Arch Capital Group Ltd.

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Good day, ladies and gentlemen, and welcome to the 3Q 2025 Arch Capital Earnings Conference Call. At this time, all participants are in the 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 yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time, 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 reconciliation to GAAP for non-GAAP financial measures can be found in the company's current report on Form 8K furnished to the SEC yesterday. It contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC website at www.sec.gov. And I would like to introduce your host for today's conference, Mr. Nicolas Papadopoulos and Mr. François Morin. Sirs, you may begin.

Good morning and welcome to ARCH's third quarter earnings call. We delivered record results in the quarter with over $1 billion of after-tax operating income and over $1.3 billion of net income, both up 37 percent year-over-year. After-tax operating earnings per share of $2.77, another record, represented an 18.5 percent annualized operating return on average common equity. These results reinforce the strengths of our diversified platform, which enables our underwriters to pursue opportunities and deploy capital across the enterprise. Meaningful contributions from all three segments, combined with solid investment returns, push year-to-date book value per share growth to 17.3%. Our quarterly consolidated combined ratio of 79.8% reflects excellent underwriting and low-cat activity in the quarter. Big picture of nine months combined ratio of 83.6%, which include the impact of California wildfires and severe convective storms, highlight the strong underwriting performance across our businesses. Now some comments about market conditions. As you have heard on other calls, competition is generally increasing. As SACO managers, we lean into the strengths of our brand, including underwriting discipline and using risk-based pricing tools to generate profitable business. We deploy capital into businesses we believe will generate superior risk-adjusted returns. However, given relatively weaker market pricing and an attractive entry point for our stock, we repurchase $732 million of shares in the quarter. Critically, our strong balance sheet and strong capital-generating capabilities permit us to both invest in our business and return capital to investors. Our objective is clear throughout the cycle to maximize return for our shareholders over the long term. Importantly, I want to emphasize that we are actively looking to deploy as much capital as possible towards attractive underwriting opportunities. Our playbook remains consistent. allocate capital to attractive opportunities that meet our risk-adjusted target returns, pursue profitable growth while prioritizing renewals that meet our return thresholds, and take full advantage of our operating flexibility across insurance, reinsurance, and mortgage. Over time, this playbook has been key in enabling us to deliver consistently strong returns without regard to market cycles. I will now provide some color from our reporting segment, starting with our property and casualty insurance group. Underwriting income for the quarter was $129 million, up 8% year-over-year, on nearly $2 billion of net premium return. Our combined ratio was 93.4%, with a current accident share XCAT combined ratio of 91.3%, reflecting the strong underlying margins of our insurance portfolio. A distinguishing strength of our insurance segment is its breadth across specialty lines, areas where our team applied deep knowledge and experience to drive better risk selection. Successfully navigating a transitioning market demands that our underwriters employ the capabilities and experience they have developed to leverage our differentiated offerings and market leadership position as we look to drive profitable returns. When compared to the third quarter last year, we grew net return premium in North America over liability occurrence by 17 percent, supported by growth in middle market and double-digit rate increase in ENS casualty. Net return premium in our North America property and short-tail book increased 15 percent. Growth in middle market and middle property more than offset declines in excess and surplus property. International premium volume was essentially flat. A strategic element of our insurance growth is our middle market business in North America, which was significantly enhanced through the mid-corp and entertainment acquisition last year. As discussed previously, the acquired business provides a significant platform from which we intend to build further scale in the middle market sectors. Importantly, it is already driving growth and yielding tangible returns. At the outset, we set three integration priorities for the acquired business. Roll over the portfolio, remediate less attractive areas, and separate from legacy systems. We have completed the portfolio rollover. Remediation and separation are on target. Even though there is still work to do, we remain excited about this opportunity, which has been well received by our distribution partners. Next to reinsurance, which delivered another strong quarter with a record of $482 million of underwriting income, the 76.1% combined ratio was a significant improvement over last year's CalHeavy third quarter and illustrates our ability to generate attractive underwriting returns. Net premium returns were $1.7 billion, down roughly 11% year-over-year. reflecting current pricing conditions in short-tail and property CAT lines and increased retention by students. The diversity of our reinsurance platform means we aren't overly concentrated in any one line. For example, property CAT, which has been a hot topic of recent industry conferences, represents only 14% of reinsurance total net premium return for the training 12 months ended September 30th. Our diversified reinsurance platform, supported by strong partnership with our broker and ceiling company across multiple lines and geographies, further enhances our ability to navigate a competitive environment. We continue to lack our prospects in most lines of business, and with improving condition in casualty lines, our agility and ability to create opportunities is an advantage for us in this market. Moving to mortgage, which continues to operate exceptionally well, generating $260 million of underwriting income for the quarter. The segment remains on pace to deliver approximately $1 billion of underwriting income for the year and is a steady diversifying contributor to Arches earnings. While mortgage originations remain modest due to affordability challenge, our high-quality in-force portfolio continue to outperform expectations. We are well positioned to support first-time homebuyers when the U.S. housing market eventually expands. The broader mortgage insurance market remains healthy, with disciplined underwriting and stable pricing. Now turning to investments, where strong earnings and cash flow go investable assets to $46.7 billion this quarter, with net investment income of $408 million, a quarterly record for ARCH. We continue to position the portfolio to remain conservative in the current environment with an eye towards generating reliable and sustainable earnings and cash flows for the group. To conclude my opening remarks, I want to emphasize that we manage ARCH with a long-term lens. That was true in the past, it is true today, and it will be true tomorrow. Market cycles span years, not quarters, and in a transitioning environment, Our focus remains on producing superior returns and profitable growth. Our ability to remain successful is rooted in our differentiated customer experience, superior risk-based pricing, and the creativity of our underwriting teams, which are empowered and incentivized to generate profitable business aligned with shareholder value. Today, we are well positioned to outperform in an increasingly competitive market. Our strong capital position gives us the flexibility to invest in the most attractive risk-adjusted opportunities, whether in the business or by returning capital to shareholders. This transitioning market is a moment to lean into our strengths with confidence and clarity. I now turn the call over to Francois before returning to answer your questions.

