Arch Capital Group Ltd.

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, including our annual report on Form 10-K for the 2024 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 also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8K, furnished to the SEC yesterday, which contains the company's earnings press release, and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Nicholas Papadopoulos and Mr. François Morin. Sirs, you may begin.

Good morning and welcome to ARCHE's first quarter earnings call. I'm pleased to report solid results for the quarter with $587 million of after-tax operating income, $1.54 in operating earnings per share, and an annualized operating return on equity of 11.5%. These results were achieved despite $547 million of catastrophe losses affecting our property and casualty segment, primarily from the California wildfire. The PNC market has become increasingly competitive. However, we remain optimistic about our prospects as we continue to achieve broadly attractive rates across the sectors where we compete. At Arch, we believe that prioritizing expected profitability of our market share by allocating capital to lines of business with attractive risk-adjusted returns gives us the best opportunity to outperform for the cycle. This is what we mean by cycle management and we stand by the historical results of this approach. While the market may be more competitive, ample growth opportunities remain. This is true despite emerging microeconomic concerns, including the potential impact of tariffs that have increased uncertainty for many of our insured across the globe and raised inflationary risks for some of our businesses. During times such as these, Risk selection is critical as a growing number of our previously attractive accounts no longer meet our return criteria. We believe the acumen of our underwriting teams, breadth of our platform, investment in data and analytics, and depth of our financial resources have Arch well positioned to navigate the P&C cycle. Now we'll turn to our segment, starting with reinsurance. Reinsurance results were solid despite substantial catastrophe losses in the quarter. A 91.8 combined ratio, inclusive of 18 points of catastrophe losses, demonstrates the strong underlying profitability of our diversified reinsurance portfolio. Growth in net premium return in the quarter was modest due to an increased level of competition, more risk retention by seeding companies, and reducing our participation for treaties where margins no longer meet our hurdles. In the first quarter, the reinsurance group deployed additional capacity into property catastrophe lines where opportunities remained attractive, particularly in loss-impacted accounts. Facialty premium risings declined primarily due to non-renewing a large structured transaction. Weaker margins in cyber and part of our international treaty business also led to reduced premium risings. Treaty casualty lines experienced growth in the quarter as R3 capitalized on a handful of select opportunities. We are hopeful these lines will continue to achieve rate and that treaty casualty market terms and conditions will continue to improve. As we look towards major renewals, particularly wind coverage in Florida and the Gulf, we expect additional demand from existing and new clients. On the supply side, it is worth noting that for many reinsurers, and the ALS funds, these zones represent peak exposure. As a result, significant additional capacity may be harder to come by, even if the market is more competitive on the margin. Moving to our insurance segment, where the California wildfires led to a small underwriting loss for the quarter due, in part, to commercial risk from the recently acquired middle-market commercial and entertainment businesses. The additional premium generated from those businesses contributed to the insurance group $1.9 billion of net premium return in the quarter, a 25% increase from the first quarter of 2024. The integration of the middle market business is progressing well, and we remain excited about the increased capabilities this team brings to the ARCH insurance platform. As we've said before, there isn't one underwriting cycle, but many. In today's market, it's possible to deliver double-digit growth in some lines while experiencing similar declines in others. In the first quarter, we generated meaningful growth in casualty-led sectors, including construction, national account, and international casualty. At the same time, we experienced premium reduction in other lines of business due to rate decreases and our desire to maintain margin in lines such as E&S property, and professional lines, including cyber. We have seen competition increasing in the London market specialty lines, which has made profitable growth difficult. Looking ahead, we expect continued growth in casualty lines, as well as the US middle market, where opportunities remain for both freight and premium growth. We are well positioned across the insurance group because of our market-leading capabilities and relevance with distribution partners that gives us first look at many opportunities. The mortgage segment continues to provide a steady earning stream, contributing $252 million of underwriting income in the first quarter. Economic uncertainty, limited housing supply, and high relative mortgage rates continue to create headwinds for new mortgage originations, which resulted in modest new insurance returns in our U.S. and international mortgage businesses. For USMI, high mortgage interest rates own price appreciation have kept persistency around 82% and insurance-in-force relatively stable. The delinquency rate of our in-force portfolio remains low, ending the quarter below 2%. Our near-term outlook for the mortgage industry is unlikely to change significantly. While recessionary trends resulting from tariffs and other economic policy could create headwinds, We still expect the mortgage segment to continue generating attractive underwriting income given the high credit quality and embedded equity of our enforced portfolio. Turning to our investment group, where invested assets increased by 4% from year-end to $43.1 billion, providing a large sustainable contributor to group earnings. Investment market volatility increased broadly, leading us to reposition our portfolio to a more market-neutral position. To manage the cycle, it's important to understand that you cannot control the market, but you can control how your underwriting teams respond to it. At ART, we manage the different cycles across our many lines through the ability of our underwriters to access, analyze, and ultimately select risk. Over time, our underwriting teams have built strong relationships with our distribution partners, which gives us an access advantage as they look to place risk with fewer, more relevant carriers, including ARCH. Risk analysis combines experience, expertise, and deep analytical insight to understand and assess the underlying risk and match it with a technical price that reflects an adequate premium for that risk. Ultimately, risk selection is what separates the winners from the losers. If the return doesn't adequately account for the risk, you must be willing to let others take the business. The P&C market in transition is one where ARCH can and has previously demonstrated its ability to find success. While premium growth may be more challenging than in recent years, plenty of profitable opportunities remain. For a company with a strong underwriting culture like ARCH, this is a market where we can stand out and continue to maximize returns for our shareholders. François?

