Arch Capital Group Ltd.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. ¶¶ © transcript Emily Beynon

Good day, ladies and gentlemen, and welcome to Fortu 2024-25 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with its update, Management wants to first remind everyone that certain statements in 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 Ledication Reform Act of 1995. The company intends to forward-looking statements in the call to be subject to safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to gap for each non-gap 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 website at www.sec.gov. I would now like to turn the call over. I will now, sorry, introduce your host for today's conference, Mr. Nicholas Papadopoulos and Mr. Francois Moret. Sirs, you may begin.

Good morning and welcome to our fourth quarter earnings call. We concluded another exceptional year by generating $1.1 billion of after-tax operating income in the fourth quarter, up 26% from the same period in 2024. Our quarterly consolidated combined ratio of 80.6% reflects excellent underwriting results across the group. For the full year, we produced $3.7 billion of after-tax operating income, a new high, resulting in after-tax operating earnings per share of $9.84 and a 17.1% annualized operating return on average common equity for 2025. Continued strong operating cash flows and capital generation enabled the repurchase of $1.9 billion of arch common stock in 2025. We strongly believe our stock is a good long-term investment, and share buybacks represent an efficient way to return excess capital to our shareholders over time. Since our inception, ARCH's commitment to maximize long-term shareholder value has been unwavering. In 2025, book value per share, our preferred measure of value creation, increased by 22.6%. Since our start in 2001, book value per share has gone at a compound annual growth rate in excess of 15%, placing us at the top of our peer group. We remain confident in our ability to deliver strong returns throughout the underwriting cycle and to build on the legacy of discipline, execution, and consistent results. We head into 2026 with measured optimism. We are starting from a position of strengths that recognize that competition is increasing in several lines of business. In an evolving market, the ARCH playbook, which has served us well over the years, is a differentiator that remains as valid and effective as ever. Our playbook is anchored by an underwriting culture defined by deep expertise and disciplined risk selection. Combined with a diversified business model, proven record of best-in-class cycle management, and the strengths of the arts brand, we are well positioned to consistently deliver superior results for our shareholders. I will now provide updates on our reporting segments. I'll begin with our insurance group, which delivered $119 million of underwriting income in the fourth quarter. Underwriting performance was solid, with an underlying ex-CAT combined ratio of 90.8% in the quarter, similar to the fourth quarter last year. Gross premium return increased 2% from the fourth quarter of 2024. In North America, we continue to grow in specialty casualty lines, including alternative markets, construction, and ENS casualty. As for our international units, we increased ridings through our Bermuda platform and in continental Europe. I will note that we experienced a year-over-year decline in net premium return, which Francois will explain in his remarks. Across the insurance platform, our underwriters pivoted towards lines of business offering the most attractive margins, and we grew premium volume in more than half of our business units. indicating a healthier underlying market that industry headlines would suggest. In North America, the rate environment is largely keeping pace with lost-cost trends, while pricing in our international business units is tracking slightly below lost trends. Within its geography, consistent with our cycle management approach, we will adjust our business mix in response to changing market conditions and pricing dynamics. Our insurance platform has expanded significantly over the last several years, providing more opportunities to capitalize on attractive margins in many areas. Going forward, our underwriters will continue to pursue growth in those areas where risk-adjusted returns exceed or meet our long-term objectives. Moving to reinsurance, which delivered a record $1.6 billion of underwriting income for the year. The fourth quarter combined ratio XCAT and prior year development was 74.9%, consistent with the prior year quarter and reflective of continued underlying market profitability. Gross premium return were flat versus the fourth quarter of 2024, despite the non-renewal of a large structured transaction. Net premium return declined, primarily due to a change in the timing of certain retrocession purchases. On January 1, proper TCAT and more generally short-tailed excessive loss renewals were highly competitive with rates down 10 to 20%. Sealing commission increased in proportional reinsurance as supply continued to outpace demand. Despite these headwinds, our underwriting teams performed well by leveraging the strengths of our platform to source a handful of new opportunities. These opportunities will reduce the negative top-line impact from the rate pressure. The mortgage segment produced $1 billion of underwriting income for the year, a fourth consecutive year exceeding the $1 billion threshold. In our USMI business, new insurance return remained modest, and insurance in-force was stable. The underlying credit quality of the portfolio is excellent, as illustrated by favorable cure rates on delinquent mortgages, which saw favorable reserve development in the quarter. While lower mortgage rates are beginning to support increased origination activity, the current market is still constrained. The team remains focused on underwriting discipline, expense management, and perfecting its data and analytical platforms to further optimize the business. Finally, investment generated $434 million of net investment income in the quarter, while equity method investments added another $155 million to net income. We continue to look to the investment portfolio, where assets surpassed $47 billion at year-end, to provide a stable recurring earnings stream that enhances the group's overall returns. As we move past 2 p.m. on the P&C underwriting clock, it is increasingly important to focus on business that generates adequate risk-adjusted returns. For almost 25 years, ARCH has perfected its cycle management capabilities by adhering to some foundational principles. One, leveraging a diversified specialty platform to maximize flexibility and reduce volatility. Two, embracing a business owner mindset anchored on delivering a differentiated customer experience. Three, using data and analytics to sharpen insights and enhance risk selection. And last but not least, ensuring alignment with investors by rewarding underwriters for profitability, not volume, and incentivizing our executives to grow book value per share above all else. The stage of the underwriting cycle will test our underwriting discipline and acumen. Hard markets are exciting for many reasons, but successfully managing the cycle is equally, if not more, rewarding, as the decisions made today will shape future returns. With our experience, focus, proven track record, and capital strength, we believe ARCH is ready for the task and well-positioned to outperform the sector. This year marks ARCH's 25th anniversary. Having been here since 2001, I firmly believe that ARCH's culture, driven by our dedicated people, is a foundation of our success. So before I turn the call over to Francois, I want to thank Team ARCH for another outstanding year and for positioning the company for continued success in the years ahead. Francois.