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spk03: Good day, ladies and gentlemen, and welcome to the Q2 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 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 also will make reference to certain non-GAAP measures of financial performance. The reconciliations due 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.hotchgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Mark Grandison and Mr. François Morin. Sirs, you may now begin.
spk06: Thank you, Jericho. Good morning and welcome to ARCH's second quarter earnings call. We are pleased to report another highly profitable quarter due to significant contributions from all three underwriting segments and strong investment results. Our ability to successfully deploy capital into this extended hard market has fueled excellent risk-adjusted returns. Coupling our cycle management strategy with an emphasis on returns and consistent discipline execution throughout the enterprise resulted in a record $762 million of underwriting income and an annualized operating ROE of 20.5%. Our results are thanks to our teams that work diligently with deep capability and a long track record of experience to earn these results. Broadly speaking, the PNC environment remains excellent, and opportunities for attractive returns are plentiful, even as competition normalizes. The duration and breadth of the current hard market of the last several years has been exceptional, and while rate increases are broadly above trend, Disciplined underwriting requires that we keep our eye on the primary goal, shareholder returns. An overly aggressive appetite for growth could come at the cost of eroding underwriting margins. The art of underwriting in this part of the cycle rests on one's ability to know how hard to push and when to pull back. At Arch, we strive to be an active yet disciplined market participant, practicing restraint and patience. We believe that capital allocation is one of our most powerful differentiators. Our priority is to deploy capital into our underwriting units first where we have the knowledge and experience to better price risk. However, we're always assessing other value-creating opportunities. One example is our previously announced intent to acquire Allianz's U.S. mid-corp and entertainment businesses. With regulatory approval on MidCorp secured, I'm able to share a few thoughts about this strategic acquisition. The addition of a talented team and their client relationships gives us a greater presence in the U.S. primary middle market while expanding our cycle management toolkit. We will have more to say about the opportunities in the middle market as we integrate our teams. I'll now take a few moments to highlight the performance of our underwriting units this past quarter. Second quarter results from our property and casualty segments demonstrate the benefits of our strong leadership throughout the ongoing hard market. The reinsurance and insurance segments combined to deliver $475 million of underwriting income and just over $5 billion of gross premium. Reinsurance generated $366 million of underwriting income despite higher frequency of catastrophic events from secondary perils, both in the U.S. and internationally. Higher premium rates and our diversified book of business enabled us to report excellent underwriting results for the segment, which has built a resilient, stable platform. Due to our view of heightened overall storm risk this year, we chose not to grow our property cat writings at the mid-year renewal. We've grown property cat meaningfully over the last few years, but as we learned during the 2002 to 2005 hard market, When there are so many good things happening across the underwriting platform, why chase returns and cat exposure at the risk of being unlucky? Property in general is very well priced. We just want to have the right balance across our portfolio. As you have heard from others, casualty lines remain an area of interest that we'll continue to monitor as we observe rate increases and ongoing reserve strengthening taking place across the industry. Our insurance segment contributed 109 million of underwriting income in the quarter. Net written premium growth was 7% this quarter compared to the second quarter a year ago. We meaningfully grew premiums in our programs business and in E&S casualty where rates are improving. In a more competitive market, It's important to be able to quickly reallocate capital to the best relative return opportunities, as we have done in the past and remain well-equipped to do in future quarters. Our International Insurance Unit continues to benefit from its position as a lead underwriter at Lloyds, where a disciplined market is providing attractive growth opportunities in specialty lines. Moving out of P&C and into our mortgage business. At the risk of repeating myself, the consistently excellent underwriting income delivered by our mortgage segment quarter over quarter provides significant value for our shareholders by producing a solid base of sustained earnings. MI underwriting has been solid across the industry since 2009, and the current environment is one that rewards the MI companies underwriting the risk. This quarter, The mortgage segment generated $287 million of underwriting income while increasing new insurance written at the U.S. by 12% from the same quarter a year ago. The delinquency rate at USMI remains low compared to historical norms, and the credit quality of our portfolio remains high, with policyholders in strong equity positions. We're pleased to have successfully closed our acquisition of RMIC in the second quarter, Although no new business comes with this run-up block, it's emblematic of our ongoing pursuit of finding profitable opportunities in which we can deploy capital. Primarily due to strong cash flows generated by our underwriting operations, our investments portfolio increased to $37.8 billion, generating $364 million of net investment income in a quarter as higher yields continue to move through our portfolio. The eyes of the world are focused on Paris this week as the Olympics get into full swing. One of the toughest events is the decathlon, an all-around athletics test featuring 10 events over a range of disciplines spread over two days. The decathlon is an incredible physical and mental test that requires maximum performance in every event. At the end of the two days, points for all 10 events are totaled up and the individual with the most points is the winner. Similar to a decathlon, in a dynamic insurance market, the ability to perform at a consistently high level across the enterprise is crucial for long-term success. And ARCH is built to excel across a multidiscipline market. Our capital allocation helps ensure that we can focus on the lines that give us the best chance to score points. The first event in the decathlon is a 100-meter sprint. and our ability to get out of the gates quickly at the beginning of this hard market positioned us to score early. Since then, our P&C and mortgage teams have been racking up lots of points. Add in our investments team clearing the bar in the pole vault, and we have an all-around performance that puts us in serious contention for the gold medal, as you would expect from a world-class leadership team. Before I hand it over to Francois, I need to mention the passing of our friend Dino's this past June. Dinos was not only an industry legend, he was also a mentor and tremendous leader who steered this company for over 15 years. Dinos led these earnings calls with his keen insights, principled beliefs, and trademark humor. He was truly one of a kind. So tonight, please raise a glass, be it Ouzo, Red Sina, or anything of your choosing, to Dinos. You are missed, my friend. Francois?