Thank you, Nicolas, and good morning to all. Last night, we reported our third quarter results with after-tax operating income of $2.77 per share and an annualized net income return on average common equity of 23.8%. Book value per share grew by 5.3% in the quarter. Similar to last quarter, our three business segments delivered excellent underlying results. with an overall ex cap accident year combined ratio of 80.5%, down 40 basis points from last quarter. Our underwriting income included $103 million of favorable prior year development on a pre-tax basis in the third quarter, or 2.4 points on the overall combined ratio. We recognize favorable development across all three of our segments and in many of our lines of business. The most significant improvements were, once again, seen in our short tail lines in our P&C segments and in mortgage due to strong cure activity. Current year catastrophe losses were low at $72 million net of reinsurance and reinstatement premiums in what is typically our most active quarter for catastrophes. The insurance segments net premiums written grew by 7.3% compared to the same quarter one year ago, mostly due to the contribution of the mid-corp and entertainment unit for a full three months this quarter compared to only two months from the same quarter one year ago. The ex-cat accident year loss ratio improved by 10 basis points to 57.5% compared to the same quarter one year ago. And the 220 basis point increase in the acquisition expense ratio is primarily due to the benefit we observed in the third quarter of 2024 from the write-off of deferred acquisition costs for the acquired business at closing under purchase gap. Profit commissions paid for prior accident years also explain some of the increase from the same quarter one year ago by approximately 40 basis points. The reinsurance segment produced its best quarter ever in terms of pre-tax underwriting income at $482 million, a direct reflection of the strong underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity in the quarter. Overall, net written premium was down by approximately 10.7% from the same quarter one year ago. Of note, approximately 75% of the overall reduction is the result of two large transactions from the third quarter in 2024 in our specialty line of business that did not renew this quarter. The absence of reinstatement premiums also negatively impacted our top line this quarter. Our XCAT accident year combined ratio remains very strong at 76.8%. reflecting the robust level of underwriting margins in our book of business. Once again, our mortgage segment delivered another very strong quarter with underwriting income of $260 million. The improvement from last quarter was primarily due to a lower level of seeded premiums as a result of the tender offers we executed in the second quarter for two Bellamedry securities. There was also a slight benefit due to a higher level of cancellations on CRT transactions. The delinquency rate of our USMI business increased to 2.04%, in line with our expectations due to seasonality in the business. On the investment front, we earned a combined $542 million from net investment income and income from funds accounted using the equity method. or $1.44 per share pre-tax. Net investment income remains an important source of income for us. And with the help of strong positive cash flow from operations, $2.2 billion in the quarter, it should continue to grow in line with the size of our investment portfolio. The allocation of our portfolio remain neutral relative to our targeted benchmark. Income from operating affiliates was strong at $62 million, due especially to a very good quarter at Summers Reef. Our operating effective tax rate on a year-to-date basis stands at 14.7% and reflects the mix of income by tax jurisdiction. It is slightly below the 16% to 18% previously guided range, mostly due to a 1.7% benefit from discrete items. As of October 1, our peak zone natural cap probable maximum loss for a single event, one in 200 year of return level on the net basis remained flat at $1.9 billion and now stands at 8.4% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased 732 million of our shares in the quarter and added $250 million to this number so far in October. On a year-to-date basis, we have repurchased 15.1 million shares, representing 4% of the outstanding number of common shares at the start of the year. As Nicholas mentioned, our balance sheet is stronger than it's ever been, and it remains a significant asset for us as we focus on executing our playbook and leveraging the value of the Arch brand as we move forward in this dynamic market. 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. And if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question and we'll pause for just a moment to allow everybody an opportunity to signal for questions. And your first question will be from Elise Greenspan at Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first question is just on capital. You know, the level of buyback went up in the quarter. So I guess my question is maybe two pronged, you know, just, How do we think about the level of buybacks going forward, just given the strong earnings this year? And then I know last year you guys had gone the route of a pretty substantial special dividend. So is this year the route more of buyback versus a special in terms of capital returns?

