Arch Capital Group Ltd.

Good day, ladies and gentlemen, and welcome to the Q2 2023 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risk and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on form 8K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website and on the SEC's website. I would now like to introduce your host for today's conference, Mr. Mark Grandison and Mr. Francois Morin. Sirs, you may begin.

Thank you, Josh. Good morning and welcome to our second quarter earnings call. We're more than halfway into 2023 and Through our commitment to underwriting acumen, prudent reserving, and cycle-focused capital allocation, we were able to deliver another quarter of profitable growth. In the second quarter, our results were primarily driven by our willingness and ability to deploy capital into lines with superior risk-adjusted returns. Our operating results in the quarter were stellar, with an annualized operating return on average common equity of 21.5% that drove a 4.8% increase in Archer's book value for common share for the quarter. As you know, book value for share growth is our primary focus on our road to creating long-term value for our shareholders. Each segment generated over $100 million of underwriting income in a quarter. These outstanding returns reflect our ability to effectively execute in each segment. We're really operating in our sweet spot. I also want to commend our employees for the continued exceptional growth they've delivered in the quarter, most notably a 32% increase in property and category net premium written compared to the same quarter a year ago. This hard P&C market is proving to be one of the longest we've experienced, and we are in an enviable position as we look to 2024 and beyond. We often refer to the insurance clock developed by Paul Ingres to help illustrate the insurance cycle. You can find the clock on the download tab for this webcast or on our corporate website. If you can't view the clock right now, just picture a traditional clock dial. For some time, we've been hovering at 11 o'clock, which is when we expect most companies in the market to show good results as rate adequacy improves and loss trends stabilize. Last year, a popular topic on earnings calls was whether rate increases were slowing or whether rates were even decreasing. These are classic signs of the clock hitting 12 when returns are still very good, but conditions begin to soften. Yet here we are in mid 2023 and conditions in most markets remain at 11 o'clock. We've even checked the batteries in the clock and they're just fine. The clock isn't broken. It's just that the current environment dictates an extended period of rate hardening. So what's sustaining this hard market? Well, I believe it's a relatively simple combination. Heightened uncertainty is driving an imbalance of supply and demand for insurance coverage. Since this hard market inception in 2019, we've had COVID, the war in Ukraine, increased catactivity and rising inflation, all of which creates significant economic uncertainty. Underwriters have had to account for more unknowns. Beyond those macro factors, industry dynamics also play a role in sustaining the hard market. Generally, inadequate pricing and overly optimistic loss trend assumptions during the soft market years of 2016 through 2019 have led to inadequate returns for the industry. The impact of these factors should cause insurers to raise rates and purchase more reinsurance in a capacity-constrained market with limited new capital formation. Put it all together, and it may be a while before the clock strikes 12 and we begin to move beyond this hard market. I'll now share a few highlights from our segments. First, P&C. In the second quarter, the reinsurance group was successful, again, at seizing growth opportunities. In particular, the mid-year property and property cap renewal saw significant improvement in rates adequacy, and our underwriters were ready, willing, and able to provide valuable capacity to our clients. Our PML, or exposure to a single event in a one in 250-year return period, went up in a quarter, while our premium income grew substantially. At July 1st, our peak zone exposure rose to 10.5% of tangible equity. Overall exposure to property cat risk remained well within our threshold, and because of our diversified portfolio and broad set of opportunities, we retained the flexibility to pursue the most attractive returns across lines and geographies. Although there are lines where pricing has declined, Large public D&O comes to mind. P&C markets continue to see rate changes above lost trends. Even with those few lines with weakening rates, the compounded rate increases over the past several years continue to be earned and are generating attractive returns. Overall, we like the range of opportunities in front of us, and we continue to lean into the current market. Next is mortgage, which keeps generating meaningful underwriting income and risk-adjusted returns. Housing and credit conditions remain favorable, although high mortgage interest rates temper demand for mortgage originations and limit refinancing options. The lack of refinancing has led to a historically high persistency rate of 83%. High persistency stabilizes our insurance in force, which, as many of you know, drives mortgage insurance earnings. Our discipline underwriting process and risk-based pricing model have helped us to build a healthy risk-reward profile for the business we write. The composition of the overall book, with high FICO scores and low loan-to-value and debt-to-income ratios, remains one of the best risk profiles in the industry. International growth, along with our GSC credit risk transfer business, enabled us to profitably manage risk better than more online U.S.-only companies. a key differentiator of our MI global platform. Mortgage insurance plays a valuable role in our diversified business model and continues to generate capital that is and can be deployed into the most attractive opportunities across the enterprise. Moving on to investments now. Since our second quarter call last year, the Federal Reserve has increased, as we all know, the rate eight times for a total of 375 basis points. Given our short-duration portfolio, these hikes have positively affected our net investment income, which is up approximately 22% over the first quarter of 2023. New money rates exceed our book yield, which, along with our strong cash flow, sets the stage for further growth and book value creation. I've had tennis on the brain after watching the incredible Wimbledon final a couple of weeks ago. It was an epic matchup. 20-year-old sensation Carlos Alcaraz taking on all-time great Novak Djokovic. It was a back-and-forth match that lasted nearly five hours before Alcaraz emerged victorious. There was one pivotal moment that will be remembered for years. In the third set, a single game, something that usually takes about three to five minutes, instead lasted 26 minutes. The game included 13 deuces and seven breakpoints. It was an incredible display of tenacity and athleticism, not to mention the mental strength required to remain focused. It was insane. But what really struck with me was that, kind of like this hard market, the game simply refused to end. There were many times where a single winning shot could have ended the game, but it just kept going. About 15 minutes in, it became clear that we just needed to enjoy what we were watching and not focus on the end point. So that's what we're doing with this hard market. Returning with the market serves us with gusto. As always, our goal remains to generate strong risk-adjusted returns in order to create long-term value for our shareholders at lower volatility. The exceptional profitable growth over the last several years has fortified our market presence and helped us achieve one of the most profitable quarters in our company's history. This is a type of well-rounded quarter we've always envisioned, the sweet spot, if you will, and we look forward to building on this momentum in upcoming quarters. I'll cede the court now to Francois, and then we'll return to answer your questions.