spk07: Thank you, Mark, and good morning to all. As you know by now, we reported excellent second quarter results last night with after-tax operating income of $2.57 per share, up 34% from the second quarter of 2023, for an annualized operating return on average common equity of 20.5%. Book value per share was $52.75 as of June 30, up 6.9% for the quarter and 12.4% on a year-to-date basis. Once again, our three business segments delivered outstanding results, highlighted by $762 million in underwriting income and a 78.7% combined ratio, 76.7% on an underlying X cap accident year basis. We continue to benefit from strong market conditions across our businesses as the pricing environment remains disciplined, giving us confidence in our ability to generate solid returns over the coming quarters. Our underwriting income reflected $124 million of favorable prior development on a pre-tax basis, or 3.5 points on the combined ratio across our three segments. We recognize favorable development across many lines of business, but primarily in short tail lines in our property and casualty segments and in mortgage due to strong cure activity. Catastrophe loss activity was in line with our expectations as we were impacted by a series of events across the globe, generating current accident year catastrophe losses of 196 million for the group in the quarter. Approximately 70% of our catastrophe losses this quarter are related to U.S. secondary perils, with the rest coming from a series of international events. As of July 1, our peak zone natural cap PML for a single event, one 250-year return level on a net basis, declined slightly and now stands at 7.9% of tangible shareholders' equity, well below our internal limits. For the mortgage segment, since this is the first quarter end since we acquired RMIC Companies, Inc., and the subsidiaries that together comprise the runoff mortgage insurance business of Old Republic, there are certain items that I'd like to highlight. First, the acquired book of business represented $3.6 billion, or a 1.2% increase to our U.S. primary mortgage insurance in force at the end of the quarter. Second, given the risk in force is from older vintages and has been in runoff since 2011, Its makeup resulted in an incremental 19 basis points to our reported delinquency rate at USMI. Absent this transaction, our reported delinquency rate would have improved slightly since last quarter. On the investment front, we earned a combined $531 million pre-tax from net investment income and income from funds accounted using the equity method, or $1.39 per share. Total return for the portfolio came in at 1.33% for the quarter. Cash flow from operations remained strong, and at $3.1 billion on a year-to-date basis, we have seen material growth in our investable asset base, which should result in an increasing level of investment income. Our effective tax rate on a pre-tax operating income was an expense of 9.5%. for the second quarter, with our current expected range of 9 to 11 percent for the full year 2024. As disclosed last year, last week, we now expect an August 1 close of the transaction to acquire the U.S. mid-corp and entertainment insurance businesses from Allianz. At this time, we do not have new information to share on the estimated financial impact of the transaction beyond what we provided in early April. Starting next quarter, We expect to update this information to help in developing a forward-looking view of the insurance segment's results, including this new business. All in, our balance sheet is in excellent health, with our common shareholder's equity approaching $20 billion in a debt plus preferred to capital ratio slightly above 15%. We are well positioned to take advantage of opportunities that may arise as we move forward. Before I conclude my remarks, I also wanted to take a moment to build on Mark's comments and share a word of sincere appreciation for the impact Dinos had on Arch, its employees, and many others across the industry. While he will certainly be remembered for his energetic personality and his ability to captivate an audience, we are truly grateful for his guidance, vision, and leadership during his career at Arch. Thank you, Dinos. Mark.
