Arch Capital Group Ltd.

Good day, ladies and gentlemen, and welcome to the 1Q2026 Arch Capital Earnings Conference Call. At this time, all participants are in 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 the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2025 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 to 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. Francois Morin. Sirs, you may begin.

Good morning, and welcome to ARCHER's first quarter 2026 earnings call. We deliver the strong quarter reflecting both attractive underwriting margin and the disciplined execution of our underwriting and capital management strategies. After tax operating income for the quarter was $901 million, or $2.50 per share. producing an annualized net income return on average common equity of 17.8%. Today's market is clearly more competitive than in recent years. That said, rates and terms and conditions in aggregate still support strong returns. Capturing those returns requires the ability and willingness to actively manage the portfolio across and within lines of business. This is embedded in Archer's operating principles and among our differentiating traits to dynamically add to areas where returns are attractive while declining those risks that no longer provide an adequate margin of safety. Regardless of where we are in the cycle, ARTS is committed to generating superior returns for our shareholders. I'll now provide updates across our reporting segments, beginning with insurance, which generated $66 million of underwriting income in the first quarter. It compares favorably to the first quarter in 2025 that was impacted by the California wildfires. Overall, market conditions remain favorable. However, top-line growth in the segment was essentially flat in the quarter, reflecting our focus on profitability over volume as competitive pressures increase. Growth opportunities remain across most casualty-focused businesses. including excess and surplus line casualty, construction, alternative markets, as well as a number of our London market businesses. Growth was offset by softening rates in a few areas, including large account and excess and surplus line property, as well as some short tail lines in London. We also chose not to renew certain program business acquired in the middle market commercial transaction that did not align with our risk appetite or meet our profitability requirements. As we have discussed on prior calls, these non-renewals are expected to reduce net premium return by approximately $250 million throughout 2026. I also want to note a significant operational milestone achieved in our middle market commercial business. Earlier this month, Our team successfully completed the data and system migration of the acquired businesses from Allianz to Arch-owned systems. The ability to complete this effort in just 18 months speaks not only to the dedication of our teams, but also represents a scalable, best-in-class experience for clients and distribution partners. Our insurance segment delivered an excellent $441 million of underwriting income in the quarter, a significant increase from the $167 million in the first quarter of 2025, which was heavily impacted by the California wildfires. Rate reductions and increased retentions by our students contributed to a 6% decline in net premiums return versus the same quarter last year. Shorted lines, including other property, property catastrophe, and marine, were the primary driver of these declines. Strong industry results over the past few years have attracted significant new capacity from traditional markets and third-party capital, resulting in a broadly competitive environment. Its additional supply continues to put downward pressure on property catastrophe and short air rates, while also moderating the push for needed rate increases in some casualty lines. However, underwriting performance remains excellent. Our focused and disciplined underwriting led to the reinsurance group's 76% combined ratio, marking the fourth straight quarter of 70% combined ratios. Consistent with our cycle management philosophy, our reinsurance team actively manages the portfolio mix by continuing to write new business that meets our risk-adjusted return targets and by reducing our share of business that falls below our minimum return thresholds. The mortgage segment delivered another strong quarter with $221 million of underwriting income to go along with $266 million of net premiums returned. Mortgage originations picked up modestly in the first quarter, though affordability challenges tied to high mortgage rates and home prices continue to constrain demand. Credit quality across the mortgage insurance portfolio remains excellent, with delinquencies normalizing from seasonally higher levels in the fourth quarter of 2025. Competition remains disciplined, and we continue to pursue growth for innovation and new product introductions across our global footprint. Overall, mortgage performance continues to exceed expectations and provide shareholders with a differentiated and diversifying source of earnings that support long-term value creation. Turning to investments, which contributed $4.8 million, or $1.13 of net investment income per share in the quarter. The decline in net investment income from the fourth quarter of 2025 was driven in part by lower cash yields, lower qualified refundable tax credit benefits, and seasonal compensation payouts. Our nearly $48 billion investment portfolio provides a material contribution to earnings and book value growth, effectively raising our quarterly earnings floor. In the first quarter, we repurchased $7.83 million worth of our common stock, while still increasing book value per share by 1.7%. Our first priority remains to deploy capital into our business. When organic opportunities do not meet our return threshold, we view repurchasing our shares as an attractive use of excess capital, reflecting our conviction in the intrinsic value of the franchise. The board's recent $3 billion increase to our share repurchase authorization underscores this approach to capital allocation. To conclude, ARCH delivered another strong quarter by staying true to our principles of discipline cycle management and by leveraging the strengths of the ARCH brand and our diversified platform. In today's market, underwriting discipline powered by insight from our investment in data and analytics Rewarding our underwriter for profit not volume and prudent capital management continues to differentiate ARCH and drive long-term value for our investors. ARCH's 25-year record of strong return and compounding book value at double-digit rates is a direct result of hard work and discipline. That is ARCH. That is our DNA. And that is why we believe we will continue to deliver best-in-class results across market cycles and into the future. I will now turn the call over to Francois, who will talk through the financials in more detail. Francois.