Thank you, Nicholas, and good morning to all. Last night, we reported our first quarter results with after-tax operating income of $1.54 per share, resulting in an annualized operating return on average common equity of 11.5%, and growth in book value per share of 3.8% for the quarter. At a high level, our three business segments delivered excellent underlying results, with an overall ex cap accident year combined ratio of 81%. And importantly, each of our segments showing an improvement for that metric over the same quarter one year ago. Our underwriting income included $167 million of favorable prior development on a pre-tax basis in the quarter, or four points on the overall combined ratio. We recognize favorable development across all three of our segments. and in many of our lines of business, but the effect was most notable in short tail lines in our reinsurance segment and in mortgage due to strong cure activity. The acquisition of the mid-corp and entertainment insurance businesses continues to roll through our financial metrics within the insurance segment. This quarter, the net premiums written coming from the acquired businesses was $373 million. contributing 24.2 points to the reported year-over-year premium growth for the segment and generally consistent with last quarter. Also, the inclusion of the acquired business in the segment's results lowered the current accident year ex-cath combined ratio by 1.1 points. This can be further broken down to include the current quarter acquisition expense ratio that was lowered by 0.9 points, due to the write-off of deferred acquisition costs for the acquired business at closing under purchase gap, the other operating expense ratio that was lowered by 0.9 points, and the accident year XCAT loss ratio that ended up being 0.7 points higher, reflecting the underlying results of the acquired business. The quarter-over-quarter comparison of net premiums written for the reinsurance segment showing growth of 2.2% was also impacted by a few items. Of note, this quarter's net premiums written includes approximately $70 million of reinstatement premiums, mostly related to the California wildfires. Offsetting this benefit was the non-renewal of large structure transactions in the specialty line of business, which reduced our top line by $147 million in the quarter. There were also some timing differences in the recognition of certain treaty renewals, which resulted in lower net premiums written in the quarter of approximately $103 million. Our mortgage segment delivered yet again another very strong quarter with underwriting income of $252 million. Even though the origination environment remains challenged, The underlying fundamentals of the business are excellent, as exhibited by most of our key metrics, including a very low delinquency rate for our USMI business, which currently stands at 1.96%. On the investment front, we earned a combined $431 million pre-tax from net investment income and income from funds accounting using the equity method, or $1.13 per share pre-tax. The reduction in net investment income relative to last quarter is attributable to a few items, including the impact of paying a $1.9 billion special dividend in December, the timing of incentive compensation expenses, slightly lower interest rates in the quarter, and the repositioning of our portfolio to a lower risk posture in light of the current macroeconomic uncertainty. Income from operating affiliates was down this quarter, mostly due to our lower level of affiliate income at Summers Re, in part as a result of the California wildfires. Cash flow from operations remained strong. It was approximately $1.5 billion for the quarter. Our effective tax rate on pre-tax operating income was an expense of 11.7% for the quarter and reflects a one-time discrete benefit of 4.6%, related to differences in the expensing of non-cash compensation. Also, it is worth mentioning that we started to amortize this quarter the deferred tax asset we established at the end of 2023 related to the introduction of the Bermuda corporate income tax. This benefit does not impact our operating or our net income effective tax rates in the period, but as we mentioned previously, will flow through our financials as a reduction to pay taxes. As of January 1, our peak zone natural cap probable maximum loss for a single event, one in 250-year return level on a net basis, increased slightly and now stands at 9% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased $196 million worth of our common shares in the first quarter and an additional $100 million in April. demonstrating our ongoing disciplined approach to managing our capital to enhance shareholder returns. In closing, our balance sheet remains extremely strong with common shareholders' equity of $20.7 billion, and a debt plus preferred to capital ratio remains low at 14.7%. With these introductory comments, we are now prepared to take your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions. The first question comes from Mike Zaremski at BMO. Please go ahead.