spk06: Now, so we don't keep anyone from their lunch, which we know was very important to Dinos, on to your questions.
spk03: Thank you. If you have a question at this time, please press star 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star 1 again. And if you are using a speakerphone, please lift the handset.
spk04: Our first question comes from Elise Greenspan from Wells Fargo.
spk01: Hi, thanks. You know, good morning. You know, my first question, you know, I guess is, you know, on the insurance side, right, Mark? I think it's been since probably October, late October of last year with Q3 earnings. You were kind of leading the industry, you know, in terms of talking about this casualty market turn. And it's been slow to evolve. Maybe it's in line with your expectations, but it just seems it's been slow to get price through those lines. How do you see that transpiring from here relative to price increases in casualty lines?
spk06: Well, like I said, well, good morning, Elise. I think the point we made last quarter, the quarter before, is that the casualty turn and realizing actually how much or how well or bad you're doing in casualty line takes a while. It has a tail to it. It could take five or six years. So I think we're starting to see the early signs of more recent years being a bit more impacted by the inflation that we saw of late. And I think that it will take a while. People are trying to adjust. We're trying to look at the numbers in the triangles that are actually not as good as they used to be. So there's a lot of uncertainty in this space. And I think it will take us several quarters to come to a more stable or a better view of the industry. So, you know, the last hard market and casualty started to turn, you know, in 2000. And it, you know, it took until about 2004 to really see the impact and sort of have running out of, you know, having to price, you know, and rate increase after that point. So it takes several years, unlike the property cap, right? At least 2022, something happened in the fall. Well, right away that people are adjusting because the cost of goods sold or losses are known. So this is not surprising to me. I'm expecting a bit more. We're expecting a bit more. We're seeing it through our reinsurance submissions. I think people are slowly but surely recognizing, you know, some of these bad years, but it takes a while.
spk01: And then in terms of just, you know, on the insurance side, as you think, you know, the underlying, I guess, margin, right, kind of low 90s in the quarter, Given your views about price and loss trend, does that feel like kind of the run rate level from here?
spk06: Well, as you know, Elise, we report the numbers as we see it based on the data we see. That sort of seems to be the emerging sort of rough average over the last couple of years. There's also a mix going on early, so things are shifting, as you know, from time to time. So it's hard to compare combined ratio. But right now, based on where we are, it's well within expectation of getting the returns. And our returns on insurance, we believe, are in excess of our long-term target.
spk01: And then the mortgage releases have held, you know, steady. You know, Q2 was above the Q1 level. Can you just provide, you know, Francois, maybe a little bit more color on what's going on there and how we could kind of think about run rate level of potential releases within the MI book?
spk07: Great question. I think we, I mean, I and many others have been wrong about, you know, taking a forward looking view of releases on the, or favorable development on mortgage in general. I think, you know, right stepping back, I'd say that early in 2020, You know, late 22, early 23, we were more cautious about the state of the economy and took a, you know, a view about, you know, new notices and average reserves that we are attaching to these notices that, you know, was a bit more that didn't turn out to be the case, right? That turned out to be better than what we had expected at that time. The fact that, you know, we just had another quarter of kind of more, you know, better cure activity, you know, I don't think, you know, a lot of these cures this quarter were related to the 2023 accident year. So, you know, we're more positive, I think, I'd say in general about the housing market. So the level of reserving that we're that we're attaching to the new delinquencies is a bit lower than it was a year ago. So maybe directionally, we would not expect to have the same level of reserve releases going forward. But again, not knowing for sure how quickly people are going to cure, unemployment, et cetera. I mean, they'll have an impact on the level of reserve releases.
spk01: Thanks for the color. You're welcome.
spk04: Our next question comes from the line of Jimmy Bullard from JP Morgan.
spk12: Hi, so first just a question on reserves. You had favorable development overall, and so did many of your peers, but a lot of the competitors had adverse development and casualty for both older and recent years. It doesn't seem like you had that, but maybe you could go into detail a little bit on the developments. in the second quarter? And then also, why do you feel that you're not as susceptible as some of the competitors to all the casualty issues, either in your book or maybe in the Watford blog that you inherited?
