This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good day, ladies and gentlemen, and welcome to the Q1 2024 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 risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends 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. 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 at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your hosts for today's conference. Mr. Mark Grandeson and Mr. Francois Morin. Sirs, you may begin.
spk03: Thank you, Gigi. Good morning and welcome to ARCH's first quarter earnings call. We are pleased to report a terrific start to the year. In the first quarter, we posted $736 million in underwriting income and a 5.2% increase in book value per share as we realized the benefits from several years of strong and profitable premium growth. Underwriters in our P&C units continued to lean into hard market conditions, riding $5.6 billion of gross premium in a quarter, a 26% increase from the same quarter last year. Overall, rate changes are exceeding lost trends, and absolute returns remain above our long-term targets, positive indicators in our continued efforts to deliver superior results to our shareholders. Broadly, we are seeing incremental signs of increased underwriting appetite in the market, but this is not surprising given the favorable conditions that exist. It is still an underwriter's market where ARTS can thrive. At the beginning of this hard market, as other providers pulled back, ARTS sought to establish itself as a key trading partner. aiming to solidify relationships and remain top of mind when it comes to addressing our clients' increased needs. Our success in establishing deeper client connections continues to pay dividends in this extended yet increasingly competitive hard market. The first quarter served as a reminder of our risky world when an active catastrophe quarter concluded with a major industry loss, as the DALI cargo ship collided with the Francis Scott Key Bridge in Baltimore. Although we recognized a loss related to this event, the virtue of having multiple lines of business with improved and positive expected margins made this event manageable for ARCH. Incidents like this reinforce the importance of our core tenets. One, we practice disciplined underwriting that builds a meaningful margin of safety into our pricing. We take a long-term view of risk and a conservative approach to reserving. And three, we operate a diversified global business that we believe maximizes our total return by mitigating volatility in any one line of business. Capital management has been a key differentiator for Arch and is integral to how we operate our companies. Effective capital management requires that we allocate resources to the most profitable underwriting opportunities while retaining the flexibility to invest in our platform when we find attractive opportunities. One of those prospects came to fruition earlier this month when we announced our intent to acquire Allianz's U.S. Miller Market and entertainment businesses. We see this as a unique opportunity to quickly build scale in the $100 billion-plus U.S. middle market, a longtime strategic area of underwriting interest for us. Increasing our middle market presence will further diversify our North American insurance platform by adding stable businesses with recurring premiums that can generate attractive returns over the cycle. As a cycle manager, we like having many pawns to fish in And this acquisition will significantly expand our opportunities in the middle of market for years to come. I'll now share a few highlights from our segments. As you know, the property and casualty market cycle is evolving, but still offers attractive growth opportunities at good returns, particularly for our skilled specialty underwriters who can use their expertise and experience to differentiate ARCH. The first quarter results from our reinsurance segment were outstanding. Underwriting income for this segment was $379 million, while gross premium written grew by 41% over the same quarter last year. While there is some developing competition, we're observing an increased flight to quality and fully expect to capitalize on that trend as the cycle ages. Our reinsurance segment is in an enviable position. The in-force book constructed over the last several years is strong and allows us to exercise our underwriting acumen. When opportunities emerge, whether from dislocation in a casualty market or by offering value that others cannot, ARCH is there to provide solutions and financial strength to its clients. In our insurance segment, Growth tapered from the highs of the past few years as rate increases slowed, and some of the dislocations were met by additional capacity. Overall, conditions remain strong, and the market is behaving rationally, two important factors that continue to support growth and strong profit. In the first quarter, we found growth opportunities in several lines, including property and casualty E&S and other specialty lines. Across most of our specialty lines, pricing remains very healthy, and we are able to deploy capital in order to deliver attractive returns above our long-term target of 15%. Like reinsurance, our insurance segment has made strong efforts to establish itself as a first-choice provider for its clients, and that manifests in seeing more opportunities. In life, you have to play to win, and in insurance, if you don't see the business, you can't ride it. And now let's pivot from P&C to mortgage, which, to borrow from a famous