Thank you, Mark, and good morning to all. Thanks for joining us today on this gorgeous day in Bermuda. As Mark highlighted, our underwriting and investment teams delivered excellent results across their respective areas in the second quarter, which resulted in a performance that exceeded that from our very strong first quarter. For the quarter, we reported after-tax operating income of $1.92 per share for an annualized operating return on average common equity of 21.5%. Book value per share was $37.04 as of June 30th. up 4.8% in the quarter and 13.5% on a year-to-date basis. Turning to the operating segments, net premium written by your reinsurance segment grew by 47% over the same quarter last year, and this growth was observed in most lines of business. Growth was particularly strong in the property catastrophe and property other than catastrophe lines. with net written premium being 205% and 53% higher respectively than the same quarter one year ago, a reflection of the fact that market conditions in these lines remain very attractive. As a result, the quarterly bottom line for the segment was excellent, with a combined ratio of 81.9%, producing an underwriting profit of $245 million. The accident year XCAT combined ratio was 77.4%. The insurance segment also performed well, with second quarter net premium written growth of 18% over the same quarter one year ago, and an accident quarter combined ratio excluding CAATs of 89.8%. Except for professional lines, which saw a slight decrease in net written premium in our public director's and officer's business due to a more competitive market, all our underwriting units in insurance, both in the US and internationally, saw good growth in the quarter as market conditions remained excellent. Our mortgage segment had another excellent quarter with strong performance across all units, leading to a combined ratio of 15%. Net premiums earned were in line with the past few quarters, reflecting a high level of persistency in our insurance and force during the quarter at USMI, partially offset by lower levels of terminations in Australia and higher levels of seeded premiums. Benefiting our results was approximately $84 million in favorable prior and reserve development in the quarter, net of acquisition expenses, with over 75% of that amount coming from USMI and the rest spread across our other underwriting units. Cure activity at USMI was again very strong this quarter, and our delinquency rate stood at 1.61%, its lowest level since the onset of the COVID pandemic. At the end of the quarter, over 80% of our net reserves at USMI are from post-COVID accident periods. Overall, our underwriting income reflected $116 million of favorable prior redevelopment on a pre-tax basis, or 3.9 points on the combined ratio, and was observed across all three segments, mainly in short tail lines. Current accident year catastrophe losses across the group were $119 million, over half of which are related to U.S. severe convective storms that have occurred so far this year. Pre-tax net investment income was $0.64 per share, up 21% from the first quarter of 2023, as our pre-tax investment income yield was almost up 50 basis points since last quarter. Total return for our investment portfolio was 0.56% on the US dollar basis for the quarter, with most of our strategies delivering positive returns. Our interest rate positioning with a slightly shorter duration helped minimize the impact of the increase in interest rates during the quarter. We remained comfortable with our commercial real estate and bank exposure, which is of high quality and short duration. Net cash flow from operating activities was strong. in excess of $1.1 billion this quarter and continues to provide our investment team with additional resources to deploy into the higher interest rate environment. With new money rates and our fixed income portfolio is still in the 4.5 to 5% range, we should see further improvement in our net investment income in the coming quarters arising primarily from positive cash flows and the rollover of maturing lower yielding assets. Turning to risk management, our natural cap PML on a net basis at the single event one in 250-year return level stood at $1.46 billion as of July 1, or 10.5% of tangible shareholders' equity, again, well below our internal limits. In light of the improved market conditions in the property market, we were able to deploy more capacity, which resulted in significant premium growth for property lines in both our insurance and reinsurance segments. This growth was well diversified across multiple zones. Our view is that the current in-force portfolio with a broader spread of risk across many zones is well positioned to deliver attractive returns. Our capital base remains very strong with $17.4 billion in capital and a debt plus preferred to capital ratio of 20.5%. Even though the results of the past quarter set a high watermark for us on many fronts, we believe the continued hard work and dedication from our teams, serving the needs of our clients every single day, along with our steadfast commitment as disciplined and dynamic capital allocators sets us up very well for future success. With these introductory comments, we are now prepared to take your questions.