spk07: Yeah, let me take a stab at that. I'm sure Mark will have something to add. I'd say on the part to your question, Jimmy, I'd say, you know, the book of business that we have is, I wouldn't call it a standard commercial general liability book of business to ask some other competitors have. We don't write a whole lot of commercial auto, for example. So that's another line of business that's been a difficult line to get a good handle on the trends and how inflation has picked up in there. So the books that we have in general liability, A, I think are smaller. Certainly, we think underweight in those lines of business. You know, roughly speaking, our insurance book is like, call it less than 15% of our overall premium, what we consider to be traditional casualty in the GL lines of business. So the mix matters. Certainly the areas where we write the business matters. I mean, we have an international book within that, so it's not only U.S. where I think we've seen more pain. And in terms of the favorable, you know, the movements in the quarter, I think, yes, in aggregate, we were favorable, mostly in the short tail lines. On the longer tail lines, which is primarily GL, I think we were pretty flat. I think, you know, it's something we look at carefully. Some, you know, some noise here and there, but collectively in aggregate, we're very comfortable with the level of reserves. And, you know, so far our numbers are holding up pretty well.
spk06: And what I would add to what Francois just said, and as you know, Jimmy, we're a cycle manager. We also didn't write as much in even the years that we believe are now still very soft years. So that also prevents you from having to outsize surprise.
spk12: And then on a different topic, your capital is building up pretty nicely, and I'm assuming it's enough to fund your growth. and you have done a couple of acquisitions, but how do you think about buybacks or potentially instituting a dividend given the capital levels that you have?
spk07: Yeah, I mean, the philosophy has not changed, right? I'd say certainly we're on track to close the Allianz acquisition tomorrow, so that will certainly be a draw on that capital base that we have. We are also entering the active wind season, so we'll want to take a look at how that develops. But absolutely, going forward, the fact that we historically have been, I think, very good stewards of capital. We like to deploy it in the business where we can, but if there are no opportunities beyond what's in front of us in the coming months, we'll do what we've always done is return that capital. And it could be in the form of share buybacks or dividends or any other method.
spk04: Thank you. Our next question comes from Josh Shanker from Bank of America.
spk08: Yeah, thank you very much. So, Mark, sometime in the past, I think one thing you said to me was that the big surprise was from the hard market of 2000, 2004, that pricing stayed good for a lot longer than we thought it would. and we pulled back too early. I mean, clearly, you're not pulling back here, but the growth has decelerated a great deal. Given that you have that 2020 hindsight, how are you looking at this market opportunity, and how long it might last compared with what you knew from the past?
spk06: Well, first, Josh, it's I probably erased from my memory what we did wrong in 2004-2005, but thanks for reminding me. What I would tell you, Josh, is we talk about this at underwriting meetings. Our underwriters and our underwriting executives are acutely aware of that phenomenon. We also have to remind ourselves that pricing is going up, as we talked about, specifically now in casualty, which seems to be the more acute area. I think it will take a longer time to to go down or it takes longer to take down, right? It goes up an elevator and goes down an escalator. So that's probably why we would expect the market to be. I think we're aware of this. Now we have more data. We have more experience. We have, you know, an existing platform. Underwriters, many of them have been there through those years. So very confident that we will be more judicious, if you will, in terms of, you know, holding the line when the market gets a little bit softer. In terms of growth, we still have close to 11% growth in P&C, which is a big feat. It's a very, very good growth. But as I said in my comments, and you probably heard already, Josh, the market is a little bit more reaching equilibrium in terms of supplying demand for the risk. So the question that we have to ask ourselves all the time is, if we push too hard, we might dilute the broader margin and return expectations in the marketplace. So we take this And not only us, by the way. I think the market is broadly, very, very widely behaving the same way. People want to make sure that they get it right, and nobody wants to be the first one running out and doing something that will probably jeopardize or not jeopardize, but maybe take down the returns expectation. So it's just that kind of market, Josh. The equilibrium on the supply and demand for capacity is just coming back to a more normal level. It's still... still on the side of the underwriters, but it's clearly moving in a more equilibrium state.
spk08: And then continuing on the thought in fondlement, Jimmy asked, I have a very crude capital model, and I wouldn't recommend anyone else use it, but it does seem like at the pace that the premium is decelerating, you're going to be sitting on some sizable excess capital in a fairly short order. Can you, I guess, talk about a little bit about how the Allianz transaction uses capital? That might be incorrect, my assumption. That may be a source that's really causing a capital plug there. Or additionally, am I correct that you have, at the current trajectory, a real capital buildup that's going to need to be utilized in short order?
