Arch Capital Group Ltd.

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.

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?

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.