Hey, good morning. Thanks. I guess thanks for all the insightful market commentary on the reinsurance group deploying additional capacity into catastrophe lines. You know, you said that loss impacted accounts remain particularly attractive. Should we be, you know, I guess we'll think through kind of the how to change our our loss ratio a bit if you kind of feel like you're going to continue leaning in. Any kind of update to your cat load guide? I believe it was seven to eight points when you updated us last. Should we expect the number to move up a bit?

I don't think so. I think the number should be relatively stable. I mean, full year cat load, obviously there's seasonality to it. As we look at market conditions, we certainly had thought that after the California wildfires, there might be a little bit of a you know, I think a more, um, some stabilization in that market, which, um, you know, we think will happen. Although as we, you know, we touch on, I think Florida is its own different market, right? So, uh, a little bit early for us to know exactly how Florida is going to ultimately perform or what opportunities we're going to see there. But big picture, I think, you know, what we saw at the start of the year seems to be holding up pretty well.

I agree. Okay. I think the, uh, The Florida outlook, as we see it, is, you know, for the reason I described in my comment, is pretty flattish. So I think, you know, we like the business. I think, you know, if our teams, again, we don't know, but if our teams find opportunities to grow, and we expect more demand in the marketplace, you know, for several reasons. I think the FHEF is raising the retention by a billion and a half, and I think they we think more students wanted to increase their limits, you know, things that they haven't been able to do in the last few years because of the lack of capacity. So we think an opportunity to potentially do more if the rates hold up.

Got it. Okay. Pushing gears to market competition outside of reinsurance, I think, you know, the common theme has been in recent quarters that large account property is well-priced and we're seeing some more meaningful downward pressure. You mentioned in your prepared remarks the London specialty market as well. Can you kind of unpack what you mean by the London specialty market and maybe kind of help frame what you know, which lines in particular are, you know, the clock isn't where you'd want to grow as much?

Yes, I think in London what's happening, I mean, it's twofold. First, I think we've seen, you know, after years of good results, you know, more appetite, you know, for people to expand in lines like terror, marine energy, You know, the typical, you know, species, the typical lines of business that are returned historically out of Lloyd's. And also, I think what we are seeing is, you know, London is kind of the excess and surplus market of the rest of the world. And so we're seeing... as companies in their local market become more comfortable with their risk, their appetite expands. And so there is a little bit less business coming from Australia, from Asia, from jurisdictions that historically rely on loads as the appetite of their local companies gets diminished. So that's what we're seeing. We're seeing the combination of the two. I mean, the tailwind for us and a few other markets is that the market is consolidating around leaders, and I think we lead in many other lines of business. So it's difficult to predict how it's come out, but we feel positive about how we are positioned to continue to take advantage of the market there.

Thanks for the call. You're welcome.

Thank you. The next question comes from Cave Montessori at Deutsche Bank. Please go ahead.

Thank you. My first question is going to be on net premium growth in interview insurance. I think it's pretty clear that those are the days of 30% plus growth and then PWR are behind us now as you become more selective. But I'm assuming also 2.2% growth is also probably a little bit too low to expect going forward. Can you maybe unpack some of the key drivers of the deceleration you saw in the quarter? Maybe give us a bit more details on the impact of the structured yields, just to help us understand how would you think about that going forward in terms of premium growth in your insurance?

Yeah, I mean, I touched on it in my comments, right? There's a couple of items. If you adjust for what we mentioned, again, we're not trying to do the but-fours and adjust for everything. But, you know, if you adjust for those two things, you still get to a call at like 6%, 7% growth rate, which, you know, may be more consistent with what we see in the near future. But beyond that, I'd say there's really a separation. We had good growth in property other than property cap and in property cap and in casualty. Where we saw some decreases is on the specialty line beyond the structured and the timing of accruals on written premium. And there I'd say it's a function of some of the lines or some of the smaller specialty lines that we participate in where there's been more competition and And cyber is a prime example of that. It's a combination of rates coming down a little and also some of our seeding companies retaining more of the risk. So, you know, that's how I'd say, like, you know, midterm, you're right, the 30% growth is probably behind us, but for the near term at least, but hopefully, you know, These couple of things help you reconcile a little bit from the 2.2% to what you may perceive to be a more realistic expected growth for the rest of the year.

I think in the specialty book, you have a mix of lines of business. It goes from credit to cyber to agriculture and a few others. Our team are really scouting the world to find opportunities. We had a great opportunity in Brazil last year on the agriculture side, and this year the student is reading more of the business. I think you have to be opportunistic in those lines of business to make money. Yes, if we have a big book, the ups and downs upset each other. In the last few years, it grew together because it was what the hard market does. I think we should be prepared to see more ups and downs quarter by quarter going forward in that particular book. That's what we want them to do.