spk07: Well, I mean, first on the Allianz transaction, we, you know, disclosed that we were, you know, the rough number of capital that we were going to deploy in that transaction is $1.8 billion, which is the premium we're paying to acquire the asset and also the capital that we need to deploy to support the LPT that's coming our way immediately and then the ramp up of the new business or the renewals that will end up on our balance sheet. So, you know, sizable number. And that is, you know, so far, I mean, as far as we know, I mean, there's things are on track to be kind of at that level. You know, to your point, yeah, I mean, returns have been excellent. And we're very, you know, we're proud of that. And, but, We're not going to accumulate capital just that we can't deploy forever. So the reality is if, you know, give us another couple of quarters maybe, but, you know, I mean, we'll definitely have, you know, a better view of where things stand by, you know, later this year. And then, you know, Mark's been talking about the casualty kind of pickup potentially. So, you know, if that, you know, accelerates in the third and fourth and quarters and early next year, then we want to have the capital ready to deploy there. So that's certainly how we think about a big picture, but it's an ongoing discussion we have here.
spk04: Martin, thank you for the answers. Have a good day. Thanks, you too. Our next question comes from Michael Zaramski from BMO.
spk02: Hey, thanks. I'll keep with the theme on casualty and social inflation, especially since we do value your your thoughts on this. I guess, can you remind us, two-part, I believe you've said in the past that ARCH's casualty reserve reviews are more geared towards summer months and related, you know, now that you've been studying, you know, your book and the industry a little bit more, I recall last year, you know, or not just, and Mark, you had said, but others have said, too, that they thought that the casualty pressures would be more large accounts kind of than small accounts, but the data we see so far appears to be that the small account players have really added to their reserves more so. So I don't know if there's any thoughts there.
spk06: Thanks. I'll start with the second part of the question. You're exactly right. I think that I said that the large accounts, they're the ground zero for pressure points on the losses because they're deeper pockets, right? They're larger limits, bigger enterprises, more complex cases, and more attractive to the plaintiff lawyers. But you're right, we've seen, as well as everyone else, you know, pressure building, commercial auto as well, even of all sizes, also going through a similar process. And it impacts, obviously, the umbrella portfolio. But, you know, you're quite right. We're sort of a second round, you know, sort of the rippling effect, you know, starting in ground zero, which is always a larger account, and it sort of slowly but surely ripples through the market. And we're starting to see this impact on the smaller packages as well. smaller policies as well have lower limits. So it's probably easier. Well, it seems to be currently in the space. You heard this too, I'm sure. You know, the $1 million limit isn't what it used to be. So there's probably more of a, you know, pressure to pay the full limit as opposed to before. Maybe the industry was you know, more willing to fight or push back. But again, the million dollar because of all the inflation has changed. In terms of reserve review, I'll say it, but, you know, we do a quarterly review of our reserving, you know, of every line of business that we do. Our actuaries, you know, review it every single time and we have a change of loss ratio that we get reported on on every line of business, sub-line, quarterly for all the units that we look at. The one thing that we have as another benefit at ARCH is we have also, we have the insurance group and the reinsurance company, so we're able to compare at a high level the holding company, Francois and I, as to what the trends are developing and what they're looking like. So it's a constant. I think what we may have said to you is we used to do an annual trend analysis. Now it's becoming... a twice-a-year analysis, and it might accelerate as well. And I would assume that most people are using, you know, the same frequency because, as we talk about all the time, reserving feeds into pricing.
spk07: Yeah, the one quick thing just to add on reserving, we monitor actual versus expected experience quarterly. That's a big part of the process, and not only do we do it against our own expectations, but we monitor against our external actuaries' expectations. So we got two views of, you know, how, you know, Independent groups of actuaries think the business or the reserves should develop over time, and that certainly informs the actions we take every quarter, and to Mark's point, that's done in all the business units regularly.
spk02: Okay, that's helpful, understood. Just last quickly on catastrophe levels. I see you guys are more open than others on quote-unquote normal disasters.
spk06: the reinsurance segment uh fat ratio the load ratio this quarter is that kind of normal-ish since you guys have grown into property over the years i think yeah yeah no i think no again repeating what we said before and it's always hard to appreciate from from your perspective i'm sure that the reinsurance is has more volatility into it so we tend to look at this on a longer term you know average so Sometimes we have a quarter, I'll remind everyone here, sometimes we have a quarter where, you know, the combined, the current accident year, you know, X cap combined ratio in reinsurance goes up a little bit. And people say it's a trend, but it's very hard to see, to say this in reinsurance. Sometimes it's above, sometimes it's below. I think this quarter, frankly, we had no lower attritional losses across the reinsurance portfolio. And this is what explains that. But if you look at a 12-month basis, it's not as drastic of a move.