Thank you, Nicolas, and good morning to all. Last night, we reported our first quarter results with after-tax operating income of $2.50 per share, and an annualized operating income return on average common equity of 15.4%. Book value per share grew by 1.7% in the quarter. Our three business segments once again delivered excellent underlying results with an overall XCAT accident year combined ratio of 82.3%, up 130 basis points from the same quarter last year, and consistent with the more competitive environment we are facing. I will provide more color on trends in each of our segments shortly. Our underwriting income included $200 million of favorable prior year development on a pre-tax basis in the first quarter, or five 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 mainly in short tail lines in our P&C segments and in mortgage due to strong cure activity. Of note this quarter, we commuted a large transaction which increased the level of favorable prior development in our reinsurance segment by approximately 25% in the quarter. Current year catastrophe losses were $174 million net of reinsurance and reinstatement premiums. and were mainly the result of winter storms in the U.S. and the Iran conflict. All in, these losses were slightly lower than our seasonally adjusted expectations for natural catastrophes. The insurance segment's gross premiums written grew 2%, while net premiums written declined 1.4% year over year. As Nicholas explained, the non-renewal of a certain program business acquired as part of the MCE transaction impacted our top line this quarter. In addition, net premiums written were also impacted by a shift in business mix toward lines with lower net-to-gross retention ratios. The XCAT accident year loss ratio improved by 70 basis points to 56.7% compared to the same quarter one year ago. The acquisition expense ratio for the current accident year increased by 160 basis points as the benefit we observed in the first quarter of 2025 from the write-off of deferred acquisition costs from the MCE acquired business rolled off. We would expect the most recent acquisition expense ratio to be more representative of long-term expectations. Our operating expense ratio was higher this quarter as we incurred additional expenses related to the transition of our middle market business to arch systems. You would expect our operating expense ratio to revert back to a level closer to historical levels during the second half of the year. The reinsurance segment had an excellent quarter, $441 million in pre-tax underwriting income. Overall, gross premiums written were down by 2.3%, while net premiums written were down by 6% from the same quarter one year ago. Net premiums written were up in specialty, partly due to timing differences in the recognition of certain treaty renewals that impacted our financials in the first quarter of 2025. Over one-third of the decrease in net premiums written in property catastrophe was attributable to a lower level of reinstatement premiums compared to a year ago, which were impacted by the California wildfires. Overall, our ex-catastrophe accident year combined ratio of 78.1% is comparable to last year's result for the same quarter. Our mortgage segment produced another very strong quarter with underwriting income of $221 million. Net premiums earned were down by approximately $6 million from last quarter, mostly driven by lower levels of cancellation premiums in our CRT business. Of note this quarter, new insurance written at USMI reflects a large non-GSC transaction of $2.2 billion in NIW. Absent this transaction, which increased our NIW by 15%, we would expect our market share of the PMI market to remain relatively unchanged from the prior quarter. The delinquency rate for our USMI business decreased to 2.06%, consistent with our expectations and seasonal trends. On the investment front, we earned a combined $568 million from net investment income and income from funds accounted using the equity method, or $1.57 per share pre-tax, slightly down from the $1.60 per share we earned last quarter. Cash flow from operations remained positive at $1.2 billion for the quarter. Our portfolio remains of very high quality with a short duration and in line with our asset allocation targets. Income from operating affiliates was $36 million for the quarter, up from $17 million from the same quarter one year ago, which was impacted by the California wildfires. As a reminder, this quarter's result reflects our lower ownership stake in Summers Re since the start of the year. Our effective tax rate on pre-tax operating income was 14.8%, reflecting the mix of income by tax jurisdiction. It was slightly below the 16 to 18% previously guided range, mostly due to a 1.7% benefit from discrete items. As of January 1, our peak zone natural catastrophe probable maximum loss from a single event, one in 250-year return level on a net basis, remained flat at $1.9 billion and now stands at 8.2% of tangible shareholders' equity. On the capital management front, we repurchased $783 million of our shares in the first quarter, or 8.3 million shares. We have repurchased an additional $311 million in shares so far this quarter through last night. Our balance sheet remains in excellent health with strong capitalization and low leverage. 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 one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Elise Greenspan from Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first question is on, you know, PropertyCat on the reinsurance side. I was just hoping to get, you know, some of your expectations for the mid-year renewals. And then, you know, if you expect, you know, declines in the book, you know, to continue, would you expect, you know, your cat load to, you know, come down after the mid-years?