I think that's a very helpful caller. My second question is on casualties. Last year, a big theme was just the strengthening in capital reserves at the industry level. We haven't seen much of that so far in 2025. I think some people are thinking maybe we might be past the point of maximum fear with regards to social inflation. Just wondering what your thoughts are. Do you agree with that? Or do you think we're just in the eye of the storm and there's more pain to come in the second half of 2025?

My prediction is that I don't know when the pain will come, but it will come. There's more pain. That would be my, you know, how people manage the pain, you know, and I can tell. But, you know, we think the casualty, you know, social inflation story has not fully played out. I think that's our view. And we're still, you know, we were getting definitely right above trend on our casualty line and where we feel comfortable with the exposure, you know, the jurisdiction, the type of, you know, the jumping condition that we get. You know, I think we're willing to lean in, but I don't think we are still at the case where, you know, it's a market that you can, take a share of it and guarantee that you're going to make adequate returns. I think there's more to come. That would be our general underwriting view.

Very clear. Thank you.

You're welcome. Thank you. The next question comes from Elise Greenspan at Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first one, I think, is a quick one. The 7% adjusted growth in reinsurance that you were talking about in the quarter, is that excluding reinstatements and the structure deals? I just want to make sure I understand what you're backing out.

No, I'm just putting back in the two items I mentioned. That's all. So I'm not backing out the reinstatements. I'm just adding back the... the non-renewed deals and the timing of the accruals on some business.

Okay. Got it. And then my second question is on the commentary around the mid years. You know, it sounds like you're expecting perhaps some opportunity on the demand side. What about pricing? I guess, are you guys expecting that price is probably down, but that there could be some growth opportunities just with demand? Can you help me think through those two pieces?

So clearly, yes, it is the data point at 4.1 where, you know, single digit down, most places maybe a bit more than that in Japan due to, I think, one of the players, you know, buying less, which, you know, the market scrambled around that. But I think the dynamic in Florida is, as I said in my remark, is a little different because it's a big zone for most markets, And, you know, the dynamic is people like the top players, but there are not that many top players, and people didn't like the bottom of the program. There's not as much. And what we've seen in the past and we're seeing still today is, you know, bottom of the programs, which have been impacted by the loss last year, you know, the hurricane last year, Milton, you know, we'd expect those probably to see some price increase. And would that be compensated by a price decrease at the top of the market, at the top of the program? I don't know. But I think that's why I think our view is if things play out the way they should, which they never do, you know, we would expect something more flattish for Florida. And at that point, we feel that based on our positioning and we should be able at least to – to keep our share of the programs that are, you know, buying more and therefore, you know, we may have opportunity to deploy more capital.

Okay. And then one last one. In insurance, if I kind of X out mid-corp, you got, I think, around like a 56-7 underlying loss ratio. I think that was slightly below the Q4. Is that about like run rate-ish, I guess, on core arch, right? And then we think about bringing in mid-corp on top or anything else we need to think about just with, you know, pricing and loss trend and dynamics on the margin as we go through the year?

Yeah, well, I mean, call it for the legacy arch book. I mean, it's, you know, at a high level, we'd say that, you know, our margins are holding up in terms of, you know, rate above trend kind of being kind of, you know, keeping us, you know, steady. The one thing, though, that you have to factor in somehow is the mix is changing, right? As we pivot a little bit more into casualty, you know, you might see that underlying loss ratio go up a little bit as we see more competition on the property. And we mentioned it, like a lot of our growth was in the casualty-led kind of lines of business or profit, you know, units for us. So, That might be the only thing, but, you know, big picture, we still think the loss ratio that we had this quarter is, you know, there's no reason why it can't hold up at that level.

Thank you.

You're welcome.

Thank you. The next question comes from Andrew Kligerman at TD Securities. Please go ahead.

Hey, good morning. First question is around the reserving. It looked like you had some nice favorable developments, particularly in reinsurance. But could you call out anything around commercial auto and other liability net plus or minus in both insurance and reinsurance? How did that perform and how do you feel about reserving in those lines going forward?

Great question. We, you know, reserves are something we, again, we mentioned before, we look at it every quarter. You know, the actual versus expected that we monitor very carefully is looking good. But for us, it's a little bit early to call it a victory. So we're, you know, we're monitoring everything, you know, pluses and minuses. Yes, there's always going to be the finer, you know, you slice it down to very fine levels. There's some pockets where we took a little bit of adverse, which were offset by others where we had some good, you know, favorable coming through. But big picture, I'd say we're flattish. I mean, everything on the casualty kind of long tail side, auto and some of the more difficult lines, as you mentioned, umbrella, et cetera, we're comfortable with what the reserve, what the indications are.