ad campaign, just keeps on going and going and going. Our mortgage segment continues to generate solid underwriting income and risk-adjusted returns from its high-quality portfolio. While mortgage originations remain tempered by high mortgage interest rates, The persistency of our in-force book remains a healthy 83.6%, while the delinquency rate is near all-time lows. New insurance written is in line with our appetite given market conditions. When the mortgage market picks up again, we're prepared to increase our production. However, if the status quo persists, we're content with our current situation that has extended the duration over which we earn mortgage insurance premiums. Competition within the MI industry remains disciplined, which means we are in a good place. Finally, our investments portfolio grew to $35.9 billion, generating $327 million of net investment income in the quarter. The extraordinary premium growth from our P&C segments continues to increase our float, which provides a significant tailwind to our overall earnings through the next several quarters. In the U.S., the NFL conducted its annual draft this past weekend. Traditionally, the team that finished last season with the worst record gets the first pick, a chance to select the best college player while the champions pick last. The players selected with the top picks are expected to be immediate difference makers, even though they are typically selected by a team with multiple deficiencies, making success far from guaranteed. If your talented quarterback has nobody to throw the ball to, it can ruin the player's confidence and the pressure can quickly sabotage a career. Compare this with teams drafting at the end of the round coming off successful seasons with talented rosters in place. They often have the luxury of selecting an excellent player who doesn't need to contribute right away. Instead, these teams select players who can fill a specific short-term role and be given time to grow into a difference maker. Our acquisition of the Allianz Midcorp business is like adding a solid player to a winning team. We already have established all-stars, a winning, talent-dense culture, and a favorable schedule in the years ahead. Adding the mid-corp team to our diversified franchise makes us better today and tomorrow, and that's a winning proposition. I'll now turn it over to Francois to provide some more color on our financial results from the quarter, and then we'll return to take your questions. Francois?
spk04: Thank you, Mark, and good morning to all. As you will have seen, we started out 2024 on a very strong note with after-tax operating income of $2.45 per share, For the quarter, for an annualized operating return on average common equity of 20.7%. Book value per share was $49.36 as of March 31, up 5.2% for the quarter. Our excellent performance was again the result of outstanding results across our three business segments, highlighted by $736 million in unwriting income. We delivered exceptional net premium written growth across our reinsurance segment, a 31% increase over the first quarter of 2023, driven by strong business flow in all our lines of business. Growth was also solid for our insurance segment, 12% after adjusting for the impact of a large non-recurring transaction we underwrote in the first quarter last year in our warranty and lenders business unit. Overall, the combined ratio from the group came in at an excellent 78.8%. Our unwriting income reflected $126 million of favorable prior year development on a pre-tax basis, or 3.7 points on the combined ratio across our three segments. We observed favorable development across many units, but primarily in short day lines in our property and casualty segments and in mortgage due to strong cure activity. The collapse of the Francis Scott Key Bridge in Baltimore last month has the potential to become the largest insured marine event in history. Both our insurance and reinsurance segments were exposed to this disaster and our current estimates represent an impact of 2.1 and 3.0 points respectively on the combined ratio in these segments results this quarter. We note that the losses for this event were reported as non-catastrophe losses in our ratios. Catastrophe loss activity was relatively subdued and below our expectations across our portfolio, with a series of smaller events generating current accident year catastrophe losses of 58 million for the group and the quarter. Overall, our underlying XCAT combined ratio remained excellent, with the increase this quarter relative to the last few quarters mostly due to the Baltimore Bridge collapse. Despite the impact of this event, Our current quarter XCAT combined ratio still improved by 1.4 points from a year ago as a result of earned rate changes above our lost trend in our P&C businesses and lower expense ratios mostly from the growth in our premium base. These benefits were slightly offset by investments we continue to make in people, data and analytics, and technology to improve the quality and resilience of our platform going forward. From a modeling perspective, I'd also like to remind everyone that our operating expense ratios are typically at their highest in the first quarter of the year due to seasonality and compensation expenses, including equity-based grants for retirement-eligible employees that were made in March. As of April 1, our peak zone natural cap PML for a single event, one in 250-year return level on a net basis, remained basically flat from January 1, but declined relative to our capital