Thank you. If you have a question at this time, please press the star one one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star one one again. And if you are using a speakerphone, please lift the handset. One moment for questions. Our first question comes from Elise Greenspan with Wells Fargo. You may proceed.

Hi, thanks. Good morning. My first question, Mark, can you quantify the supply-demand imbalance that you're seeing within the reinsurance market? And how much of that do you think could transpire from an addition, a pickup in demand potentially at 1-1-2024?

I think, yeah, good question. Good morning again, Elise. I think, you know, the numbers we've seen for around $50 to $70 billion is not a crazy number. So, I think that where we still have this imbalance occurring, I think the market has found a way to, you know, do the reinsurance transaction and buy coverage. But indeed, there was also a, there could have been more to be had from the reinsurance perspective, but we believe, and you heard it on the call, that insurance companies also had to, had a sticker shock of sort and had to evaluate what they can buy and how much they could afford based on what the pricing level was. So I think there's this imbalance right there on the reinsurance. There's also, I believe, we also believe there's imbalance in the terms and conditions in the overall broad industry. That needs to be a bit more of a function. On one hand, you could create capacity for cap exposure through third-party capital or reinsurance protection, but at the same time, you could also do it through improving terms of condition at the insurance level. And I think that's also something that will help bridge the gap, and we believe that's going to be one of the key elements as well for the next 18 to 24 months.

And then the 77-4, Francois, the accident year underlying combined ratio within reinsurance, is that a good run rate level, you know, or maybe it could get better as we think about, you know, some rate earning into the cap book, or is there anything one-off in that number in the quarter? Sure.

Well, I wouldn't say there's anything one-off. It's certainly a very good quarter. I think our view, as we've said in the past when we've had some quarters where there's a little bit more activity, is we think it's better to look at it on a 12-month kind of forward-looking view. So, you know, Is this quarter going to repeat in the future? Maybe. We just don't know. I mean, but I'll say it's certainly good. There's room for further improvement. But again, recognizing that there's going to be volatility in the reinsurance segment from quarter to quarter, I'd say it's, you know, I'll let you make your pick from there.

Thanks. And then, Mark, one more for you. I mean, your stock has done really well. So, you know, you have you know, a problem that, you know, a good problem that any CEO would want and that you have an extremely valuable currency. We sit here with a hard market. You guys obviously have a lot of organic growth opportunities. What would you need to see from an M&A perspective to consider, you know, using your stock as currency to enter into any type of transaction?

Well, many things are needed. Obviously, you need stakes to the tango as well as you can appreciate in this world. But I think at a high level, at least, we're not focused on M&A at this point in time. We're really focusing on growing the book organically. We're also maintaining pretty well EMI as well as other non-property exposures. So we are seeing a lot of opportunities broadly here. And this is what our shareholders are paying us to do. And this is what we're doing. And this represents really a once in a little while opportunity to really deploy and really get access to the market in a bigger way and provide more capacity to our clients. And we don't want to miss that. I mean, an M&A would have to strategically fit for us beyond the money. I think right now our efforts and time is better focused on organic growth though at this point in time.

This is where I think we have plenty of opportunities on our own.

Thanks, Mark.

Thanks.

Thank you. One moment for questions. Our next question comes from Tracy Benjiji with Barclays. You may proceed.

Thank you. You mentioned that your 1 in 250 PML intangible equity was 10.5% at 7.1, which was up from 8.1% at 4.1. And I recognize your upper tolerance is 25%. It almost feels to me like you have a sublimit below the 25%. Is it fair to assume that getting closer to 25% requires an even higher ROE hurdle rate or pricing? Like, could we just be theoretical? What would you need to see in order to get more comfortable taking on more volatility in your book where you can get closer over time to that 25%?