Yes. Good morning. It is... Yeah, so we don't... You know, as we always say, we don't have a crystal ball, but, you know, for the sixth one, I think we... We really expect the market to remain competitive and to adjust our underwriting stand based on the actual rate decrease that we will see at that time. So we don't really have a forecast there. On the overall trend of the catastrophe portfolio, I think we have huge... huge headwinds, you know, because of the, you know, double-digit rate decrease. And we, you know, we really, as I said it in prior call, we really monitor the property cat through a lens of 50 separate zones. So I think some, if I go back two years ago, they were all green. So now we have a bunch of them that are still green, I think. Florida is still green, but we have a bunch of them that are yellow and some of them that have turned red. So I think it, you know, depending of where the business renew and our perception of the attractiveness of that zone, we are underwriting team, we make the decisions.

Okay, thanks. And then on the casualty side, you know, you guys were mentioning still some good opportunities, I think, on both the insurance and the reinsurance side. Can you just talk through, within casualty, where you're currently, you know, seeing the best growth opportunities?

Yes, I think, you know, we're still optimistic on the casualty, and we think that the pain has not... is not gone through yet, as you may have seen. I think we're still seeing some little development from the year 2016 and 17, but the most recent years, 21, 22, 23, 24, we've seen additional adverse development. And so that should, in our view, continue to sustain price increases above trend. In terms of our risk appetite on the insurance and the reinsurance, I think it hasn't changed. I think we like the specialty casualty, you know, the excess and surplus line casualty, you know, primary position on the large account. So that's where we play. We stay away from, you know, the commercial auto and also, you know, the The larger count excess towers, which we think are still very challenging, despite some of the rate increases that we've seen.

Our next question comes from David Montemayden from Evercore ISI. Please go ahead.

Hey, thanks. Good morning. maybe just to get an update on the insurance book where we stand just on rate versus trend in both the U.S. and internationally?

Yes, good morning. So, you know, starting with the U.S., I think on the U.S., I think we are broadly getting rate at trend. And I think so, as I mentioned earlier, we – we are getting rate above trend on the casualty lines of business. And we are getting, you know, as the tractor on the trend is really the short tail property lines of business where, you know, we've seen a rapid rate decrease. But when you sum it up for North America, I think we're seeing rate slightly below trend. If you go to international markets, I think we have more short tail lines on the International Book of Business. So we're seeing some rate pressure on the short tail lines. So overall, a low one-digit rate decrease of overtrend overall. But, you know, we started there with pretty high margins. So we feel very good about the business there.

Got it. Thanks. And then... I believe you mentioned just in reinsurance some of the supply there and good returns and short tail lines trickling into casualty re. Just wondering, does that change sort of how you're thinking about the growth opportunity there as an offset to the headwinds on the property side?

So on the casualty, on the reinsurance side, I think we're mainly talking about quota shares. I think, you know, as I mentioned earlier, I think we like the fundamental of the specialty casualty business. The difficulty there, it's really the ceiling commissions. I think, you know, based on the past experience of the casualty market, ceiling commissions should have gone down. But we get, you know, we get excess supply. I think there's a lot of our competitors, you know, wanting to get on that business or increase share on the business so that that that allows for the sitting commission to stay flat and on the best account to continue to grow up so so the sidecars you know the latest flavor of the day with the casualty sidecar is just going to add to that dynamic our next question comes from tracy van gigi from wolf research

Go ahead.