to 9.0% of tangible shareholders' equity, well below our internal limits. On the investment front, we earned a combined $426 million pre-tax from net investment income and income from funds accounted using the equity method, or $1.12 per share. Total return for the portfolio came in at 0.8% for the quarter, reflecting the unrealized losses on the company's fixed income securities driven by higher interest rates. Our growing investment portfolio keeps providing meaningful tailwinds to our bottom line and remains of high quality and short duration. We have grown our investable asset base significantly over the last few years, primarily to significant cash flow from operations. This positive result, combined with new money rates near 5%, should support further growth in our investment income for the foreseeable future. Income from operating affiliates was strong at $55 million. Of note, approximately $14 million of this quarter's income is attributable to the true-up of the deferred tax asset at our operating affiliate Summers in connection with a Bermuda corporate income tax, a non-recurring item. Our effective tax rate on pre-tax operating income was an expense of 8.5% for the 2024 first quarter, slightly below our current expected range of 9% to 11% for the full year, mostly as a result of the timing of tax benefits related to equity-based compensation. As regards our announcement to acquire the U.S. Midcorp and Entertainment Insurance businesses from Allianz, We are making progress in obtaining the necessary regulatory approvals and are targeting a third quarter close for the transaction. At a high level, the agreement is structured around two related contracts, a loss portfolio transfer of loss reserves for years 2016 to 2023, and a new business agreement for business written in 2024 and after. Overall, we expect to deploy approximately $1.4 billion in internal capital resources to support both contracts, in addition to the cash consideration of $450 million. The overall transaction is expected to be moderately accretive to earnings per share and return on equity starting in 2025. It is important to note that even when reflecting the capital to be deployed for this transaction, our capital base remains strong with a leverage ratio in the mid-teen range. We maintain ample financial resources and remain committed in allocating our capital in the most optimal way for the long-term benefit of our shareholders. With these introductory comments, we are now prepared to take your questions.
spk00: Thank you. If you have a question at this time, please press the star 1 1 key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star 1 1 again. And if you are using a speakerphone, please lift the handset. One moment for our first question. Our first question comes from the line of Elise Greenspan from Wells Fargo.
spk01: Hi, thanks. Good morning. My first question is on the reinsurance market. Mark, I think in your opening comments, you mentioned something about potential dislocation in the casualty market. Are you starting to see casualty market opportunities emerge there? I know you've highlighted this, I think, starting in the third quarter of last year, or is this something that you still think might take a couple of quarters to kind of fully you know, present an opportunity to arch?
spk03: Yeah, the casualty market is going through, I wouldn't say repricing, but not re-underwriting as thorough because it has been already, you know, getting, was hard, getting harder for the last, you know, several years. We may have had some respite in terms of price increase middle of last year, but I think that the development of the prior year, as we all know, has created a little bit more uncertainties and inflation is not ebbing. So right now what we're seeing is people still being very, very careful and disciplined in how they underwrite the business, which leads us, gives us opportunity to lean into this even more so. We have grown our casualty book of business on the insurance side quite a bit. Our casualty book is ENS, as we all know, and very specialized in specialty. But Sorry, I thought there was some technical difficulties here. Elise, are you still there? I just want to make sure you can hear me.
spk01: Yes, we can hear you.
spk03: Okay, thank you. Thank you, Elise. You're a trooper. So the casualty market on the insurance side, we're growing, but I think now we're having more opportunities to grow. I think that there's some kind of, not repricing, but definitely a focus on that line of business on the insurance side. On the reinsurance side, I think we're starting to see some of the renewals that came through. One, anecdotally, it's creating a little bit more friction in terms of renewal of the casualty quarter share, for instance. So what we expect right now is the early stages. We don't know how long it's going to last and where it's going to go, but it's clearly a psychological belief within the human system and the human interactions and the casualty that people need and know that we need to get more rate to make up for all the risks and potentially some of the misses that we had in the past.
spk01: And then you guys mentioned the middle market opportunity you saw with this Allianz deal. you know, after this transaction, are there other things on the list? Like when you think about, you know, insurance, reinsurance, now middle market and mortgage, you know, there are other things that you guys think that, you know, maybe down the road you would need or want to potentially add to the platform?