Okay. And so that's good to hear. And then maybe shifting, this is sort of a two-part question here. you know, being clearly the acclaimed cycle manager that you are, could you share a little color on, and maybe, and I know, Nicholas, you mentioned many different cycles, but maybe very broadly, two cycles, casualty and property. Maybe we'll even skip professional, or you could throw that in if you want. But, you know, how do you see those cycles playing out as we sit here today, how much longer will we see property pricing come down? How much longer can casualty pricing hold up? I know it's a really tough question, but be really interested in your response on that. And then the second part is just, what are you seeing with MGAs today? Are they still proliferating? Are they still very competitive? And I'll stop there. That was a lot of questions. Sorry for that. The two are intertwined.

It might take a while to answer, but those are excellent questions.

I'll start on the property side, and I'll start on the reinsurance side. I think my view is that the market is more disciplined. So I think we've seen red decrease. you know, but from, uh, from peak, you know, peak of the, of the market. So I think the market remain attractive. We haven't seen any really actors, you know, behaving in a totally irrational way. The new guys are coming, but they're small. And, and so I think pretty women, very optimistic about, you know, the, the, the, the, the property cat and the way, you know, the industry behaves in general on, on, on, on that aspect. If you move to the CAD, the property in general, and especially the ENS property and the North American ENS properties, I think there you have a tale of two markets. I think you have the middle market, more admitted retail, where the convective storm and some of the... you know, recent cat element, I would say it would include the wildfire to a certain extent, keep putting pressure on the companies and they have to keep on getting rates to make sure that they cover their cat load, which has gone up in the last few years. And then you have the more the ENS, you know, cat, coastal, you know, and maybe earthquake-driven risk, where you know, that's where the MGAs play a bigger role. So I think the market has responded, you know, to my surprise, very quickly giving up, you know, double-digit rate increases. You know, we went through IN and everybody was surprised. Big limit was really something that people, you know, didn't like and took a ton of losses. So I think the market became... you know, in 2023, much more disciplined and cut limits, which really pushed, you know, when people, when the capacity withdraw, you know, that's where you see, you know, rates going up. So we got a huge upswing, re-underwriting, terms and conditions. And I think a year or a year and a half later, I think we've seen MGS, which their capacity had been curtailed, coming back with, you know, much bigger limits. And, uh, You know, if you think of a typical risk, let's say a $200 million risk where, you know, you needed probably 20 markets or more to complete, you know, and let's say us was doing the first 10 or was doing the 10x10, and then an MGA come in and they do 40, you know, it creates a complete... completes a run for the hill in terms of, if you, let's say, ask for 10x10, and then MGA, the MGA had $10 million capacity, and then, oh, and now they ask $40 million. So what do we do? We run for the hill, and we're trying to reposition of $10 million or, you know, elsewhere in the program, and that creates, you know, the huge pressure on the rates that we've seen. And I think capacity of MGS have gone up this year. So I think they play a big role, my view, in how quickly the market turned to be much more competitive. That's what I see. And same thing on casualty? So on casualty, there's less MGS. You know, I think on casualty, I think what you've seen is And to go back to property, I think when you see markets like us increasing capacity, maybe we increase capacity for 10 to 15. We don't go from 10 to 40. So if you go on the casualty side of the house now, whether it's ENS or You've seen the same thing. You've seen, you know, response to typical losses is reduction of limit. You know, you want prices to be applied to multiple risk of business to create the diversification and the lower number works better. So I think that's what we've seen. And the reduction of the capacity and the usual limits from 50s to 25s and to 15s have created this opportunity, especially on the excess side for rates to go up. I think we haven't seen, you know, a ton of people. In fact, we're seeing people still reducing limits. So this tells me that, you know, the runway to a more competitive marketplace is going to be longer.

Got it.

Thank you.

Thank you. The next question comes from David Motamedin at Evercore ISI. Please go ahead.

Hey, good morning. I had a question on the $147 million of structured deals that were non-renewed. Just so I'm thinking about it correctly, were there any other chunkier quarters in 2024 that we should think about where there were chunky structured deals that might not renew as we go through the rest of 2025?

I mean, there's always some chunky books or deals that we write throughout the year. I mean, what we don't know is whether they'll reappear or they may renew at the same thing, at the same level, same kind of structure for another year. So hard to know what the impact may or may not be for the rest of the year. Again, we're just trying to give you a bit of additional information on how the premium is, why it's going up or down. Sometimes it works in our favor in the sense that, yes, we write new deals that are significant and improve or increase the growth or the reported growth, but In this case, it was different. So, you know, these are, I'd say, though, they're on the larger side. I mean, it's unusual that we don't have that many deals that have that much premium associated with them.

Yep, got it. Okay, thanks. And thanks for that color. And then on the insurance underlying loss ratio, I think last quarter you spoke about it running at around the 58 level going forward. Um, it, it obviously came in nicely below that this quarter. Um, I'm wondering, um, you know, was there anything that drove that? It sounded like, you know, you split it out between, um, the, you know, legacy arch and MCE. Um, was there more improvement on the MCE side? Um, is that something we can expect to continue? So maybe some, some color around that would be helpful.