Well, I think the where... First, the one thing about the PML which is so interesting to us is it's within the early innings of where it's going to go, so we have to be careful the way we talk about this, even internally ourselves. These are the earnings of a market getting much better, and as I mentioned, terms and conditions, we believe also improving and really helping to manage cap and the cap related risk better as an industry. So we'll see how that develops over time, Tracy. I think that we're also a different animal than we were way back when. We've grown up our capital faster than the growth and exposure needed. The 25 before is probably a lesser number. I think you're quite right. And we also have to balance your portfolio risk profile. But having said all this, there's plenty of room to go from 10 and a half to wherever we're going to end up. We don't know where that's going to be, assuming conditions. say as they are, even improve further, it certainly will mean more PML growth. I think that it would have to be substantially better. We actually have a very, very solid construct within our overall capital allocation that will dictate what kind of market share we would have in the market. And all I would say is there's always a place to go to the level numbers you talk about, but we'll see if we get there. And I will also remind everyone that it's not a bad place to start. The radio line index of one of the major brokers, as you all know, shows us that the pricing for the cat is the highest it's ever been since 1990, even before Andrew. There's a lot of room, and we're excited to see where that takes us. And one final thing I will say, Tracy, if you look back at the 05, 06, or 07, 08, if you go back on this, if you have enough of a memory or a good document retention policy or a bad one in your company, you'll see that our PML grew in 06, 07, 08, 09. So we kept on accumulating and growing the PML. So it's just a start.

Yeah, there's one thing I'll add on that. Just going back to Mark's early point about supplying demand and balance. I mean, Florida is obviously a big market. It was a big renewal in 6-1. And the reality is even if we wanted to deploy more capital, I think, or more capacity, I mean, the buyers or the seeding companies just don't have the resources or the money to buy the coverage that we think they should be buying. So there's a little bit of wait and see whether, you know, It'll be a full year before they reprice their product, and then it gives them more money potentially to spend on resource protection, which we, again, assuming the pricing stays at the current levels, we would deploy more capital. But certainly the demand is a big factor in our ability to grow PML.

Got it. I would say that if you do change your threshold, and I get it's very fluid and the demand equation is also different, that you would provide an update to the market on that. Real quick, do you have a house view on how this year's hurricane season will shape up? There was talk about average hurricane season, and now people are talking about above average. How do you see that playing out this year?

Well, we don't have a view in the view that what we have a view with internal. We have a mineral just to evaluate the surface temperature. I'm sure everybody's in those numbers. Um, you know, we, we expect average to maybe slightly above average last time we give us a presentation. But as you know, Tracy, it moves week to week. So we'll see when we get there, we're a little bit almost starting the season. So we'll see how that develops. But. We tend to take a longer-term view, Tracy, of the frequency and the severity of the hurricane season. So we believe that the pricing as it is right now accounts for a lot of deviation from the long-term expected, and even if you had a little bit above average, I think that the market will be in a really, really good place. Not only us as a part, I think the market is, on the reinsurance side, has priced the business with that long-term expected, which had, as we all know, a little bit of increased frequency instead of late.

So that is reflected in the modeling that all the companies are using.

Very helpful. Thank you.

Good.

Thank you. One moment for questions. Our next question comes from Jimmy Buller with J.P. Morgan. You may proceed.

Hey, good morning. First, just a question on your comments on supply demand. And besides the absolute price, obviously, terms and conditions have improved as well. And where we can see the data, it seems like most of the primary insurers are absorbing more of the first dollar loss. But obviously, we don't see the data from all of them. But how broad based is this? And do you think there's sort of been a little bit of a transfer of risk, cat risk from the reinsurers to the primary companies?

given changes in terms of emissions i think the last part is is a true statement i think the q2 numbers you saw for some other other uh some of our clients actually and competitors uh demonstrate that there's a little bit more retain and this is the kind of question i mean if you can't buy the coverage you have to retain it yourself um the terms and conditions change this is what's fascinating with this market it is not only a property cat terms and condition change it is it's a very broad-based property uh you know terms and conditions and price and improvement that is sought by a lot of uh companies i think the market globally has as the psychology is squarely like i said last quarter squirreling the camp of having to mend and optimize and reshape and re-underwrite the portfolio and one of the key thing that we see that evidence is that, is that a facultative team in our E&S property have an increased amount of submission this first half of the year. And what's interesting, the E&S property on the entrance obviously has some cat exposure, a fair amount of it, but it's not only that. Our facultative book of business is not necessarily, it's actually not the cat heavy portfolio, which is an indication. As speculative is typically in any market, it's a good indication for where the market psychology is. So beyond the cap, when they provide a fire protection, the pricing and the conditions are improving there as well. So it's very much a broad base and in the early stages. And I will say, remind everyone, and we have to remind ourselves of this, is that this is the second or third year that our property rates in terms of conditions are improving. So it's not the first shot at it. It's an ongoing process, and I think that it's just got, you know, we positioned in top of mind after Ian and certainly the second quarter just here. We believe it will help maintain a bit of that going forward.

And then on the MI business, you've had obviously very sizable reserve releases over the past couple of years. How much of the forbearance-related reserves that you put up, are those mostly released, or is there more room to go there?

I mean, they're mostly gone. I think we've released a fair amount of the reserves that we put up in 2020 effectively during the early days of the pandemic. As I mentioned, a lot of the cures that we're seeing now are from 21 and 22. So that's good news. And as you know, the reserve base has shrunk. quite substantially from the peak of 2020, early 2020. So, you know, we were still very prudent. We still look at the data every single month as the new delinquencies come in and how quickly we cure and all of that. But, you know, we're still very comfortable with our reserve position there.

