, but I guess what was behind just the delay in covering it?

Well, I mean, a couple of things. One is, as you know, we've been trying to get protection on the whole book. So, yeah, no question that 2016 was the only year that did not have coverage on it. And the timing of it is really, I'd say, a big reason is the fact that it's a seasoned book. I mean, if you, you know, we saw it last year when we placed the 2018-2, you know, issuance where that was covering the 2013 to 2015 years. Once the book is seasoned a little bit, I mean, the investors have a lot more visibility in the performance, and the spreads just are that much tighter. So we saw the exact same kind of behavior for this recent issuance and, you know, just wanted to wait until the book was seasoned enough until we went to the market with it.

Okay. And then with respect to the new notice growth, I think we're seeing all the legacy players go through a transition now where the 09 and after period seasoning is offsetting the improvement on the 08 and prior. Can you provide a little bit more color on the two different books there in terms of the impact on the 9% growth this quarter? What are your 09 and afters growing their notices at versus the decline in the 08 and prior?

I'm going to have to look at these numbers now. I don't have them handy, but what I could tell you is 6% of our book is prior to 09. 94 is post-09. or post-08. So most of our growth will come from those years. And it's pretty much coming from 2015, 2017, Jeff. So it's not really different than anybody else around. I think these years have some seasoning and sort of finally a two or three years mark, right, where they tend to get the default. So, yeah. Yeah.

All I'll add is, you know, this was the first quarter really where we saw more than half of the delinquencies are from 2009 and subsequent. So up until recently, it was obviously trending up, but now it's really above 50%.

One last thing I'll add, Jeff, that this is all expected. There's nothing really to read more into it than just a natural phenomenon. of growing the book of business, the insurance in force, and overtime, the seasoning up, even the most recent year, we'll tend to get some NODs. But as we remind ourselves, as you know, Jeff, these NODs, the ultimate claim rate on those is much smaller than anything we have seen, we had seen for the pre-08, right? We're still below 10% ultimate claim rate.

Okay. Helpful. Thank you.

Thanks, Jeff.

Thank you. And our next question comes from Sean Reitenbach from KVW. Your line is open.

Hello. Arch has had some adverse development on older accident years related to a binding authority book. What are you seeing in that book of business now?

Well, I mean, it's something that we've identified, no question. We had some issues. We've had some issues within the performance of that book. We've made some corrections along the way. We've shrunk our volume. We've re-underwritten the book to some extent. Right now, we think the reserve development is contained. So we don't expect a whole lot of, you know, I think we're in a good spot and don't think there'll be more to come in a material way. But, you know, it's certainly a book that we know has underperformed and we've corrected to some extent and we're keeping an eye on it.

Okay, thank you. That's helpful. And then also we've seen some property and casualty competitors lose share in third-party capital assets under management and some are gaining share. What's happening at ARCH?

We're gaining share.

Yeah, I think there's a, you know, we've seen, I think, the quality of the operator we'd like to think has maybe a bit more, people put more value on that. So we have a good track record in underwriting on the property side, and I think there's more capital that's looking to find a home with a solid underwriting team, and that's what we think we've demonstrated over time and like to think we can continue to keep doing it.

Okay. Thank you very much. That's all I have.

Thanks, Sean.

Thank you. And I am showing no further questions from our phone lines, and I'd like to turn the conference back over to Mr. Mark Grandison for any closing remarks.

Thank you, everyone. We'll see you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.