Yeah, the last one, I think it's, you know, for us, we think of those as two options, but most likely not going to do both at the same time. So in this current environment where, yes, we certainly see our earnings profile being very strong and we think there's, you know, as we've seen, right, limited opportunities for growth, for us to grow aggressively in the business. So capital return to shareholders will be will remain a focus. And given the stock price, I think share buybacks will be our preferred method going forward, at least for the short term. We'll see how things play out moving forward. But that's obviously something we talk with our board on a regular basis. So I'd say that's where we're at. And again, balance sheet remains very strong. So is there room for us to do more buybacks as we move forward? And I think the answer is is definitely yes and something we'll keep evaluating as we move forward.

And then my second question is just on the insurance premium growth. So we've annualized the mid-corp deal, but there is going to be some impact from non-renewals there and obviously just the overall market, which is softening in spots. How do we think, as you guys think about pricing, the combination of the non-renewals on mid-corp, how do you guys see the premium growth outlook for your insurance book from here?

Yes, good morning, Elise. Yes, on the insurance side, I think we are still very much bullish about the business. I think we like the market we trade in and And we would like to grow and we talk about profitable growth. That's what we're really focusing on. And you have to divide the market in three broad categories. First one being areas where we still see some rate increase, like casualty will be the main one and the middle market business where we think we have the rate increase and I think we have the propensity to grow. Then you have the second segment, which is the one that had witnessed headwinds in the past, which is mostly professional lines, whether it's GNO or cyber. The good news there, I think the rate decrease really moderated on the GNO pretty flat, and on cyber, there's a sign that they are moderating, so there should be less of a headwind going forward. And third, you know, it's really the property, you know, whether it's the large account property and, you know, the ENS property. The good news for us is that we don't write much of the shared and layered property business. And we have a relatively small footprint on the ENS side, which is really under a lot of pressure today. So I think overall, if I look at the outlook for for us and and you know and our positioning in in in the london market as well in fact if i look at the outlook i would expect you know us to have the ability of the insurance to grow better than the market we we we play into that's helpful and then just one last one there's a hurricane um you know out there right now with the potential to impact the caribbean i don't think there is a lot of insurance or even reinsurance exposure there but

Do you guys just have some high-level thoughts there just on potential exposure?

I think it's just too early to tell. I think for sure it's going to be a – it looks like a big event potentially for Jamaica. And whether it's big enough to have repercussions that goes – affect the Caribbean overall, too early to tell.

Okay, thank you. Just quickly, I mean, obviously, depending where it hits, like some of the resorts might be the insured values that might be more, you know, that we might participate on, just not knowing at this point where, again, where things may land. But I think that's in terms of where the exposures are and what could be impacted, that would be the focus area, I would say.

Thank you.

You're welcome.

Next question will be from Andrew Kligerman at TD Cowan. Please go ahead.

Hey, good morning. So maybe starting with, you just touched on growth and insurance with a lease, maybe shifting over to reinsurance. You kind of kicked off, I remember in the first quarter you thought that, I think you did Adjusted net written premium growth of six or 7%. You kind of repeated that and reinsurance in the second quarter and then this quarter you talked about the two deals and the reinstatement premium is kind of. Creating you know a bit of noise so so. The part A of it is what would the normalized growth have been in the absence of those of those items and the part B is. You know, how are you thinking about growth going forward in that segment?

Well, I'll take the first part, and maybe Nicholas can chime in on the second. I mean, the normalized growth absent call at these kind of one-offs are, again, and they happen, right? We've talked about it in the past. It's, you know, reinsurance can be lumpy. There's deals that happen. They don't happen. The timing of it is not always predictable. But, yeah, the fact that, you know, with a little bit of the headwinds that we're seeing, again, coming from a very high bar on the property, property cap, 7-1 renewals, you know, I'd say our growth in the quarter might have been around, like, call it, you know, a decrease of 3% to 4%, not the 10% that we, you know, that is, you know, was reported in the quarter.