And if I could just ask one more. In the past, when the market's been really good, we've seen some companies go out and raise equity, try to take advantage of that. And a couple of your peers have done that as well, obviously not to a very large extent. But what do you think about your sort of desire to do that if the demand really picks up and your business continues to grow?

Well, it'll be a function of the market. I mean, we've been able to grow quite substantially the last few years without raising any additional capital. As I've told many people over the last few months, we have the luxury of having a mortgage unit that provides a source of capital that we have been able to redeploy in the P&C space. So assuming similar conditions where P&C stays very hard, and mortgage still does very well but isn't growing substantially, we still think we'll be able to generate capital internally. But, again, hard to have the crystal ball on what 2024 will look like. So, as I mentioned, we've got plenty of capacity. We are low leverage, so we've got a lot of tools in the toolbox, and we'll react to the market as it presents itself.

Thank you.

Thank you. One moment for questions. Our next question comes from Michael Zaremski with BMO. You may proceed.

Hey, great. Good afternoon.

Maybe just wanted to learn more about market conditions in the primary insurance segment. I definitely heard your comments about, you know, rate change of loss trend and, you know, pieces of where overall we are in the in the underlying lifestyle clock. But I'm just curious, we're seeing, you know, kind of different data points from companies on pricing power levels. Some are showing flat-ish pricing power, some are showing deceleration. You know, I know you guys operate in lots of different pockets, but would you say overall pricing in the primary insurance, you know, segment is is accelerating or maybe it's worth bifurcating between casualty versus property as well?

Yeah, you'd have to bifurcate the markets to your question. I think the overall statement I will say is that from our perspective, we look at our portfolio, as you just mentioned, by all the specialty lines and most of them still getting rate increases and actually had a bit more pickup in rate increase over the last quarter or two, which was a good a good thing to see and the right thing to see, obviously. But I think No Workers' Comp is a good example for rates not going up still, and there's a reason for it. It's been historically well-performing and performing better than all the initial picks from all the folks up there, so I can see why there is some validity or at least reason behind that. This is what I would tell you. The word I would use for the insurance industry right now in the U.S. specifically is rationality. It's a very rational market. There's a reason for things to happen. The reasons for things to happen are economically based. They're not you know, growth of market share or making a splash or marketing driven. Companies are really, really doing the best they can to underwrite to the best and being appropriate, right, in getting price increase, you know, a certain degree to lines that needed more than others.

I think the market is fairly rational as we speak.

Okay. Let me switch gears a bit to the reinsurance side of the marketplace. You know, Would you say there's been a lot of terms and conditions changes and just season changes too, especially in Florida? You know, would you say that if, you know, if there is a major event, should we be looking at historical market shares that the reinsurers and ARCH have had and then haircutting it? Would that be like the right exercise to do given where we're kind of, you know, in hurricane season?

I think we've grown our portfolio, right? I mean, you can see that the exposure growth, I think the proxy for market share is probably better to use the Delta and the PML, even though that's only one zone. But as Franco mentioned in his remarks, we do have, we have an increased participation in a much more wider set of property cat exposure than we used to have before. But the market share that we You know, we've said anywhere from, you know, historically from 0.5 to 0.8, it's going up a little bit. And I think I would use a PML as a proxy. That's the best thing I can tell you right now. It's very different by zone.

Okay. That makes sense.

I'll stop there.

Thank you.

Thank you. One moment for questions. Our next question comes from Josh Shanker with Bank of America. You may proceed.

I've read the Paul Ingray reinsurance clock, but it doesn't really relate to something that Paul actually knew about, which I don't, which is how to make money in the late 1970s in the insurance industry. Given where you see loss trends are, and given that pricing is going up over an extended period of time, is there an element that we just don't know really what the loss cost trend is, and we need an extra padding in there compared with our historical appraisals? And is it possible to put a supplemental ambiguous loss trend on top of what you think the loss trend is currently and still get new business attractively?

Yes, so very good question. I think this may break it in parts. I think that, yes, we do, as you know, as a reserving practice, we're very keen on reserving, being prudent. We do reserve to a higher level of trend than is embedded in the pricing or what we even observe in the data to make sure that we're accounting for this. I think as a result of that uncertainty and the need to get a bit more cushioned and the uncertainty that it generates, I mean, you've heard us On the other call, I think it does generate that need to get higher price for that reason. But there's a need, there's a recognition in the industry that we need to be a little bit on this side of the decimal to create some kind of margin of safety. So I do believe that companies are pricing for a higher inflation ratio going forward and also padding a little bit. And that's what helps sustain the hard market as we speak.

Is ARCH padding more now than it has as a company standard practice in the past? Not really.