spk03: Yes, we have a long list of things we'd like to acquire or have part of our arsenal. You know, We talk about Allianz as an acquisition, and that's an important one and significant one and very good one for us. We're very pleased with that one. But what we also would want to tell our shareholders is, as you know, Elise, is we've also added teams along the way. So a pure acquisition of a company is not the only thing that we're able to do. We've acquired some teams to do contingency, some more terror, and everything in between. So we're always on the lookout. Again, as a cycle manager, at least, what you want is as many areas to deploy your capital, depending on the market conditions. It creates a much more stable enterprise, much less volatility at the bottom line. And again, the more, you know, the market cycles are not monolithic. They're multi. They come in multi-faces and multi-places. So we also have, as a little bit of an insight, baseball. Our executive team is always, every other month, we have a list, a wish list that I will not share with you on this call, but it's a wish list of things that we know for a fact would be accretive and additive to our diversification of our portfolio, and we're always on the lookout for those. Mid-market was on the list. And this is what, so opportunities met, you know, met the willingness to do it, and this is where we are.
spk01: Okay, thank you.
spk03: Thanks, Elise.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Jimmy Buller from JPMorgan Securities, LLC.
spk10: Hi, good morning. So just a question on the Baltimore Bridge loss that you reported in insurance and reinsurance, and I recognize your results were pretty strong overall, but the number seems fairly high that you reported relative to what some of your peers have talked about and also what the industry losses seem to be. So I'm just wondering, I'm assuming most of this is IBNR, but just wondering sort of is this because of... How much conservatism there is baked into the number, or maybe the market's underestimating what the losses from the event are eventually going to end up being?
spk03: Well, Jimmy, just at a high level, right, I'll let Francois talk about the reserving level. But we have been a participant in marine liability for quite a while. I used to underwrite the IGA at Arrangements Group way back in 2002 or 2003. This is nothing new to us. We also acquired North Barbican in 2019. We have a stronger presence than we ever had in the London market, which, again, is another marine market positioning. We do insurance, reinsurance, and some retro, actually. It's nothing new to us. We like that business quite a bit, made money over the years. the rates and the returns were and are still acceptable. I mean, but sometimes a loss occurs. I'm not sure about what the other ones are thinking about, but we definitely think that this is pretty much in line with what we would have expected the market share to be or what we think our presence in the marketplace would be. I'll let Francois talk about it.
spk04: Yeah, I mean, again, we can't speculate or comment on how others are maybe or may not be reserving for this event. You know, for us, it's not unusual. And I'd say that we've taken a very conservative view of the loss. And still a lot to be determined, obviously, in terms of who's going to end up paying for it. But, you know, the last point you asked, the last question is, yes, for us right now, it's all, you know, it's IBNR. I mean, we don't really have all the specifics to establish, you know, case reserves. So we've booked it as IBNR, and we'll see how things develop.
spk10: And then on casualty reserves, your overall development was favorable, but was there any pockets of unfavorable within the overall number? And then if you could talk specifically about how your casualty reserves trended for pre-COVID and post-COVID years.
spk04: Well, part one of your question, there was really no material development on long-tail casualty lines of business across all years. So both pre, you know, the 2015 to 19 years and 21 to 23. So we're very comfortable with that. I think our reserves are holding up nicely. And I know there's been some concerns around... The more recent years where there's been some signs of adverse in the industry, we're not seeing that. Actually, our metrics or actuaries are commenting that our actual development is coming in more favorable than expected. Again, very early to declare victory, but that's certainly for us a positive sign, and we'll keep monitoring and see how things develop for the rest of the year.
spk07: Thank you.
spk04: You're welcome.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Andrew Kligerman from T.G. Cowan.
spk08: Hey, thank you and good morning. the MI market is going and going and going. How do you think about the favorable prior year developments? I mean, last year in the first quarter, it was 25 points. This year in the first quarter, it's another 25 points. I mean, does that still continue going forward as well?
spk03: Well, I don't have a crystal ball for the future, but like everybody else, we're just on the receiving end of a market that's curing better. The borrower is in good conditions. There are programs on the GSEs that help the borrower staying in their homes. Most of Those that even would have a delinquency, as we speak, would have a much lower mortgage rate. So they have a lot of incentive to stay in the home and not having to do anything with it. Plus, there's a lot of equity being built up in the home. So people are sitting on, because as you know, there's been a significant increase in property valuation over the last three to four years. So everything is really indicating that we have a lot of a lot of alignment between starting from the borrower all the way to the mortgage insurer and the mortgage origination or the mortgage companies to make sure that the borrowers can make the payment. You can refinance, delay, or attach it. There's a lot of things, a lot of tools and toolbox that weren't there, frankly, in 07-08 when the crisis happened. But what does that mean in terms of development? We'll have to see what happens. But again... it's been more favorable than we would have said probably two or three years ago. And we're just, when we see the data, we just react to it.