Thank you. Good morning. One of the largest primary insurers had said on their earnings call some pretty pessimistic views of property pricing, particularly shared and layered in North America and in London, and the culprit is cheaper forms of capital coming in from NGAs, reinsurers, and alternative capital. So from your vantage point, is this a real structural shift in the market, and how does that influence your underwriting appetite?

For us, it's more business as usual. So the advantage that we have is that we are not retail large account players. We don't play in that space. So that has gone up. It has come rapidly going down. So we don't play in that space. We play in the excess and surplus line property business. And so that space is getting competitive. And we are taking a very careful approach to that line of business right now.

Excellent. And there was also a recent settlement development early in the second quarter around Francis Scott Bridge collapse. Are you currently sizing industry loss? And has that pushed your loss estimate upward?

So in that particular case, I think we were holding much more conservative estimates than the loss estimate in the market. No real challenge for us.

Our next question comes from Mike Zbremski from BMO. Please go ahead.

Hey, thanks. Good morning. In the insurance segment, underlying loss ratio, you know, continues to show some healthy improvement. Is that, if you can kind of talk about some of the drivers, I believe, right, some of the non-renewals on some programs is, I think, helping that, but if you can kind of talk around any dynamics we should consider, thanks.

Yeah, the MRMID, this quarter in particular was, you know, we benefited from a relatively benign, you know, amount of activity in nutritional losses in London in particular. So our international segment or, you know, book did very well this quarter. So that explains most of the favorable or reduction in the ex-cat loss ratio compared to a year ago. You know, again, as a reminder, we encourage you all to look at trailing 12-month kind of rolling numbers to kind of get a view on performance of the book. And the impact of the MCD on renewals is yet to be seen, right? I think it's, you know, as the business earns out, it's, you know, it will show up in the numbers, but at this time, we don't think it'll be material. I think it's It's still a relatively small part of the book. You think of an $8 billion insurance segment book of business, the impact of non-renewing some of these programs will be somewhat immaterial or limited. So hopefully that explains that really the quarter was all about kind of really good performance out of London.

Got it. And Francois, my follow-up, I think you mentioned on the catastrophe side, that this quarter's losses were, I think you said, a bit lower than quote-unquote normal, and you also added a bit on the Iran conflict. Maybe you can kind of just elaborate on the Iran conflict, how you guys are thinking about that. Is it all IBNR? Are there real losses? Thank you.

Yeah, I mean, there's nothing paid, but it's certainly there are some real losses, you know, specialty book out of London, like terror, political violence. I mean, those are some of the lines that are exposed, will be exposed. It's ongoing. So we took a first stab at it this quarter based on what had happened and call it in the month of March. But, you know, we will expect, we do expect more losses to come through in the second quarter. And, you know, we'll keep reporting on it. But it's, yeah, it's ongoing. And the point in my comments was really to, you know, communicate that we have been able to absorb those losses in the first quarter as part of our overall cat load, even though technically, you know, the cat load is only on the natural catastrophe side. So it's a man-made, we call that, you know, man-made cat. But we still report it as part of our cap losses to the street, and that's kind of included in the overall number.

Our next question comes from Andrew Kilderman from TV Commons. Please go ahead.

Hi, and good morning. So I know you've gotten a lot of questions about property, and I'm I'm kind of just to kind of gauge a sense of where we are in the cycle, which you are very good at. I'm wondering if you could share, and again, this is blunt, where are you seeing risk-adjusted returns in property catastrophe reinsurance? I know there are different layers and risk on lines, et cetera, but if you had to gauge a risk-adjusted return range. What are we seeing today? And maybe the same question with the ENS property that you've been writing.

And so the way you have to understand is that, as I explained, PropertyCat, you know, we manage very dynamically based on the actual underlying profitability we see in 50 zones. So, you know, we... We said earlier that two or three years ago we were in the 30s. I think the business we have on the book today is still, in our mind, very attractive because, again, we're not writing some of the business that we think has fallen below the threshold for us to write the business. We think the business, it's a different mix than it was probably three years ago. The mix has shifted, but The business that we have today remains attractive on our book. So, and you know, we are still in the high teens, I think.