spk07: Yeah, and after that, also, the catalog that we reported or kind of quoted earlier this year, I mean, we have a view on seasonality, when these losses may or may not hit. I mean, it's imprecise. Does it happen second quarter? Does it happen third quarter? It's a little bit of a, you know, there's historical data to support that. But, you know, big picture, again, what we experienced this quarter was not unexpected, was not, you know, was very much within what we thought was reasonable, given the growth and the size of the book. The fact that it's broader, it's not only U.S., a lot of international, and the different types of exposures that we reinsure primarily.
spk02: Okay, that's helpful. And I'll think one last thing quickly on mortgage. Just on a macro perspective, if home price appreciation continues at a healthy pace, or I guess resumes at a healthy pace, is that any factor in kind of the reserve releases? Maybe it was unexpected. Is there anything there from a very high level we can think about?
spk06: Yeah, I think it would, right? Because by virtue of having house price appreciation, you therefore increase your equity in your home. And the equity in the home is by far, the lack thereof, is a leading indicator as to whether you're going to have a foreclosure or a loss in your policy. And most of the policies, even if you had another 3% to 4%, whatever we're expecting next year, maybe 4.5% of HPE appreciation, you know, the equity will build. And what happens, and it's very simple, right? The reason why equity matters is because, well, if you're running into trouble, the divorce, you're losing your job, you know, you don't want to lose the equity in the home. You can just turn around and sell it to somebody else. And then recapture at least a portion, if not all of the equity that you've built into it. That's something that people will do. And then there's a healthy market, supply and demand market is such that you'll be able to sell your home and capture that equity even after some expenses. So that's what happens in HPA. You know, if it goes too wild like it did in 07-08, but it got into trouble for different reasons altogether. I think the credit space and the way the mortgage has been originated over the last, you know, several years, you know, HPA going up right now would be helpful. It's definitely helpful for us as my provider.
spk04: Thank you. Sure. Our next question comes from David from Evercore. Good morning.
spk05: I had a question on the underlying loss ratio in the insurance business. It was up a little bit year over year. That's despite having a higher mix of short tail business within the earned premium mix. Could you maybe talk about what was driving the loss ratio up? year on year and was that conservatism you guys are baking in on the casualty lines or a little bit of the color there would be helpful?
spk06: Yeah, it's a pretty small increase and this is, we don't want to describe any more precision to those numbers. They're judgment call quite oftentimes. I think it's just a reflection of the mix and perhaps one on the business, the actuaries may take a little bit more of a conservative or prudent stance. and put a bit more, increase the loss ratio for a certain year or a certain line of business or product line. That's really all there is to it. I think the variability around this, even on the insurance level, we're a specialty writer, so there's a lot of things going on all at once in our portfolio. It's not as predictive, I guess, as as we wish we could be. But this is also why we believe we can attract higher returns because there's a lot more uncertainty in selecting the loss ratio. I would just attribute it to noise that happens from time to time as well as mix. Francois, anything to add? Good? Yep.
spk05: Great, thanks. And then, Francois, you had mentioned the actual to expected. Wondering if we could just get a little bit more color on that. for the quarter, and then if you guys have changed your view of expected losses, just given it appears like claims payment patterns have been extending. So I'm wondering if that's been reflected as well in your expected expectations.
spk04: Yeah, I think the A versus C work, you know,
spk07: it's done by line by year. So yeah, there's pockets where, I mean, it's puts and takes right there. There's some that we run favorable, some that, you know, there could be a year for, you know, one claim shows up and it's going to show adverse, but both quarter to date and year to date in aggregate, both by segment, we are, you know, running ahead of expectations, which, you know, we didn't take the full credit for that. Some of that favorable experiences showing up in our, in our actually, you know, favorable prior development, but, The indications are giving us a lot of comfort that our reserve base and our reserve levels are adequate to pay the claims. Absolutely, your question on patterns, that is, I mean, there's a good attempt, good faith attempt to adjust the patterns with the experience that we have, again, both internally and the advice or the opinions we get from external actuaries. So that's factored into the expectations that you know, claims may be, you know, may take longer to develop. And, you know, we understand that it's an evolving situation. I mean, it seems that the patterns are changing over time, but that is fully kind of considered in those numbers.
spk04: Great. Thank you. Welcome. Our next question comes from Charlie Lederer with Citigroup.