spk08: Pretty amazing stuff. And my follow-up question is around the Allianz acquisition. And I love your analogy about the NFL draft and picking the high-quality players. Some have criticized Allianz as maybe not, maybe I'll say they weren't a first-round player draft choice. So, you know, with that, what will ARCH be able to do to kind of turn them into a first round type player? I mean, I know I've heard about data and analytics, but can that help overnight? So I'd like to know what you're going to do there to really enhance that operation.
spk03: Well, there's a lot of things going on. There's a thorough and very complete plan by our unit to first integrate them, make them part of our company and our culture. And we'll have to look at everything that we can do to help them out. It's an okay business, very decent business, but we'll have to make it more of an arch business. But recognizing some of the cultural differences in the distribution, it's a little bit of a different business. Data analytics is certainly one of them. We also bring to bear, we believe, Allianz is a big company, and they did a lot of work on this. We have a strong presence in the U.S. as well. We also already do some middle market business, so we already have experience in that space, and so we have a We have a couple of things, a couple of tricks up our sleeves, if you will, to make it better. I won't go into all the details, obviously, but I think we're pretty excited about what we can do with the asset. And I think, like I said all the time, and this is not a comparison with Allianz or us, but truthfully, adds to the same thing to the mortgage, to UG. They're relatively a bigger piece of our overall enterprise, and perhaps they would be at some other company. That makes it for a little bit more excitement, a bit more, and a willingness from our part, obviously, to invest, right? I'll remind everyone that some of the earnings that we make, we put aside to invest for the future. So we have a lot of things going on, and we're pretty excited.
spk08: Thanks a lot.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO.
spk11: Hey, thanks. Good morning. On the insurance segment, the underlying loss ratio of 57.5, I know I'm probably just nitpicking, but I hear the commentary about the impact from the Baltimore Bridge. Just curious, you've grown into property, which has a lower loss ratio, traditional loss ratio, I believe. So is there anything going on there, Mick, that maybe you're putting more conservatism on the casualty growth or anything we should be thinking about there?
spk04: Well, Mike, I'd say it's just the nature of the business we're in. I think there's going to be some ebbs and flows. There are going to be some problems. I wouldn't call them unusual or unexpected developments. There could be one or two claims that surfaced in the quarter. We book them. We recognize adverse or bad news early on and see how things play out. So there's really nothing to say that needs to be highlighted. It's really par for the course. And yes, absolutely, this quarter, it turns out that the XCAT underlying loss ratio was up, I'd say, 30 bps. And that's just the reality of the world we're in. And we think it's still an excellent result.
spk11: Okay. Got it. Um, second question is probably a quick one, but, uh, you all are, are kind enough to give us guidance on the cat load in the last quarter. I think you said it was in a six to seven range for, I believe it's just the premiums X, the mortgage, uh, segment, uh, Is that expected to change or maybe be towards the height of that range on a base case scenario as you kind of continue to lean into the hard market conditions as we think about 24?
spk04: Well, the comment I made last quarter was, yeah, for the full year on the overall, you know, ACGL premium, 68%. We don't see that changing at this point. I think that was based on our view of how the year had a chance to play out. That's why we gave you a range. We were very happy with the 1-1 renewals. 4-1s went pretty much as expected. And 6.1% so far are holding up nicely. I mean, still a little bit of time to go before that gets finalized. But big picture, again, that's the 6% to 8% range for the year in terms of cat load is holding up nicely.
spk11: So, Francois, sorry, is that 6% to 8% on all insurance premiums X mortgage or just with or total company with mortgage? Total company-wide, ACGL total. Thank you.
spk00: You're welcome. Thank you. One moment for our next question. Our next question comes from the line of Dean Chris Citello from KBW.
spk12: Hi. My first question was on the net-to-gross ratio in reinsurance. I saw that it ticked down about five points a year. I was wondering, is that a function of buying more reinsurance or is there anything else going on there?