I think we've talked about this, Joshua, on calls the last two or three years. I think we've been consistent. you know we live it as art right it's not only science not as granular as you might think it is you know you do the reserving process you do do the reserving process and then look at what your you know expectation are versus what the actual is emerging and you adjust your loss ratio there's two things all right now there's a tendency to sort of you know pick a higher loss ratio then otherwise would be indicated because we have still see through that underwriting you develop And it's been very consistent. If you look at our IV and R ratios and the way we book the business on our insurance portfolio, it's been consistent for the last three years. So we tend to want to make sure that we see data emerge that allows us to release some of that before we do. So we have not changed a whole lot. And it's not... It's quite a bit away above the expected or the actual emergent of the losses, but inflation develops in the future, so it's an appropriate thing to do, I think, at the early stages. Francois?

Yeah, and I'd add, like, COVID certainly threw a wrench in the whole process, right? I'd say it's, you know, the way we think about the business today, the way the environment is today is different than it was five years ago, is different than it was 10 years ago. Great question, Josh, but no two periods are alike. And right now, back to Mark's point, I'd say the reaction or how do we think about courts closing and courts reopening and coverages and everything that came with COVID, I think we're still kind of working through that. So that's why I think it would suggest that we like to be prudent and maybe even more so in this environment.

And then on Tracy's PML question, I kind of ribbed into Francois and Don on this a little bit, but the corporate charter says you're willing to put 25% of the company's equity capital at risk for a one and 250 year event. You're nowhere near that. And I don't really expect there's any market where Arch at this point, given how big it is, would really put 25% of its equity capital at risk for a one and 250 year event. How... What's the reasonable ceiling on how much cat risk you'd be willing to take in the best cat market ever?

I'd say, I mean, we think we're in a good market. We know we're in a good market, but we don't know what tomorrow holds. So, I mean, the rates could go up again by a factor of, you know, quite substantially next year. Again, I don't want to speculate, but there could be some changes. markets kind of pulling back and then you know i i think uh i agree that in in what we know today it's unlikely that we would hit 25 but we don't just don't know what the future holds so i think we're um you know we're we're cognizant that there could be better opportunities at some point down the road okay thank you for all the answers thank you you're welcome thank you one moment for questions

Our next question comes from Ryan Tunis with Autonomous Research. You may proceed.

Hey, thanks. Good morning. I guess my first question is in MI. It's kind of a follow-up on Jimmy's. So on page 21 of the supplement, it looks like you guys give reserves, lost reserves, like by vintage year. And the dollar amount of reserves in 2021-22 looks pretty similar to what it was at the end of last year. Against that, you've you continue to release quite a few, over 100 mil. So I guess I was just trying to square that a bit. Like, where exactly have these releases been coming from?

Well, just to clarify, I'd say, Ryan, that the reserves, we don't disclose the reserves by year. We show the risk and force. We give you the total dollar amount of reserves as of, you know, $403 million at the end of the quarter. and the same at the end of the year, but there are some shifts between, you know, between what was at year end versus now. I will say that most of the reserves that we've, you know, the reserves releases in the first six months of the year have been coming primarily from the 21 to 22 years, I mean, and a little bit of 20 as well.

And, Ryan, what you're saying is also recognition by the MI group that, There were more uncertainties and, you know, potential recession fears. There's a lot of things going on. So the assumptions when you do reserving in the long term, at that time, you know, you'll tend to increase, could it be, you know, increased level of risk. So I think that that also could explain why, well, after two or three quarters, well, we don't need them. Well, it's because things are also, as we know, changing for the better, as we speak, on the EMI. So that could explain a little bit why it's a bit higher this quarter.

Maybe just some perspective on kind of where the ultimate loss ratios on those years are now trending at.

Well, they are, I mean, they turned out to be really, really good. I mean, the reality is, you know, even with COVID and kind of what transpired, you know, after that and the forbearance, et cetera, you know, I'd say, again, we've talked historically about, um call it a a a long-term average loss ratio in the 20 to 25 range uh we're certainly going to be below that still a little bit we're not here yet but i mean there still has to be you know we need more clarity on on you know how the remaining delinquencies are going to settle or whether they're going to cure or not but you know where we're at today i'd say we're going to be below the long-term average got it and then just follow up

Go ahead, sir. Right.

So, just to let you know, in terms of loss emergence in MI, it takes a little while, right? It takes two or three years for losses to start emerging. So, it takes a little while to get to know what the ultimate is going to be. So, I just want to make sure you know it's not like a one and done. You know, you generate an underwriting year, it takes two or three years for, you know, for losses to start to emerge, right? Situations, family situations, economic situations, and the borrowers. evolve over time. I just want to make sure you know that it's not just because nothing has happened yet.

I'm still trying to figure this business out, so I appreciate it. Follow-up, I guess, for Mark, just on P&C. I'm not sure there's ever been a cycle where when rates started to decelerate, they re-accelerated. Yeah. Why hasn't that happened before in your experience? Well, no, it's happened before, Ryan.