Yeah. Hard to say. I think, uh, you know, I, I'd say, um, you know, You know, the quarterly numbers matter, but we don't overly put too much weight on them. I'd say we want to make sure we have a longer-term view of what the underlying profitability of the book is. So I would not factor in or expect any significant movements up or down, let's say, for either the MCE or the legacy business. And as you know, in the last year, we had the Baltimore Bridge, which impacted the loss ratio upward. We didn't have that this quarter. So there's always going to be the random element of a couple of large claims here and there that may, you know, that have an impact ultimately on the quarterly loss ratio. So big picture, you know, we call it a fairly stable environment. And, you know, we always expect a little bit of volatility from quarter to quarter, depending on what happens.

Understood. Thank you. Yep.

Thank you. The next question comes from Alex Scott at Barclays. Please go ahead.

Hi. Good morning. I thought I'd see if you could provide a little more commentary on what you're seeing in the property category insurance market. I guess specifically, you know, what's your view of the impact of ILS? You know, is the pricing pressure more at the top end of the tower, you know, Any commentary on sort of the way it's affecting these towers and where you play in them? Thanks.

Yes, so what we've seen and what seems to continue to happen is what you described. More pressure at the top. We've seen the cat bond market being repriced to lower margin. So I think that put pressure also to the layer below the cat bond market. And obviously, you know, there hasn't been any losses on those layers where at the bottom of the program between, you know, the California wildfire on the nationwide account and some of the, you know, storms that we've seen, we have had losses. I think, you know, the more, I would say, the place where price decrease seems to be the focusing is really at the top of the program. So I think we You know, Florida is going to be more complicated because I think, again, there's not that much supply, you know, in the marketplace. So I would expect it to maybe not be as strong as maybe in the northeast region where, you know, you haven't had, you know, a loss, you know, in any of the top layers or middle to top layers for a long time. And people, you know, people see that. So I think... But yes, I think what you described is we expect it to, if something is going to happen, and my view is that's what's going to happen, is probably more pressure at the top of the program and maybe less moderate pressure at the bottom.

That's helpful. Next one on capital management. I mean, you guys have very strong capitalization and growth slowing a little bit, just given the environment. how do you think about priorities there and how quickly you might ramp up capital return if you don't get the opportunity to grow in the mid-year?

Yeah, I mean, it's something we look at constantly. It's part of the same framework. We've always had no question that if growth moderates, which it's starting to, and we still have solid earnings coming through, we'll probably be in a position where we accumulate a bit more excess capital and we'll probably be looking to return most of it back to our shareholders. So there could be some small M&A, there could be some other things that come our way, but at a high level, you could certainly, I think it's reasonable for us to think that we'd be returning a significant amount of capital as we move forward. You know, we had our special dividend late last year. We obviously like share buybacks a lot. And given the, you know, if the pricing and the metrics work for us, we're happy to do that. Thank you.

Yep.

Thank you. The next question comes from Michael at Autonomous Research. Please go ahead.

Hey, good morning. In reinsurance, I think you mentioned a couple of times of primary companies retaining more risk. Just hoping you could provide a little more color on what you're seeing from primaries and maybe where that's most pronounced.

I think it's most pronounced in the other property where we see it, you know, some of the other lines of business, like maybe energy and where, you know, results have been good, you know, seeing commissions have good, but companies feel more comfortable with their results. So that's a normal trend that you see as you go through the hard market and you go through the Ingrid Clark is that people tend to retain more of the risk. They bought their insurance because you know, they either wanted the volatility, you know, and they were a portion of the business, they were unsure of the performance. As they have re-underwritten their book, you know, it's not unusual for people to feel more comfortable. I know at Arch Insurance, that's what we do. When we are more comfortable with a risk, we definitely buy more insurance. So we move the reinsurance that we would buy to an excess of loss, you know, where we retain more of the premium. So I think we haven't seen a ton of... going through excessive loss, but we've definitely seen companies as they feel more comfortable with the risk or feel better about their financial situation, retaining more of the risk. And certainly on the structure, if you relate it to the structure, on the structure side, structure deals are usually capital relief deals. So I think those deals last as long as the company needs the surplus relief. If you go in a situation where they don't need the surplus relief anymore, then the deal goes away.

not think so helpful. And I think in mortgage, prepared remarks touched on headwinds of origination. Can you maybe just talk about what behavior you're seeing in that business? And are you seeing any potential leading indicators of recessionary activity at this point?