Yeah, thank you, Francois. And on the outlook for growth on the reinsurance side, so I think think of reinsurance pretty much, you know, the same outlook as insurance. I think you have red pressure on the short-tail lines, but, you know, I think you're seeing a red increase in dislocation on the casualty lines that could provide opportunity. So I think I would say a similar picture But for, I think, a big headwind is like a lot of our city companies, you know, like the business, like we do. We like the insurance business. So, you know, after a few years, you know, there's less fear in the marketplace. People feel better about their balance sheets. So what we're seeing is companies retaining more, which creates a significant headwind for the insurance group. I mean, by doing so, they... They either return the business or move very often to move more to an excess of those positions that present additional opportunities for us. And I would say that the margin on the excess of loss is usually better than the margin on the quota share. So I think we may see a different makeup of the margin going forward. I see. I see. Thank you for that.

And then maybe shifting. back to insurance as a specialty writer, you know, and especially with, you know, pressure in E&S property these days, like, you know, just more from the industry perspective, you know, and you touched on your view of how ARCH is going to do, but maybe again a little bit, but how do you see E&S premium for the industry playing out over the next few years? I mean, not only, you know, we've seen such tremendous growth over the last few years, but is it possible that E&S premium as an industry starts to decline over the next few years? So outlook and then just arch in E&S over the near intermediate term as well.

So I think the outlook of the industry, I think, is a tale of two stories. I think on the On the casualty side, I think, you know, because of what's happening in the market and because of the issues people are having with the prior years, and I think my view is that the trend of more of the business, you know, moving to the excess and surplus side where you have freedom of rate and forms and where you can add the exclusion that take a much longer time to be able to do on the admitted side. That will continue. On the shorter line, you know, we could see some of the, you know, shared in-layer business and, you know, cat-exposed business, you know, going back to the admitted market as they've done historically. So I think Hard to predict, but I think the fundamental shift, which has been driven by casualty, that I expect to continue.

I see. And then, Arch, how do you see yourselves? Do you see gaining share on the short tail and the casualty, respectively?

I mean, the short tail will be a challenge based on what we see in terms of the pricing. I think we are more optimistic on the casualty side, where you know, we've been underweight, you know, in the difficult years. And I think we're, you know, I think our last pick has been holding pretty well. So that gives us, you know, confidence in how we price the business forward. So I think that as rates continues to improve, I think that gives us an opportunity certainly to do more at a time maybe where our competitors are are still kind of caught up into, you know, looking at the right things they did, you know, in the earlier years. Thank you for the insight.

You're welcome. Next question will be from Josh Shanker at Bank of America. Please go ahead, Josh.

Yeah, I don't want to pigeonhole you too much, but obviously did a lot of buybacks in 3Q. Some companies don't do buybacks in 3Q because they're worried about the outcome of the hurricane season. But then trying to gauge your appetite for 4Q and maybe 1Q, when did you start buying back? And how much, you know, were you buying the whole quarter or really were you able to do $732 million within about a month ending up a quarter?

Yeah, I mean it's pretty consistent throughout the quarter. I think there was, you know, a little bit more in September and that's kind of, as I mentioned, I think we've been active in October as well. You know, I think again that it's, I think I touched on it on the last call. I think no question that, you know, some years ago we would have said we would not buy during the hurricane season. You know, I think ARCH is different today than it was back then. I think ARCH is much more diversified, much stronger, less, you know, less exposed on our percentage of equity from a massive or a cap, you know, PML, even at the one and 250 or below. So for all these reasons, we felt, we do feel and felt a lot more comfortable buying back during the wind season. And, you know, I think, as I said earlier, I think we're going to, keep pursuing that opportunity as we move forward.

And you're not worried in the past, you said part of the reason to do a special dividend was because you just don't think you can return as much capital as you desire to through the buyback of the limitations as you look out into the end of this quarter and beyond. Do you think you can satisfy every bit of capital return you need through repurchases?

So it's a daily thing we look at daily. I certainly think we can do more capital return. I mean, we don't set a target for ourselves, right? So I think it's an ongoing process. But, you know, there's a lot of liquidity in the stock right now. And, you know, we're able to buy back stock. We think we proceed to be a very attractive price. And, you know, we'll do as much as we can, how much we think is right. And then we'll see where we're at. Thank you very much. You're welcome.

Next question will be from Tracy Benjiti at Wolf Research. Please go ahead, Tracy.

Thank you. Good morning. This is a bit belated that it's been a while since I've been on your call. Congrats on your S&P upgrade back in June. Since capital is so topical, my question is, while it's great that you have a AA minus rating, it's a new category. You now have to hold AAA capital. Back when you were rated A+, you only had to hold AA capital. And I realize a lot of that was just model methodology driven. But my question is, how important is it to you to stay in this new rating category when you're thinking about your ability to deploy capital?

I mean, is it critical? It's not, but it's certainly an advantage, and we've seen the benefits of that already in some places, particularly in Europe. So no question that the new higher rating, I think, has been well-received, and we're able to benefit from that. But you're right. I mean, it comes at, you know, a certain cost. I'd say, though, that the S&P capital model is only one of the things we look at. We have our own internal view of capital. We have our – I mean, there's other rating agencies that we – you know, that we look at as well. So all in, I think our capital position remains very strong. It was always strong. And again, we, you know, we try to optimize within all those constraints from all the rating agencies and regulators that look at us. But, you know, the AAA level of capital that you mentioned is really not, you know, not something that's not really new to us because we were, I'd say, already at that level. So that's kind of, you know, it wasn't an additional kind of burden or initial step we had to meet.