It's happened before. It's happened before. From 99 to 2001, we had 2002, 2003, 2004, actually, we had a hardening market on liability side in the U.S. We had new lines of business such as terror and aviation going through the ringers. So we had that going. And I remember a period of time when ARCH was on the way to CAT. for the first two or three years of its existence. And we were sort of going against the grain. Most people were shying away from casualty and doing more property. And then we ran into KRW in 05, and then we had a hard market as well in property. And I think it helped maintain even the business on the liability lines a bit longer. If you look back, the years 06 or 07, 08 were still very, very good. And the price decrease were not as probably as high as they could have been otherwise. I think the one factor with these kinds of hardening market and property side is this competing competition for capital. And I think it also helps, you know, buffer or, you know, aim down the rate decrease that would have otherwise have happened. And that's an important or, you know, or rate stabilizing more than just going down first. So we've had this before. We've had this before.

then so after katrina correct me if i'm wrong there was like one year of really good rain there was quite a bit of supply that came in and that was kind of it i'm just kind of trying to contrast from a reinsurance standpoint how the supply demand balance looks today sort of a year after ian versus how it did a year after katrina it hasn't changed a whole lot we hear from our third-party capital uh team and and the market i mean you hear from other markets i think that there's a

General more leveling off of capacity has been deployed and we would have expected from the existing incumbent which helps Explain a lot of the price increase that we've seen in our ability to flex in into this We're not seeing or hearing you know, supply increasing for a while. I think that there's still a, it's very much, the money that was there before that presumably was requiring lower returns has not returned back to the table. And even if they were to come back to the table, what we hear is their return expectations, like ours, have increased dramatically. So we'll see what that ends up.

I guess it's largely on that side. Yeah. What are you paying the closest attention to, thinking, like looking forward into 1-1, kind of what might drive pricing when you get to the end of the year?

Well, activity, cat activity, of course, and demand increasing. Demand, people, like we said before, needing to buy more or having to bite the bullet and do the right thing at the same time that they're improving their insurance portfolio. That's the big tell for us.

Thank you.

Thank you. One moment for questions. Our next question comes from Brian Meredith with UBS. You may proceed.

Hey, thanks. A couple questions here for you. First, just on your PML, what is your peak zone right now? Is it still northeast?

Spry County. Florida.

Where is it? Pardon me? Florida. Florida.

Yeah, my Spry County, Miami-Dade area.

Broward. Broward, yeah. Okay. And then on the PML question, I'm just curious, you give us 1 in 250, but how has your kind of 1 in 50 and 1 in 100s kind of increased, you know, over, you know, since call at the beginning of the year? Is it, is it, is it, they increased more or less about the same amount? Just trying to get a sense of where you're playing in programs.

Yeah. So from a big zone perspective, it's going up similarly in terms of percentage. It's a very similar increase.

Gotcha. That's helpful. And then, Mark, I'm just curious. I know there was a lot of one-off type transactions, top-up programs that happened in the second quarter. Can you give maybe some perspective on how much of that contributed to your growth here in the second quarter and how much is kind of continuing here going forward, just so we can get a sense of how is this growth sustainable here for the remainder of the year, maybe in the 24th?

We've had a couple of programs, for instance, on the intro that we won, and we've had a couple of big transactions. But I don't think this quarter is necessarily a large transaction quarter, Brian, the way you make it sound. I think it was more regular growth. A couple of transactions here and there, but nothing to the extent that when we talk on the call that Franco mentioned in his remarks that it has to – highlight it specifically for you. I don't think there's nothing really to highlight in this quarter, actually.

Good. Thanks. And then I guess last one just quickly here. One of your competitors talked about reducing market share in the MI business because of some concerns about potentially recession going forward. Maybe give us your kind of perspective on what you're seeing right now in your MI and kind of outlook and potential for some higher loss ratios there if we do go into recession as we look into 2024.

Yeah, I think pricing has improved over the last two years and credit quality stays really, really beautiful. And it's one among the best, you know, if we go back to 2013, 2012 in terms of quality of origination. So, as you know, credit is not readily available. The availability of credit is still pretty tight out there. So, from a credit quality perspective, Brian, It's as good, you know, it's a really, really solid marketplace. I think the market share question, which we never, you know, we don't lose sleep over this, as you know, Brian, I think a couple of things. And the market share that we're trying to do in terms of shaping the portfolio in the MI is trying to get the higher quality, like I mentioned in my remarks, lower FICO, higher FICO or lower LTV, and also geographically go to the places where there's less received inflation or an overvaluation. And also there's some different programs that have different returns, meaning they're less than we would have hoped for them to be. And they just don't meet our threshold. And especially Brian, if you overlay the opportunity set that we have on a property side, it just makes for our fellow folks and am I willing to take the earnings that they generate and give it to us on the P&T side to generate even better returns. So really good return business, Brian. It's just also for us a matter of comparative ROEs as well as absolute. Great. Thank you. Sure.

