Arch Capital Group Ltd.

Good day, ladies and gentlemen, and welcome to the Q3 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 the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2023 fiscal year. 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 references 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. Nicholas Papadopoulos and Mr. Francois Morin. Sirs, you may begin.

Good morning and welcome to our third quarter earnings call. I'd like to begin by wishing the best to my friend and my business partners of 23 years, Mark Goldison, who retired earlier this month. Art had a fantastic run under Mark's leadership. While we will miss him, I'm very excited about the opportunities before us. My message to our shareholders, employees, brokers, clients, and business partners is that it is business as usual at Arch. Our core objective remains unchanged, to be the best-in-class specialty lines insurer in the market. We will continue to execute on the key pillars of our strategy, which are build a diversified mix of businesses, actively manage the underwriting cycle, remain prudent stewards of capital, be dynamic managers of a data-driven enterprise, and foster a culture that attracts best-in-class talent. Back to the quarter, where ARCH generated strong top and bottom line results with an annualized operating return on equity of 14.8% and an 8.1% increase in book value per share. Our third quarter results included 450 million of CAT losses across multiple events, including Hurricane Eileen. It's worth noting that this cat loss is within our third quarter seasonally adjusted cat load. Overall, the P&C environment remains very favorable, despite increasing competition in many lines of business, making underwriting and risk mitigation increasingly important. Underwriting strategies empower our businesses to respond quickly to their trading environment. This has been and remains a competitive advantage as we pursue those opportunities with the best risk-adjusted return. Industry CAT losses have once again exceeded $100 billion for the third quarter. We should continue to support increasing demand for property insurance and reinsurance. Even with this increased CAT activity, we believe the property market remains attractive and one in which disciplined underwriters can produce attractive return on CAT. Casualty rates continue to outpace trend, which is consistent with our hypothesis of a hardening casualty market. We have selectively increased our casualty riding in both insurance and reinsurance as the markets respond to claims inflation and uncertainty around loss trend with higher prices. Turning now to underwriting segments, our insurance segment was 1.8 billion of net premium and delivered 120 million of underwriting income in the third quarter. Our acquisition of the mid-corp and entertainment business from Allianz in August helped drive a 20% growth over the same quarter a year ago. We are confident that the mid-corp team will be an important part of our growth story as we further enhance our capabilities in the middle markets. Excluding mid-corp, insurance growth was mid-single digit as we continue to find attractive growth opportunity in casualty, programs, and our London market specialty business. Premium rates remained competitive in ENS property and professional lines. Reinsurance had another excellent growth quarter with net premium return up more than 24% to over $1.9 billion, along with underwriting income of $149 million, as our team continued to benefit from more robust relationships with our brokers and assistants. Growth was driven by property X cap, including facultative business, casualty, and other specialty. Our industry-leading mortgage segment again contributed significantly to our earnings, with $269 million of underwriting income for the quarter. Underlying fundamentals remain excellent for the mortgage insurance industry, including strong credit conditions and continued favorable house price appreciation. Mortgage origination activities remains light, but new insurance return of $13.5 billion was in line with our expectation, as relatively high mortgage rates and continued house price appreciation have kept most buyers on the sidelines. Finally, the contributions from our investment portfolio were substantial. In the quarter, Arch Investment Management generated $399 million of net investment income. Significant operating cash flows from our underwriting units should support continued growth of our assets under management, setting us up for strong investment contributions in the years to come. Looking ahead, we lack our position in the market opportunities. This is true as we enter a responsible growth part of the P&C cycle, where disciplined underwriting and thoughtful risk selection are essential to success. A few final comments in closing. Arts has proven to be an exceptional company defined by a culture of underwriting excellence, underpinned by our core strategies of cycle management and thoughtful capital allocation. That was true yesterday, it is true today, and it will be true tomorrow. I'm very excited and proud to lead this company and work with our leadership team as we continue to strive to deliver the greatest value to our clients and shareholders over the long term. And now I'll turn it over to François to provide some more color on our financial result in the quarter, and then we will return to take your questions. François.