Too early. I mean, really too early. I mean, we can speculate. We do the work. We certainly have a view that, yeah, I mean, if recession, we have a severe recession and that impacts you know, unemployment and, uh, you know, and home prices go down a little bit, you know, that, that may have an impact on the performance of the book, but we keep going back to the strong fundamentals, the high credit quality of the borrowers, home prices are, are, you know, there, there's a lot of equity that's been built up by the homeowners and their homes. So it's a, it's a vastly different situation than what we had back in 2008. So we're, um, You know, not to say that we don't worry about it, because we do, but we're a lot more comfortable with our position. And, you know, for a stress scenario to generate or create significant hardship on ARCH would take, it would have to be very, very severe. So we're, you know, at this point, you know, we're in a, we think in a very good place. Thanks so much.

Thank you. The next question comes from Josh at Bank of America. Please go ahead.

Oh, thank you for taking my question. Good morning, everybody. Back in the fourth quarter, you paid a big special dividend. You bought back a little stock. You bought back more stock this quarter. I tend to find it difficult to parse paying special dividends and buying back stock at the same time. Either the return on the stock is attractive or you need to give money back to shareholders promptly because it's not so attractive. A couple of things there. One, can you talk a little bit about your philosophy, which is about three-year-ahead book value? But I've done a little bit of the math, and if the three-year-ahead book value rule of thumb applies, the market is very much underestimating your earnings power for the next couple of years. Can you talk about the philosophy of buybacks versus dividends and what that means for this year and what you think about the attractiveness of the stock at this point?

Well, we like the stock, that's for sure. But I mean, the biggest obstacle, Josh, is truly the level of the speed at which you can execute share buybacks. You know, we have limits on daily trading volume, et cetera. So the main reason, if you put aside, even if the price was right, and you say, well, it's really attractive to buy at a certain level, the advantage of a dividend is you can execute a much bigger return of capital, I mean, instantly versus over a long period of time. So for us to buy back $1.9 billion of stock at the rate at which we can actually do it because of the restrictions we have would take a long time, at which point we'd accumulate more excess capital and you never catch up. So that is, I think, important to realize that there's only so much we can do with shared buybacks. You know, when you get into what's the three-year payback, yeah, three years is a good metric for us that we follow. Do we have a different view of what the book value might be out in three years out than you do? Maybe, you know, and we take a hard look at what we know about our business. But, you know, we're still within that roughly that three-year payback period. And And, you know, we still think there's a lot of good runway for us to keep growing book value at a good clip for the next little while. So that gives us a lot of comfort that buying back stock at this price is a good way to return capital to shareholders.

If you started now, do you think you could execute $2 billion in buyback before year end and preclude the need for a special dividend?

It would be hard. It would be hard. I mean, there's ways you can kind of create some programs, but we like to retain the flexibility. We like to have optionality. So locking yourselves in, and that's true in everything we do. So to lock yourselves in to, you know, making it public that we're buying back a certain amount at a certain price is something we try not to do. We like to be, you know, opportunistic. And, you know, it's something that we, again, it's constantly something we, you know, we look at and try to optimize as best we can.

Well, thanks for being transparent about the behind the curtain, how the sauce is made. Happy to do it. Thanks. Talk later.

Thank you. The next question comes from Andrew Anderson at Jefferies. Please go ahead.

Hey, good morning. Just on the income from operating affiliates, I think it was $17 million in the quarter. It was down a bit year over year. I think that's Summers and CoFace. Can you maybe just talk about the moving pieces there and perhaps how you're thinking about full year?

Yeah, CoFace has been very, very good. So it's been a great story for us. We're extremely happy with it. There could be some pressure with trade credit going forward, but that's, again, something we're keeping an eye on. We don't have visibility or a ton of clarity on it. So really, the drop in income from operating affiliates was mostly, almost exclusively, due to the summers. And let's remember that summers is effectively a sidecar to archery. So you have wildfires this quarter. They impact us, and they impacted summers as well. There's a little bit of a kind of a a one-off on the Bermuda tax that, you know, was, was reflected in, in the summers, uh, financials Q1 of 2024, that maybe makes the, the drop more significant than you would think otherwise. But, um, as you look for the run rate, you know, you know, I'd say this quarter is a bit lower than what we normally think, uh, for the, you know, operating affiliates in general. And, um, You know, I think we're still looking, you know, when you think about our returns, we think plus or minus, like we're earning well and to follow that 10% range on these investments, if not more. And, you know, let's just say we have over a billion dollars in assets there. So hopefully you can do the math from there. Thanks.

That's helpful. And then just insurance expense ratio. I mean, there was improvement in OPEX. But is full year 24 still a good way to think about the rest of the year for the OPEX, or is there still some headcount costs coming on?