I think, you know, we don't only manage one point. I mean, usually we look at AA, AAA, so, you know, and for a while, I think we were a little bit on the penalty box because of the MI. So I think, you know, now I think it's more, I think it changed completely our capital structure. And also, I think it's been helpful on the some of the MI, CRT, and SRT where, you know, the buyer are extremely sensitive to the rating of those layers, and they actually pay a differentiated price for better ratings. And as Francois said, I think in Europe, you know, as we lean to, especially on the reinsurance side, but also on the insurance side to, you know, our strength is really casualty professional lines. And as we lean into those markets, I think having a double A minus rating is an advantage.

OK. So do you view it just opportunistically, or could you see a scenario where you could reduce capital and live back to the A plus rating?

It's obvious. I mean, it's a trade-off we constantly look at, right? I mean, how much capital do we need to hold on the margin to get the incremental rating? Right now, we already have the capital. We're in a very strong capital position. But down the road, if conditions change, the question you ask is something that we've asked ourselves many times in the past, like how much capital do we, is it really worth it to us to hold that incremental level of capital. But right now, given our capital position, and again, given the strength of our earnings, the earnings profile that where we generate internally the capital on a regular basis, I think we're in a very, very good position.

Okay. My next question is, you said you like insurance and you're bullish on business, and you mentioned casualty rate increases. Casualty can mean a lot of things. So once I strip out some of the casualty lines, like you mentioned professional lines, what you're left with in terms of attractive pricing is GL, commercial auto, and excess liability, which includes auto. So I'm wondering where you're seeing the opportunities. Is it more auto orientated? Or if you could just let me know the different casualty lines that are attractive.

Yes, I think one of the opportunities on the ENS casualty side, which would be excess, you know, excess liability. So that would include some auto, but usually, you know, we don't focus on the auto, you know, on the ENS side. And then we have other, you know, we have other franchise, like sensitive business, like national accounts or constructions, which are casualty lead lines with heavy components of workers' comp, you know, general liability and a lesser amount of auto. So those are the places where we think we have the ability to grow.

Thank you.

Next question will be from Ryan Tunis at Kantor. Please go ahead, Ryan.

Hey, thanks. Good morning, good afternoon. I just wanted to go back. I thought it was an interesting comment that on the reinsurance side, you're seeing students proactively retain more. And I guess I'm curious when I look at like the facultative property decline of 17% this quarter, How much of that is, I don't know, you guys proactively walking away or decline in exposure as opposed to rate? Because I was thinking it was kind of more rate-driven, but that comment made me think it might be more volume-based.

No, I don't think we are cutting back. I think at this stage, I think we... on the other property, which I think, you know, it should clarify other property line of business. I think, you know, the main factors there is a couple of our clients on the ENS side of the business and on the, you know, we're getting more of the business at this stage. So that's really... We would like to do more. And also, I think, let's forget, the rates are also going down. So some of our students are also revising some of their seeded premium to the downside. And so those are the two components. Them, their ability to wanting to retain more of the business, and also they're re-forecasting their growth downwards, which impacts our insurance volume.

Just to confirm, I mean, it's no question that the rate environment is down in property. There's also a drop in exposure, but just to be clear, that drop in exposure is typically not our decision, right? It's the student's decision. There are some situations where, again, they decide to keep it net or they They use a different structure, but we still like the product. We still like the line. Most of what we do, we like a lot. And any reduction in exposure that you see that we experience is generally at this time more because the scenes choose to do something different, not because we decide to walk away.

Got it. And then just to follow up, you guys talking about the transitioning market. I think a lot of times we just want to focus on pricing, but I'm curious if, you know, what type of lines are, it might be in primary because there's business going back to admitted and just some of the more bad stuff stays ENS or I get, you know, facultative, I guess it could be a seed and just choosing to, I guess, just continue to seed the stuff where they feel like there's an arbitrage, but like other pockets you point out that are kind of particularly challenging to underwrite in this type of market where you really got to kind of cross your T's and dot your I's.

I think it's a competitive market. I would say a lot of the market today, you get a lot of anti-selections. We develop a lot of data analytics tools to really segment our portfolios and provide underwriters some really granular information that you know, which price for which risk, which limit for which risk. I think underwriting the market, we are bullish because we have those tools. I think if you don't have the tools, I would be a lot less bullish about our ability to write profitable business going forward.

Did you have further questions, Ryan? I'm good. Thanks, guys.

Appreciate it.

Next question will be from Mike Zaremski at BMO. Please go ahead, Mike.