Thank you, Nicolas, and good morning to all. As you know by now, we reported third quarter after-tax operating income of $1.99 per share for an annualized operating return on average common equity of 14.8%. Book value per share was $57 as of September 30, up 8.1% for the quarter and 21.4% on a year-to-date basis. Once again, our three business segments delivered excellent underlying results, highlighted by $538 million in underwriting income and an 86.6% combined ratio, which was slightly elevated from an active catastrophe quarter. Our combined ratio was 78.3% on an underlying XCAP accident year basis. Overall, current accident year catastrophe losses were $450 million for the group. In the quarter, split roughly 80-20% between the reinsurance and insurance segments. Approximately 45% of our catastrophe losses this quarter are due to Hurricane Helene, with the rest coming from a series of events, including Canadian events, smaller named hurricanes, U.S. severe convective storms, flooding in Europe, and other events across the globe. As of October 1, our peak zone natural cap probable maximum loss for a single event, one in 200-year return level on a net basis increased slightly. and now stands at 8.1 percent of tangible shareholders' equity as we incorporated exposures from the mid-corp acquisition on August 1. Our PML remains well below our internal limits. Our underwriting income included $119 million of favorable prior development on a pre-tax basis in the quarter, our three 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. As you know, we closed on our purchase of the U.S. Midcorp and Entertainment Insurance businesses from Allianz on August 1st, and I would like to expand on a few items that impacted our financials this quarter. First, The net written premium coming from the acquired businesses was $209 million for the two-month period, contributing to the reported year-over-year premium growth for our insurance segment. Second, in accordance with U.S. GAAP, the fair value of the acquired balance sheet does not include an asset for deferred acquisition costs. Therefore, since there is no amortization of deferred acquisition costs associated with the enforced business at the time of the acquisition, The current quarter's acquisition expense ratio is lower than in the third quarter of 2023. This item resulted in a benefit this quarter of approximately 1.9 point in the insurance segment's acquisition expense ratio. Although we would expect this benefit to become less significant over the next three to four quarters as a larger proportion of our earned premium relates to premium written after the closing date. Operating expenses in the new business were also somewhat lower than ultimately expected as we ramp up operations, contributing to a 60 basis point benefit in the quarter. Third, as is required with business combinations, we recorded goodwill and intangibles in connection with the transaction, primarily from the value of the business acquired, distribution relationships, and the present value adjustment related to the reserves for losses and loss adjustment expenses. This quarter, we incurred an expense for the amortization of intangibles of $88 million, $63 million of which was for the mid-corp and entertainment acquisition. We expect our overall amortization expense across the group to be approximately $100 million in the fourth quarter of this year and $195 million in 2025 spread evenly throughout the four quarters. While still early, The mid-core business is performing as expected, or even maybe slightly better, and we are satisfied with the progress we are making in our integration activities. Turning to our reinsurance group, the team delivered a very solid 92.3% combined ratio in an active catastrophe quarter. Of note, the reported net written premium growth of 24.5% in a quarter was augmented by reinstatement premiums. Adjusting for this item, the growth rate would have been approximately 22.4%. The mortgage segment reported an excellent 14.8% combined ratio as cure activity on delinquent mortgages is strong and the underlying credit quality of the book remains very high. The reported delinquency rate at USMI inched up slightly this quarter and was impacted primarily by seasonal factors. On the investment front, we earned a combined $570 million pre-tax from net investment income and income from funds accounted using the equity method, or $1.49 per share. Our investment income reflects approximately $20 million earned during the two-month period from the assets we received in connection with the mid-corp acquisition. Total return for the portfolio came in at 3.97% for the quarter, as there was significant price appreciation on our fixed income portfolio due to lower interest rates. The appreciation of our available for sale investment portfolio resulted in a book value increase of $1.56 per share net of tax. Cash flow from operations remained strong and exceeds $5 billion on a year-to-date basis. Our effective tax rate on a pre-tax operating income was an expense of 8% for the third quarter and our annualized effective tax rate remains in the 9 to 11 percent range for the full year of 2024. In closing, our balance sheet is strong with common shareholders' equity of $21.4 billion and a debt plus preferred to capital ratio of 14.2 percent. This level of financial resources gives us flexibility to deploy capital as needed and continue delivering outstanding results for the benefit of our shareholders. With these introductory comments, we are now prepared to take your questions.