I see. I see. But it sounds, Nicholas. And on the ENS, yeah.

Go ahead.

Yeah. Just following up on that, Nicholas, it sounds like that there is business out there that Arch Capital won't write that is well below your upper teens return threshold. Is that fair?

That's fair.

Okay.

Our next question comes from KB Montessori from Deutsche Bank. Please go ahead.

Thank you. First question is on share repurchases. It was nice to see a little uptick. I think this quarter it was 87% of your operating income. versus roughly 70% of each of the past two quarters. Now my question is, if the current pricing trends continue, you don't really need any capital to grow, and you're starting from a pretty healthy capital position. So without any obvious 7-8 targets, is there any reason why you couldn't pay out 100% of income, potentially even more, given that you're releasing capital when you're shrinking? I guess I don't want to sound greedy, but I'm wondering what held you back from doing more this quarter?

I mean, there's nothing stopping us. We don't set targets in how much we're going to buy back. So we go at it. We look at what's in front of us. We look at both in terms of the stock price and also liquidity in the stock, which is still very liquid. So that means so far it hasn't been a problem. Uh, but you know, in terms of like, could we buy back a hundred percent of our income for the year? We could, I mean, we, we, but that's not how we think about it. It's more, I'd say an outcome, uh, if, you know, things work out in a certain way in terms of, um, kind of, again, the stock price and the volume, et cetera. So, um, you know, you saw the reauthorization by the board. I think hopefully that gives you a little bit of a, some direction in terms of how we think about the opportunity there and how much capital we think we can buy back or are looking to buy back. But whether it happens this quarter or next quarter or next year, I think that's nothing set in stone. So we'll react to what's in front of us. But to answer your question, there's really no structural limitations beyond, again, the regulations around buying back stock that we have to deal with.

That's great to hear. Thank you. My second question, just want to pivot to cyber insurance, and maybe if you can help us separate the cyclical versus structural pieces for us. So I guess first question, where are we in the underwriting clock today for cyber? And then structurally, like given the recent developments in AI and the potential for cyber attacks to become more frequent and more destructive, Does that change your view of tail risk, aggregation risk, or even the long-term insurability of the product?

Yes, I think in terms of the Ingrid clock, I would think cyber is probably around 3 p.m. I think so, you know. It's still okay, but it's, you know, it's getting to that point, so... In terms of the recent AI, you know, tropic mythos, we see it as a real current threat, but we don't really see it as changing the cyber product. I think we see the cyber product as more of a... the cyber market as more of an arm race between attacker and defender, and certainly mythos is accelerating that trend, but... you know, the METOS can help, you know, the attacker, but, you know, the defender can also, you know, reinforce in defense, you know, using the same model. So we think it's really an acceleration of the speed at which, you know, maybe cyber attacks can be conducted. And to your point, it's also an acceleration of the scale. So I would think because the scale would be larger, I would think we see it more as a, an increased systemic risk. So we are taking a very careful approach to that in our RDS scenarios.

Our next question comes from Josh Shanker from Bank of America. Please go ahead.

Yeah, I know you don't give guidance, certainly on margins, but it's an interesting time. Obviously, property declines and prices are well noted. Broadly speaking, at Arch and other companies, loss ratios are generally in the same sort of range they were a year ago, but growth is about zero. I guess maybe it's another clock question, but you sort of give an outlook internally for

next year do you expect arches and the industry's uh loss ratios to begin to deteriorate from here or do you think the current levels are supportable so you know i i don't know about the industry to be honest it's hard to uh it's hard to predict because uh as far as we are concerned you know we we are confident in our ability to to manage a cycle that's what we do so i think we uh I think, you know, that's a first line of defense. If things, you know, fall below our threshold, we reduce and we are confident in our ability to continue to find, you know, attractive opportunities to be able to expand. And I think we have, you know, certainly the property market is coming down. So, you know, everybody can see that. But we still think we have a good opportunity on the casualty side. So overall, I think we, again, as I said, based on our own mix of business, we think that we see rates just below trend. So that would support the thesis that margins are sustainable at least for the near future.