Okay, great. Thanks. Pivoting to the mortgage side of the business, I feel like when we were to quiz most people and ask them what the historical five, six, seven year loss ratio was, most people wouldn't guess it was zero. And obviously, there was unique circumstances in the past five-ish years. But just curious, and we know it defeats our family business, but curious if your views on a normalized loss ratio is different from what was asked, if we think about kind of the current cycle and the next cycle coming.

Well, not knowing what the next cycle will look like, I think we'd be speculating. I think, you know, we have talked about a normalized most ratio in the 20% range, you know, across the cycle. You know, I think, you know, we have said and we believe strongly that home prices are the key driver of what, you know, how performance, what the performance will look like, you know, for the mortgage book. And so far, I mean, home prices have remained very strong. You know, there's been some pockets, there's been some home prices decline, some home price declines in a few areas, but across the nation, across the U.S., you can see that home prices remain very strong. So that, I think, explains in large part, I'd say, the outperformance of the mortgage business relative to what we would have thought over, you know, an extended period. that remain the same going forward uh again there's a lot of macro factors that will come into play on that but as long as you know and we do have you know strong beliefs that you know based on lack of inventory and kind of you know there's you know there's a lack of housing in the us i think will support home prices for you know the foreseeable future and on that basis we'd like to think that the performance will remain strong now does it Does it inch up a little bit over time? Maybe a little because it feels like it's been really, really good for a long, long time. But for the time being, again, we've said it and we still are very, very, very bullish about the mortgage business because it's been truly a terrific business for us. Got it understood.

And the underwriting remains excellent. I think if you look at the FICO's distribution, I think they're getting better. So that will drive better outcome.

Got it. Moving to capital management, clearly you signaled buybacks are high on the list. Maybe you can just give us an update. Has anything changed quarter-by-quarter on maybe inorganic opportunities? You know, is U.S. small commercial still something that's on the retail small commercial still high up on the wish list? Thanks.

Yeah, the wish list is long. I mean, we, you know, but by the same token, we have a lot that we are working on and can work on. Middle market is obviously a big focus for us. We've talked about other areas, you know, that we'd like to grow in. But, you know, as you know, these M&A opportunities, you know, they don't happen that often. They take a while to materialize. And so, you know, we're not going to, you know, hold a ton of excess capital just in the, you know, on the potential that we might do an M&A transaction. I mean, our leverage ratio is it's maybe the lowest it's ever been. So we've got a lot of flexibility. The balance sheet is strong. We got some excess capital. So we got a lot of flexibility in our ability to execute on that, I think is really good. So if there's other things that we can get our hands on that would make us better, we'll be happy to do that. But in the meantime, there's a lot that we already have that we can generate good earnings on as well.

Got it. And maybe just thinking one last one, since you guys provide excellent market commentary. And Nicholas, you provided a good view of how to think about the E&S marketplace going forward. Do you all have a view on what has also been the kind of exponential growth of the MGA marketplace and kind of how it's been impacting ARCH or maybe the industry? And do you view the MGA's marketplace growth to continue to grow much faster than the the rest of the market. Thanks.

Interesting subject. I'm personally bearish on the MGA. I think historically strong growth in the MGA, except for a few exceptions, didn't turn out to be Didn't turn out to be good. You know, I think the. The the the lack of incentive alignment, the you know the delay in the information to the you know to the to the insurance carrier or the reinsurers you know. And I'm not bullish on that on that model, so I think you know it's been. It's been the flavor of the of the months and the last few years and. I'm still a little bit questioning what the outcome is going to be.

Thank you.

Next question will be from David Motamedin at Evercore ISI. Please go ahead, David.

Hey, thanks. Good morning. Just had a question. obviously still very good reserve releases. Just focusing in on insurance and reinsurance specifically, could you talk about the movement between long-tail and short-tail lines between those two? Any sort of things to point out on that front?

I'd say nothing unusual. Very similar to prior quarters. There is a little bit of adverse on casualty. I mean, nothing that stands out. It's a couple of, you know, it could be one accident a year within one business unit, the one line of business. So small adverse on casualty, which I don't think is surprising, at least to us. But when we look at the overall picture around kind of where, you know, how the reserves are performing or quarterly actual versus expected, which is still showing favorable and meaning, you know, lower than expected, I think gives us a lot of comfort there. So, you know, we're, you know, reacting to the data. And in some places, there's no question, there's trends that are showing up that we're addressing. But big picture, you know, the short tail stuff did extremely well. as it has for quite some time, and we'll keep evaluating it every quarter.

Got it. Thanks for that. And then just taking a step back, the mixed shift to casualty lines in both insurance and reinsurance, at least if I look at it on an earned basis, that definitely is up a bit year over year. hasn't really increased much, I guess, over the past few quarters. Is that having any bit of an impact at all on the underlying loss ratios in either segment? And how should we think about that going forward?