spk03: No, I think if you look at the – it's a good question. If you look at the last four or five years in the first quarter, you'll see that our net-to-growth ratio offers between 65 to 70. Last year was 70% because we had a larger transaction that came through that was not seeded. So it's really just a comparison that's not – just one period comparison is not reflective of what's going on. If you look at the longer term, you'll get to the 65 to 70, so nothing changed there.
spk12: Okay, thank you for that. And then the next thing, shifting back to the insurance business, I was a bit surprised to see solid growth within professional lines given the rate environment there. So can you maybe talk about the market dynamics or the opportunities that you're seeing in that? And is that growth coming from D&L or is that within other professional lines?
spk03: Yeah, so a professional liability has many things to it. You know, it's got large company, large public company, D&O. It's got some, you know, smaller private. Also has cyber in it and some professional ability like, you know, agents, you know, and stuff like this that's more E&O based. I think that the growth is largely attributed to the cyber. Our teams are leaning a little bit more into it, and we've also acquired a couple more teams or developing a team in Europe. There's a big need for what we realize is a need for cyber in Europe, and that's something that we're starting to grow and see more of. And the reason it's grown in cyber is because even though some of the race, as we all heard, went down slightly, it's still a very, very favorable, we believe, very favorable proposition for us to underwrite. Also, it helps us doing other lines of business because it creates value for our clients. It's still a little bit harder to get in terms of coverage. On the DNO, we would have decreases and increases depending on where the rates are or where we see the relative valuation or profitability of a portfolio. On that note, the rates in DNO went down about 8% in this quarter, not as bad as it was a year, year and a half ago. You heard the comment that the SCEs are down. So there's still, we believe, there's still a lot of favorable opportunities in that segment as well. We just have to be a little bit more circumspect when we do this. Thank you. Sure.
spk00: Thank you. One moment for our next question. Our next question comes from the line of David Motamedin from Evercore ISI.
spk07: Hi, thanks. Mark, you mentioned in your prepared remarks that you're seeing increased underwriting appetite and developing competition specifically within reinsurance Could you just talk about where you're seeing that, elaborate on that a little bit, you know, in what specific lines you're seeing that in and how you guys are responding to that?
spk03: Yeah, I think right now what we're seeing is more higher appetite for cyber is one of them. That's for sure. Insurance and reinsurance, I would also. I mean, you can run the gamut. There's many of them. Typically, right now where we are, the lines that are more short tail in nature, You can see a little bit more, you know, willingness to take some more risk from the competition. And how we react to it is we have many things we do. We typically will tend to, you know, first look at the overall, you know, if the rates go down or if the rates stay as is with the new conditions, you actually price the business as if it's a new piece of business and what kind of return. It will get you, and if it's a little bit not as much or too close for comfort, we might just decrease our participation. And we also might just stay on the clients that we believe have a better chance to really maneuver through that little bit sideways market, if you will. It's really an underwriter's market at this time.
spk07: Got it. Thanks. And just within reinsurance, the underlying margins there were strong and even better if I exclude the bridge loss. Can you talk about if there was anything in there that would flatter the results or is it more just sort of the earn in of the property you know, more short tail lines and, you know, these results are fairly sustainable. I guess, how should I think about the sustainability of the results on the reinsurance side?
spk04: Yeah, I mean, it's a great market, right? And we've been saying that for a few quarters, I think, and we've said it before, I think we encourage you all to look at results on a trailing 12-month basis. I think it's a bit more, you know, reliable. I think less prone to volatility that is sometimes hard to predict. But, yeah, I mean, we, and Mark said it, I think the quality of the book that's in force right now is excellent. And, you know, we're going to earn that in. But whether, you know, how, you know, was this quarter a little bit better than maybe the long-term run rate? Maybe. We don't know. But, Again, as you try to look ahead, I'd say more of a trailing 12-month, again, view is probably a bit more reliable.
spk07: Understood. Thank you. You're welcome.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Josh Shanker from Bank of America.
spk05: Yeah, thank you very much for taking my question. On the other income, which doesn't get enough attention, that's Summers and Kofos. It was a weak quarter for Kofos' stock return in 4Q23, yet the other was quite strong. And maybe I'm misunderstanding how to model this, but I bring this up because Kofos had an excellent quarter this past 1Q24, and I'm wondering if that presages a very, very strong return. other income return for the company as we head into 2Q24?