Thank you. One moment for questions. Our next question comes from Meyer Shields with Keith Rieden Woods. You may proceed.

Thanks. Quick question to start. The level of reserve releases in reinsurance is lower than it's been in recent quarters. Give us some color. Is that because you're assuming higher loss trends or are there other factors that may have played into the quarter's results?

No, I'd say it's, I mean, we will look at the data, right? So I think some quarters there's, you know, evidence that we can release a bit more this quarter, maybe, you know, not as much. You know, it's a process that we go through every quarter. So I think our underwriters and our actuaries kind of sit down and take a look at, you know, the respective treaties and come up with a point of view on whether there's, you know, enough evidence to release reserves. So I wouldn't read too much into it right now. I think it's a... You know, just another quarter, still, you know, we think healthy reserves, healthy reserve releases, but not as much as, as you said, as in prior quarters.

Okay. No, that's fair. Second question, and I'm really not sure how to ask this, but there's a lot of chaos right now in U.S. personal lines, and ARCH has always been really opportunistic. And I was wondering if there's a way that in a line of business that's so dominated by major players, but you do have this level of instability, is there an opportunity for ARCH?

I think it's a hard one.

I think that our shareholders, I mean, we could always see what we could do there. But from my perspective, I think we're more of a B2B and more of a commercial provider of insurance and specialty provider of insurance. You know, certainly on the reinsurance side, we're helpful. Our companies, a lot of companies are homeowners. homeowners, writers, and we do provide significant capacity for them, be it on a quarter share basis or excess of loss, and also be on property. So I think our game plan on homeowners is more to support the clients that we have because I think on a long-term basis, it has a set of characteristics, as we all know, and focus that is not necessarily core to what we do every day, you know, rate filing and everything else in between. It's a bit of a different animal for us.

Okay, understood. Thanks so much. Great.

Thank you. One moment for questions. Our next question comes from Yaron Kinnar with Jefferies. You may proceed.

Thank you. Good morning. With most of my questions already asked and answered, I figured I'd maybe focus on a couple more esoteric items. Thanks. So, first, on ag covers, can you maybe talk about how much you're still writing in 23 versus 22?

We, we've cut our ad books significantly over the last 12 months. You would say even in two 22, we started cut already as we, as we saw this. And again, it's a matter of opportunity, right? I mean, we do some, we do some, but we've cut the book heavily because of the better, frankly, better opportunities on the excess of loss occurrence, much better.

Yeah. And, Is the client base there? Has that changed at all? Can you maybe talk about the mix between large globals, smaller regionals?

When we grew, of course, in Florida, as you know, it's a different kind of animal because of all the small companies out there. But in general, I would say that our portfolio will opportunistically grow into the larger global companies. We tend to think that they're relatively not as, it says transparency of visibility into what they write. So our tendency is to be more of a super regional businesses and more ones that have a lesser footprint in terms of state. We think we can better allocate capital. This is sort of a high level philosophy that we've had for years that hasn't really changed our own. I think that we would prefer to grow with these clients over time. But I think that all this opportunistically, being on a core share basis of excess of loss, if it's a large corporate, we definitely were able to provide more capacity because they needed it. As we speak, and the price, we believe, reflected the higher level of risk that they had. So I think I would say, same as before, with a little bit of opportunity to play on the larger companies.

Got it. And then if I put this together then, and we look at the very large CAT activity that has really been incurred much more by the primaries here, With the changes in terms of conditions and maybe tighter or more limited cover per peril, ultimately, how does that impact ag covers later in the year if, let's say, the primaries had a lot of cat losses on secondary perils that are now no longer covered by reinsurers, at least not per event? Ultimately, does that also flow into the ag covers that will not be breached on perils on a reinsurance level because of that.

Yeah, so I think an aggregate excess of loss is very similar to an occurrence. If you do change terms and conditions and cut the coverage at the underlying portfolio level, it will have a leverage impact into your aggregate excess or occurrence, meaning it will definitely cut down the loss expectations heavily into these layers. But what I would tell you, Aaron, is we're not there yet. This is the only thing, like I mentioned to you before on the call, is that We're going to have the phenomena you just talked about. We'll have a much better perspective and view on this and the impact it's going to have on the losses next year in 2025. I think right now we still have a portfolio that hasn't gone through quite 100%, right? of all these changes that you and I expect to happen, I think, in the marketplace. So the aggregate cost of loss is, for that reason, probably still a bad bet in 2023, right? So we probably need to see this underlying change in terms of conditions on the insurance portfolio before we can see this being a potential viable product.

Makes sense. Great. I appreciate the answers. Sure.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the conference over to Mr. Mark Grandison for closing remarks.

So from Borges, Bermuda, I want to wish everybody a good month of August, and we'll see you in the fall. Thanks for your support.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.