So, I mean, at some point you will, but because I think the loss peak on the casualty line is a bit higher than the last peak on the shorter lines. But I think the shift, you know, the mix hasn't really changed fundamentally at this stage, I think. So I think down the road, you know, I think it might.

Great. Thank you.

Next question will be from Rob Cox at Goldman Sachs. Please go ahead, Rob.

Hey, thanks. Yeah, just curious as you start to renew the MCE book, anything interesting you're seeing either on the delegated or the non delegated side? And you know how far are we through the non renewals on the programs book?

So so I think we you know what what we've seen so far and I think we've renewed. You know the entire book has been I think we I'm personally very pleased with the what we've seen, what we've seen so far, and I think the stickiness of the business, you know the. You know the the ability to to provide additional lines of business or distribution partners to be more relevant to them. You know the the the property expected expertise that in the. you know, in the admitted property business that we really didn't have, that we acquire. All those, you know, assumptions that we had made at the time of the purchase turned out to be true. So I'm actually very pleased with the, you know, the strategic decision we made to go for the acquisition. On the delegated side, the MGA I think we knew you know we didn't do the deal because of the uh the MGA portfolio that was coming with the acquisition so I think we we started the remediation and and there I think we it's pretty much what we expected so and I think we it it takes more time than you think because all these MGS have noticed period so I think we will see the impact really in 2026 of the of the non-renewal uh of this period that we've spent a number of those MGAs this year.

Got it. Thank you. And then just wanted to follow up on credit. I mean, just given the mortgage book and the investment in CoFACE and I think a relatively larger private credit book that you guys have, Any thoughts on the credit environment and anywhere you're leaning into or out of, just given some of the noise in private credit?

Yeah, I think you've got to be careful, I'd say, in what we're looking at. No question that certainly maybe the headlines around subprime auto loans not performing well, I think that's a totally different type of customer than what our borrowers would be on the USMI front. So, I think that, you know, and we're not seeing any of the same kind of results and that, you know, I guess the proof is what we reported, you know, this quarter. So, again, very specific around kind of, you know, the type of borrowers in the US, the trade credit world, no question that there's been a couple of insolvencies that, you know, have made the headlines that, you know, we, you know, COFAS, we don't know, but may be exposed. And that's, you know, for them to work on. But there's no question that, you know, when, you know, these types of events happen, people will start to think a bit harder about dependencies and the credit and lines of credit they extend, et cetera. But that's not unusual. So at this point, we're very, very comfortable with the exposure we have, we understand it well. And, you know, obviously we look and monitor all the external data and the trends that are happening. But so far, there's nothing really that stands out that we think we have to adjust our thinking or strategy.

And more specifically on COFAS, I think this is short-term credit. So, you know, the game here of the underwriting is really as you... as you are aware of, weaker credit is really to, over time, cut your line to that particular credit name so that when the inevitable happens, your exposure is much less. I think they played that game really, really well. I don't know about the latest insolvencies, but historically, they've been very good at that.

Thanks for all the color.

Next question will be from Alex Scott at Barclays. Please go ahead, Alex.

Hey, good morning. First one I had was just circling back on Rob's question on the remediation. Could you frame for us at all how much impact that could have on the insurance segment? you know, just thinking through trying to dial in premium growth estimates and knowing how much, you know, some of us missed our reinsurance growth this quarter from not knowing about the transactions. I just want to make sure I'm layering in enough for this lag remediation impact.

Yeah. So specifically on the programs that we acquired, the premium that we've identified and has been, you know, will be non-renewed is roughly $200 million. And, you know, again, as Nicholas said, the notices went out and then there's a notice period and then the MGA has, you know, three to six months to find another carrier. And some are more, I mean, some are more successful in getting a replacement sooner. So some of that may actually start happening in the fourth quarter. I don't have the precise, like, projections of when it's going to hit the top line in each of the, you know, the next few quarters. you know, just to at least give you an idea, like call it $200 million part of a billion and a half to a billion six book, which was the overall MCE premium volume is kind of the impact that we expect to, you know, to see. The flip of that, though, is the middle market business that we you know, really was attractive to us was really what we were trying to get has done very, very well. So the rate, you know, the rate environment, both on casualty and property in that business has been very good. And, you know, we just came back from a couple of industry conferences where the, you know, our business partners are very supportive and they are very happy to do business with ARCH. So we like to think that some of that kind of headwind in terms of giving up or non-renewing some of those programs, we can make up some of that, at least in the middle market side.

Got it. Second question I had is on the reinsurance business and casualties specifically. The repricing efforts, I guess, a lot of it's on the quota share, the actual underlying primary taking rate. Can you characterize what you're seeing there? I mean, are the underlying primaries taking enough rate where it's in excess of loss cost and it's actually building, improving margin in there? You know, is that why you're speaking more optimistically about it? Or is it, you know, still pretty, you know, obviously high loss cost environment? So I'm just trying to get a feel of whether that's actually improving or not.