spk10: Hey, thanks. Good morning. Definitely heard Mark's comments on the reasons for the flattening out of property CAC growth. Would you say the weather forecast had an impact on that? And could we see you reverse course and reaccelerate if pricing is still good in 1.1 and you have a better view of how much of the mid-core business you're keeping?
spk06: I'm going to say this is one of the easiest answers, yes and yes, to your question. Yes and yes. Yes, we believe, we took a conviction that there was a higher likelihood of frequency of events, and you're right, and it could change. This would be a short-term perspective, and this will help inform whatever new vision or new projection or new belief we have will help us make a decision as we get into 1-1-25 after the win season is over. Mind you, the business is still very good even with our increased frequency. So it's still a very, very good book of business. We just wanted to have the right balance.
spk10: Got it. Thank you. And then I guess I'm wondering if you guys have your arms wrapped around the CrowdStrike cyber event yet and if you can help us frame what the losses might be and if you see any impact on the cyber pricing environment coming out of it.
spk06: Well, we're Yeah, on the crowd side, I mean, we're still gathering information in our units, trying to figure out what's out there. And it's not only the cyber, but there might be some other lines of business that we're just going through as we speak. It's still kind of hard to disentangle. I mean, some people are claiming some losses. They're not insured. So there's a lot of things going on. I think we tend to agree broadly with the market view that, you know, six, five, six hundred million to a billion two. That's sort of it's still a wide range at this point in time. It's going to take a while to to know how it develops. I think I would want to, I mean, it's not a big number in terms of loss ratio points for all the premium worldwide for cyber, but it's certainly a reminder that there's risk in the portfolio. And it's early now, we haven't seen that many renewals, but I would expect, you know, rates could still go down a little bit, but probably not as fast as they were going down. And people are going to probably take a bit of a more of a pause, if you will. to evaluate what it looks like. It could go either way, right? If crowd strike does not create a big loss, it might reinforce the belief that it's not as risky. Although having that event, which was not malicious, happened out of nowhere and we were all like out of, unable to work for a day, I think it's a good reminder of people that there's still uncertainty and there's some lost potential there.
spk04: Thank you. You're welcome.
spk03: Our next question comes from Andrew Clickerman from TD Securities.
spk13: Hey, thank you. Good morning. So I was interested in the net written premium area in professional lines. It looked like you were pretty much flattish this quarter year over year at $345 million. Could you share some of the puts and takes? public D&O off a lot? Did you see a pickup or a decrease in cyber? What were some of the big lines and how did they move?
spk06: Yeah, there's a lot of things in the professional lines. It's kind of hard to disentangle from your perspective, but at a high level, you know, D&O, you know, we're reacting to what's out there. We're still maintaining our positioning and Cyber, we're still making exposure. Rates still go down, so that would go the other way. Healthcare, we like a lot, so we've grown that book of business. This is within the professional lines. And there's been some re-underwriting of some areas, if you will, at a high level that we're not as performing as well. So there's a lot of things going on all at once. I think what you're seeing, it was not the 300, you know, the flattish number is really a sum total of many decisions that were independent from one another. That's really what you can read into this.
spk13: Got it. And along the same lines in reinsurance, property X catastrophe, it was up quite a bit at $585 million versus $457 million last year. What did you like in the property area in reinsurance?
spk06: We... Well, in there, there's a lot of different lines, but, you know, there's a lot of quota shares, some risk excess. We also have a facultative book in there as well. And all these units are taking advantage of the hard market still to this day and picking their spots. And we think the return expectations is not as cat-exposed. There is some cat exposure there, obviously, but we believe the returns are just very, very accretive and very, very favorable. Some of them are opportunistic by nature, right? We might be doing a specific deal in some specific payroll because we think the market is hard as we speak. So some of that was also factored in our writing. So it's a really broad line of business. As you can see, we love that line. We love the opportunities there. It's a bit more complicated, I would say, to underwrite than a property cap, pure property cap book of business. But We've had the expertise and the knowledge and the willingness to do this for a long time, and we would like to be exposed and do more of that line of business in that current return expectations.
spk07: Yeah, and I'll add to that quickly. Just on the accounting side, it's important to remember that the property cap line of business is mostly on an XOL basis where we write all the premium on day one. versus this property other than property cat line where the component that is on a quota share basis, the premium is written evenly throughout the exposure period. So they could very well be, you know, there's accounts that we wrote at 1.1, for example, that, you know, the ramp up of that premium is taking place over the four quarters of 24 as we write the premium. So a little bit of a different kind of accounting policy on those types of reinsurance agreements, and that certainly has an impact on how it shows up in the quarterly numbers.