spk04: Yeah, so just to be, make sure we're on the same page, there's a lag, right? So COFAS is booked on a one lag, one quarter lag basis. So what they just reported for Q1 will show up in their Q2 numbers. Summers is on a real-time basis. And, you know, as we know, right, Summers should follow relatively closely the performance of our reinsurance book because it's effectively a sidecar. There's some nuances to it, but big picture, that is booked on a real-time basis and should mirror fairly closely our reinsurance book. But to your point, yes. I mean, if COFAS reported a strong Q1, you should see the benefits of that flow through in our second quarter.
spk05: In theory, there should be, I guess you're saying, some correlation between reinsurance segment underwriting income and summers, which appears in that other line?
spk04: Correct. It's not perfectly correlated because it's not the whole segment. It's mostly the Bermuda reinsurance unit that they follow, not the entire business, but big picture still. I mean, if the market conditions are good in reinsurance, the summers will benefit from that on a similar basis.
spk05: And if one other numbers question, post the S&P model change from a few months ago, is there any way to think smartly about how much excess capital you think you're sitting on or the possibility if you find other interesting M&A items, the ability to quickly deploy?
spk04: Yeah, I mean, that's always an evolving topic, right? I think we are always focused on putting the capital to work in the business where we can. I think we've done a fair amount of that, obviously, this quarter with the reinsurance growth that we saw. The BillionAid that will support the Allianz transactions, another example. We will see how the year plays out. No question that we are generating significant earnings, so that goes to the bottom line. And we'll be patient with it until we can't really find other ways to deploy it. But for the time being, we're in a really good place in terms of capital and gives us a lot of flexibility.
spk05: Thank you very much. Thanks. You're welcome.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Brian Meredith from UBS.
spk09: Yeah, thanks. A couple quick numbers and one big picture question for you all. The first one, just quickly, on the Allianz deal, is it possible to give us how much cash you're expecting to come in from the, I guess, the UEP and the reserve assumption, kind of net cash position you're expecting? Well, big question.
spk04: Yeah, big picture, it's a $2 billion LPT and, you know, dollar for dollar, right? So we get $2 billion cash and we're spending $4.50 that goes out back to them for the cash consideration. So net, it's a billion and a half of incremental cash that we will get. And the rest on the new business, then it's call it, it's the premium flow with You know, as we write that business that that's the overall over time that will be the incremental investment income or invested assets that we will get.
spk09: That's helpful. Second, quick question here. You referenced in your commentary higher contingent commissions unseated business in your reinsurance. What exactly is that?
spk04: Well, a lot of it is third-party capital, right? We, you know, last year was a very, you know, very, you know, light or good year for the performance of that book. So, you know, some of those agreements, many of them actually pay us a commission that is, you know, there's a base and then there's a variable aspect to it. And that was kind of a lot, a large part of that. So that effectively performance-based commissions on, you know, property cast or property business.
spk09: Makes sense. And then one bigger picture question here. I'm just curious on your reinsurance business, obviously during the first quarter, you're getting a lot of border roads coming in from clients. What are you seeing with respect to reserve development at your clients, right? And how are you kind of protected against that and not potentially seeing some of that adverse development that your clients are seeing on your kind of casualty quota share business?
spk03: So I think François mentioned the actual is expected, which is sort of consistent in both insurance and reinsurance on the more recent policy or accident year, which, you know, having the right starting point means that you don't really have to correct as frequently. So I would say that we're not surprised on the reinsurance about what we see. But as I said earlier, I think there is There is anecdotally some heavy, more friction, I would say, between insurance and reinsurance companies to make sure that people get to an agreement as to what the ultimate is going to be. So we're hearing this going in the marketplace. Of course, we participate in that, but we're not seeing this as being a big issue for us. And the other years that would have been pre-2020 and 2021, I want to remind everyone that we were very defensive. We do not have a whole lot of those premium companies. and those harder developing areas that people are talking about. So I will say that we see opportunities to write more of those, and we expect to see more opportunities to write more of those types of deals this year. But I wouldn't say that we're the most present in those worst years, if you will.
spk09: Great. Thank you.
spk03: Sure.
spk00: Thank you. One moment for our next question. Our next question comes from the line of KV Monteseri from Deutsche Bank.