I mean, it's a good place. We are no question. I mean, as we think about, you know, our growth and how we need to manage our expense base, you know, we are being very thoughtful and diligent about, you know, do we need to replace people that don't? resigned, retirement, etc. So we, you know, I think we're going to get some benefits from the MC acquisition, like scale brings a little bit of, you know, a bit of leverage, a bit of kind of, we can scale better, but no question that we're trying to hire still on the MC side. We want to staff up with data scientists, and we need a bit more, a few more actuaries, etc., but Big picture, I think we're, you know, we are watching our expenses and that's something that will be a focus as we move forward. Thank you.

Welcome. Thank you. The next question comes from Myers Shields at KPW. Please go ahead.

Great, thanks. I think I have the same question in two contexts. Nicholas started or comments talking about the preference of brokers to work with fewer, bigger insurers, and I'm wondering if you could talk about the volume versus profitability implications of that to companies like ARX.

Yes, I don't think the two are necessarily linked. I think I think in in my view the you know, you know, the best place to talk about this is probably the London market. In the London market, you know, the brokers, because the business comes to London, the main three brokers, you know, control a lot of access to the business we write. So I think it's more of a, you know, supporting them where they need you to be supported and playing the role that you have to play where you can align with their own strategy. And I think they you know, if you think of the way they are organizing the market, having their own facilities, then they need leaders. Without leaders, nothing works. Then they have some follow-up facilities, and then ultimately they have the open market that remains. I think you need to find a a place, you know, you can't service just one. I think if you service just one, you'll be the, so you have to be able to figure out your distribution strategy is a key component of a future success. That's what I'm saying. And I think we spend a ton of time thinking out, you know, how do we align better and where do we bring value to our distributors? And it varies, you know, for the bigger, you know, distributors, it may be one thing. For a smaller distributor, a mid-market distributor, where they rely better on the expertise of art, it may be something different. So I think you have to really be successful going forward. You really have to question the value you bring in the transaction. You can't just underwrite business. So the two components is that you have to do the underwriting the cycle thoughtfully, but you have also to figure out what's your place in the food chain and and what value you bring. So that's really the, so we, we, we, we've done a lot of work and we're still thinking of this in a way that's less, it's less about us, but it's, it's about the, ultimately the customers. Without customers, we don't exist. So we need to, we need to provide value to the ultimate customers. That's how, and that dynamic is, is, is, maybe it's playing out in London, it's playing out in North America. You can't just be, you know, sitting at your box in Lloyd's and waiting for the business to come to you and, and, because you're not even sure that the business you're going to see is the one you want to write. That's the issue. I think, you know, if there is five people in front of you that are picking up the good business, now you're picking up from a part that, by definition, is not so good. I think you have to work hard, and size matters, and relationship matters, and being able you can see the business you're really targeting. And that's where distribution strategy matters.

Okay, perfect. That's very helpful. Second, on reinsurance, when you have sedents retaining more business, how do you deal with the risk of adverse selection when the sedent kind of decides, a more educated sedent because of the experience, decides what they're going to keep and what they're going to reinsure?

A lot of the business is about adverse selection. The question is that insight into the business to understand why people are buying and does it make sense and do you, can you, you know, they have a need, you know, and you have to, we spend a lot of time and creating insight to figure out there are needs that we are willing to insure or reinsure and there are things that we are unwilling to do because it's this, you know, I said before, I think we're looking for risk where we have upside that outweigh the downside. So that's one way to look at it. When you have only downside, you know, you usually don't want to do those risks. And so I think that there is always that risk. Anti-selection, it's a very dynamic market. And anti-selection is everywhere. So I think you have to factor that in into your selection, in my view. So I think it's, yes, you can't, you know, if you're on the right risk, you know, a lot of what you get told as an underwriter is more like a fairy tale. So, you know, if you like fairy tales, you're not going to end up in a very successful underwriting shop. So I think, you know, you have to, that's part of the job. The job is to have the insight to be able to ask the right questions and get to the answer and and build a relationship with the clients where they come to you for legitimate, you know, for legitimate concern that they have and where you can really provide value by either insuring or insuring them.

Okay, understood. Thank you so much.

But you can't, you know, we have both sides of the house. I mean, on the insurance side, you know, you... you know, yeah, yeah. Those people that, you know, we try to tell our guys to do the right thing. And, you know, if the risk is good, try to retain it, to have conviction about. So if you, you know, you for a while, you're not sure. So you buy your insurance on a quarter share basis. And ultimately you, over time, you build conviction that you're underwriting guidelines work. Your pricing is okay. At that point, you don't need the insurance. So you, you retain it net. And that there's nothing wrong about that. My view is that we should, uh, You know, that's the role the reinsurers play.

Thank you. I'm not showing any further questions. Would you like to proceed with any further remarks?

No, I think thank you. And I think another, I think, good quarter for us in a little bit more difficult or more competitive market. But I think we remain bullish about, as I said in my presentation, in my remarks to stand out. So I think we'll see you guys in the next quarter.

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