spk13: Got it. And if I could just sneak one quick one in. On the insurance line, the expense ratio picked up by 70 basis points. Should we be thinking about the expense ratio being slightly more elevated as you take on the Allianz book and invest there?
spk07: Well, the investments that we made through this quarter were not related to that, right? So, they are other opportunities, other, you know, efforts that we have underway that were predictive analytics, some tech, you know, companies that we've invested in. So we feel it's the right time for us to make those investments given, you know, how strong the returns are. And, you know, we'll see how those develop over time. Maybe they slow down, you know, down the road, but for now we're very comfortable with the level of investments we're making. In terms of Allianz, just, you know, we'll give you more information as we move forward, but they're You know, there will certainly be some integration expenses that will come through in the insurance segment specifically going forward. Some of those expenses, though, will be kind of one time, and we'll probably report those as part of a transaction cost and other. So that will clarify that for everybody once we close and after we have some time to digest it. But, yeah, the investments so far this quarter are for other initiatives.
spk04: Got it. Thank you. Our next question comes from Brian Meredith from UBS.
spk09: Yeah, thanks. A couple of them for you guys. The first, I'm just curious, do you all still stand by the three-year payback period for share buyback when it comes to book value dilution?
spk07: That has been our practice. You know, it's not a hard and fast rule. I think it's been the practice historically, but again, that's part of The framework of how we evaluate various alternatives, could we think about extending the payback at some point? And the answer is maybe.
spk09: Gosh, that's helpful. Thank you. And then I guess my next question, thinking about M&A here, it looks like you probably have the financial capacity to still do a reasonable amount of M&A. But do you have the kind of call it management and strategic or call it management capacity at this point as you're integrating M&A? the Allianz business or Fireman's Fund business, you know, over the next, call it six to 12 months to do anything. You're going to kind of take a pause here for a while.
spk06: Well, I think, Brian, it's also dependent on the opportunity that we have ahead of us, and we can certainly attract people to help us do any other, you know, integration. We've We have a team that, between us, leading the effort on Alliant, that also were instrumental in integrating United Guarantee way back in 2017-18. So we have already some good experience there. So I think we have enough bandwidth for what we're doing now quickly. And if something were to happen, right, Francois, that was really creative and interesting, we would find a way to do this. I think that we're not there to... to work half the time. If something is very, you know, favorable to us, we'll expand the effort and the work that needs to get this done.
spk07: And these opportunities to order, I mean, I'd say geography specific and segment specific. So, you know, the Allianz acquisition is purely insurance North America. So that absolutely has taken, you know, center stage. But, you know, if we were to do some other M&A in other parts of the world in the reinsurance segment, that could be a different team most likely that would contribute.
spk09: Makes sense. And I wonder if there's just a quick one. I know you're going to give us some numbers on the Allianz thing, but is there any color you can give us with respect to how does it add to your PMLs as we think about it going forward? Just looking at the map you provided us, it looked like there's a decent amount of business in kind of cat-exposed areas.
spk07: Not materially because it's not as much in our peak zone. The book is more diversified, more Midwest, more California area. less, you know, Florida, which is our peak zone. So, in terms of the 1 to 250 marginal impact.
spk04: Great. Thank you. Appreciate it.
spk03: Our next question comes from Meyer Shields from KBW.
spk11: Great. Thanks so much. Two quick questions. First, Mark, I think you and Francois both mentioned the elevated uh, frequency predictions for not growing cat premium. Was there any reshaping of the portfolio to move further away from frequency events?
spk06: No, I think that, I think that if you look at, at a high level, I think our, our exposure was, uh, is, is more stable. Um, it may have grown a little bit even on a gross basis, but what happened is we just, you know, shaped it through retrocession purchases. That's really what we did. And that's, that's how we got back to a more, you know, more, uh, more reasonable and more acceptable level of PML.
spk11: Okay, that's helpful. And second, just sort of for the most recent or up-to-date events, as we've seen more capital markets activity come back, and we've seen that being blamed for pressure on public company pricing, are you seeing any inflection that coincides with recovering activity?
spk06: Oh, really? I mean, the third-party capital that we hear, again, even those third parties, there's a healthy level of rationality in the behavior. So we haven't seen, like I said before, you know, crazy players or, you know, mavericks in the marketplace. It's a pretty well-behaved marketplace.
spk04: Okay. Thank you very much. You're welcome. I'm not showing any further questions.
spk03: Would you like to proceed with any further remarks?
spk04: Thank you very much, everyone. We'll talk to you again in October. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
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