So I think you got it right. I think we believe in casualty in general. We're getting more rate than the lost cost, and it's an elevated lost cost. So I think that's what, you know, if you back on the insurance side, if you back the right specialty on the riders, people that, you know, manage their limits well, you know, avoid some of the heavy auto or, you know, other difficult class of business, I think you would want to do more business with them, and I think over time we expect to be able to write more of that business.

Okay, thanks. Next question will be from Andrew Anderson at Jefferies. Please go ahead, Andrew.

Hey, thanks. Maybe you could just expand a bit on how you're thinking about 1-1 prop cat renewals. Do you still see returns of kind of 20% here on this line? And how are you thinking about ILS impacting kind of return levels and industry capital?

Yes, on the cat side, we remain bullish. Outlook is bullish. We like the margin and Maybe a couple of data point the the the market really picked you know in July 2024 so a little bit over a year ago and I think in 2025 you know market the the price went down between 5 and 10%. So we we are into our second round of of red decrease and. But depending on the region, you know the the. The increase that we witnesses from you know 2021 to 2024 20 you know some of those right doubles. I think we are in a really we are in a good place. It depends on the region, but generally we we remain you know optimistic that you know the business is attractive. There's there's more demand. We had more demand last year. We expect more demand to come to the market in. in the U.S. and international basis. So overall, we think, you know, despite pressure, expected pressure on the rates, we remain, we think the margins are still very attractive.

Thanks. I'll leave it there. Thank you.

Next question will be from Meyer Shields at KBW. Please go ahead.

Great. Thanks so much for fitting me in. In the past, you've talked about ramping up some spending associated with mid-corporate. I was hoping we could get an update of timing and maybe amounts of increased spending.

Well, increased spending, I think, was more of the focus. The question that we got, I want to call it a bare bones organization, but the people that transferred back in August of 2024, was call it primarily, you know, underwriters and claims people, right? So that was the bulk of the staff that transferred. And what we talked about at that time was that, yeah, we would need to hire to, you know, reinforce, you know, our capabilities in terms of actuarial data analytics and a few support functions here and there. So that, you know, we knew what would take some time. It's a competitive job market. We've been able to to address some of that too. But, you know, I think ultimately, you know, it's still, I want to say on the expense ratio on the OPEX side, I mean, we're, you know, we can run the incremental mid-core business at a more efficient or lower expense ratio than we had pre the acquisition, given the, you know, the synergies and kind of some of the infrastructure costs that we can spread to a bigger base. You know, we still have a few, I'd say, openings that we're trying, you know, both on the underwriting side and on the kind of support functions that we're trying to fill. But, you know, we've done a lot of the work that's been done in the last year, and it's shown, right? The business is doing well, and we're able to execute on the strategy and try to grow in some specific areas. So we're, you know, again, a little bit of work to do, but we're in a good spot. Okay, perfect.

Thank you so much. Yep.

Next question will be from Brian Meredith at UBS. Please go ahead.

Yeah, thanks. Thanks for putting me in. Two quick ones here. Just going back to the whole MCE mid-corp and the program business runoff, the underlying loss ratio improvement insurance, is that a direct result of some of the actions being taken there, or is that something else? And therefore, as we start to see this runoff, should we start to see underlying loss ratios continue to improve in insurance?

It's more the latter. The impact of the non-renewals has not really come into play on an earned basis. So the improvement, you know, again, somewhat, you know, not huge at this order, but, you know, I think hopefully there should be some benefit as this, you know, business runs off and we'll see some improvement or at least some stable loss ratios.

Right, thanks. And then, first of all, I wonder if you could talk a little bit about the substance-based tax credits that Bermuda came out with. I think it was the end of September. What that impact could potentially be for you all?

A bit early to tell. No question, yes, the consultation paper is out. Comments have been submitted. We have had meetings with, you know, obviously as an insurance community with the government expressing our views. uh the biggest can i say remaining item that we don't have clarity on is um is on the transition credits i mean at what pace will these kind of credits be allowed to be or reflected uh starting in 2025 so that is still to be determined uh there's work being done on that right now we expect to have clarity in the first call at first half of december clarity slash almost finality because it has to be enacted before the end of the year for us to be able to reflect it in our financials. But, you know, to your question, Brian, I think it will be, you know, substantial, we hope. And, you know, when we have like the law, I mean, we'll be very quick to share that with you all and give you a bit more color on what that might mean for us.

Thank you. You're welcome.

At this time, I'm not showing any further questions. I would like to turn the conference back over to Nicola Papadopoulos for closing remarks.

Yes, thank you for spending time with us this morning, and we're looking forward to talking to you next quarter. Thank you.

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