spk02: Good morning. I only have one question today on the Florida market. The tort reform implemented over a year ago seems to have had some positive impact on the primary carriers and reinsurance capital seems to be coming back. This is a market that you guys know very well. Do you have any color you can share with us on the state of the market in Florida?
spk03: No, I think it's to your point that some of the adjustments are coming through, but inflation is also picking up. And there's also, as we all hear, there's potentially more activity in the southeast of the U.S. in terms of activities and storms. I think that people are trying to sort out what they will do at this point in time. I think we have already existing relationships that we think will get us a little bit ahead of the game in terms of participating and getting a participation in the marketplace. But bottom line is we expect the Florida market to be well-priced and very good from a risk-adjusted basis. Nothing indicates anything else other than that. Of course, the... Everything that's been done to take care of the AOB and whatever else in between, I think it's helpful. But it's still the largest property CAD exposure for everybody around the world. So even if you make some corrections, and they have made some corrections, I think we still have a couple of years before we start thinking about having a heavy softening in the market. There might be some here and there, but we still believe the market will be healthy as a reinsurer. Thank you. Thanks.
spk00: Thank you. One moment for our next question. Our next question comes from the line of Bob Juan from Morgan Stanley.
spk06: Good morning. Quick questions on M&A side. Obviously, you have historically generated very durable underwriting returns, mainly because of cycle management, in my view. I'm just curious as you move into M&A and diversify your business mix, does that impact your cycle management ability or retention levels when we think about M&As or potential M&As down the road?
spk03: No, it doesn't change. I mean, cycle management is a core principle of ours. And if anything, we'd like to be able to do, you know, It's going to be a matter of degree, perhaps. Some lines of business have more acute cycle management need because they're probably more heavily commoditized. I would expect the cycle management to be much softer in the US mid-core business. And that's also what's attractive about it, right? Because it creates more stability for the portfolio.
spk06: Got it. No, that's very helpful. Thank you. Thanks. In that case, when we think about M&A or future M&As, is it the first preference to use the excess capital or excess cash you're generating from the business to do the M&A deals, or is it more preferable to use some of the stocks given where the valuation is and things of that nature?
spk04: I mean, there's no one answer to that. I think there's always, I mean, you know, and we talk about M&A, but, you know, M&A doesn't happen that often, right? So, you know, there's size that matters. You know, how much, you know, how much, you know, could we, you know, need, would we need to raise in terms of using our own stock? You know, certainly in terms of dilution, it's always, we think, better to kind of use your cash. But, you know, there's many considerations we look at. trying to optimize as best we can all the options. We've got plenty of capacity in raising debt, too, if need be. So it's very much a function of each specific circumstance, each specific opportunity. We look at it on its own and go from there.
spk06: Sorry, if I can just have a little bit of clarification. Is it fair to say that in that case, Cash and debt is more preferable, and then equity maybe a little bit less, or I might be too assumptuous there. So, sorry, just maybe a little bit of clarification on that.
spk04: I mean, that's been the preference historically, but, I mean, again, it's hard to speculate on what could be the next thing. So, yes, historically, but things change over time, too.
spk06: Okay, thank you very much.
spk00: Yep. Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO.
spk11: Oh, great. Just quick follow-up. You mentioned fee income earlier. You know, ARCH has a lot of diversified sources of income. You know, is there a way you can update us on kind of what percentage of your earnings maybe last year was derived from these kind of fee income type arrangements at a high level?
spk04: I mean, it's grown over the years for sure. I think that the difficulty or the reality we face is some of these fees are somewhat, you know, the expense, the revenue we get has some expenses to go with it, and those are kind of commingled with our own internal expenses. So isolating, you know, call it the margin on those contracts is a little bit kind of But, yeah, it's grown. It's part of what we do. It's part of the, you know, leveraging our platform, leveraging our underwriting capabilities in all our segments, right? All three segments have some fee income that comes into theirs. Obviously, summers, you know, is part of that as well. But, yeah, it's become a bit more sizable for us. Okay.
spk11: I tried. Thank you.
spk08: Yeah.
spk00: Thank you. I would now like to turn the conference over to Mr. Mark Grandison for closing remarks.
spk03: Thank you very much for hearing our earnings. Great start of the year. We look forward to seeing you all in July.
spk00: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
Disclaimer