And then in terms of SMEs, a commercial business, the mid-core acquisition was in part to be less cyclical. Are you seeing fruits of that play out in 2026 that you're able to capture some incremental share in less cyclical SME business?

So, again, we just, as I mentioned in my remark, we just finished the cutover. So the main focus on the for us has been to roll over the portfolio and to create an entirely workbench with which we can underwrite the business on arch paper. Those have been the primary goals. Now that this is done, it opens abilities to try to enhance the value proposition, of that business and build scale. So I think we, I would doubt, you know, I think it's more of a 2027 game, you know, than it is a 2026 because after you do the cutover, you have to stabilize, then we have to start to, we're focusing on building new tools to really help on the riders with selection, you know, triage and so on that will make them you know, more productive.

Our next question comes from Rob Cox with Goldman Sachs. Please go ahead.

Hey, good morning. Just a question on premium leverage. So on the one hand, the business is shifting away from property and property cat, which should allow for an increase to premium leverage. But in the past, we've noticed it's been hard to right-size leverage in a softening market like this due to the lack of growth opportunities. So I guess the question is, do you foresee premium leverage would continue to fall like this as we get further into the soft market? And how does that impact your view on the future ROEs?

Well, certainly we're managing the equity side of the leverage. So if we can't grow, we can't deploy the capital in the business, as we've been doing like the last few quarters, we'll be returning more of the capital to the shareholders. So that's certainly a tool we have that we have been using, we'll keep using, and make sure that our ROEs remain attractive. So I'd say for sure, like if the mix goes more long tail than short tail, it helps on the leverage. And again, the equity part of it is something we're watching carefully.

Thanks. That's helpful. And then just to follow up on terms and conditions, just curious if any negotiations on terms and conditions started to change in the quarter and which terms you think could start to get further negotiated as we move deeper into the soft markets.

Which lines of business are you talking about? PropertyCat?

Yeah, particularly PropertyCat reinsurance.

So we've talked to our team and we're seeing a bit more, but it remains a very small portion of some of the aggregates, a bit more aggregates, a bit more top and drops, but it's at the margin so far. But You know, as the market gets more competitive, we'd expect more of those structures that are much more difficult to price to come back to the market.

Thank you. Our next question comes from Brian Tunis with Cantor. Please go ahead.

Hey, thanks. Good afternoon. The company is obviously... a much larger company today than it was seven years ago, both from a premium side, but also from an OpEx side. And I imagine a lot of that increase in OpEx is in support of hard market growth. But my question is, no longer being in a hard market, to what extent are you looking at managing the OpEx side of things as a potential source of boosting margins?

I think the answer is yes. That's something that's in our mind. I think the loss ratio part is probably more important as the market gets softer, but yes, I think especially in the insurance group, the expense side is important, and we're actually paying attention to it.

Okay. And then just a follow-up for Francois. underlying loss ratio and the mortgage insurance segment looked a little elevated. Nothing really stood out to me, maybe a little bit higher reserve per default. Not sure if that's seasonal, but how should we interpret that loss ratio result this quarter?

Definitely some of it is a result of the change or the growth in the average mortgage that goes into NOD. So if you think of the loans that are currently going in NOD this quarter are more, you know, from more recent vintage years and, you know, post-COVID effectively, right? And that's when, you know, mortgage loans were up in size. So as you look at the, you know, frequency assumptions have not changed. You know, they've been flat for us the last couple of years, I want to say. But, you know, the math behind the reserve levels is such that, you know, we apply the frequency with a severity per loan and the severity, you know, remains stable, but it's the average size of the loan that's hitting the loss ratio. So I think it's, you know, it's a little bit kind of like an evolving kind of thing within the loss ratios. I think it's for mortgage, it's gone up a little bit, but

still very much within what we would expect it to be our next question comes from alex scott with barclays please go ahead hey thanks for digging it um i guess i wanted to follow up on the excess capital and you know less about just asking how much you buy back but you know thinking more broadly i mean you don't you don't have business that you can really lean into growth in right now, like you have in sort of most environments in the past, but one of your three businesses has been attractive to really leg into. So, you know, does it create any need to sort of look at, you know, potentially diversifying transaction and then, you know, is legging into an artificial intelligence investment and doing it that way to try to achieve growth, something that you think is achievable? just trying to understand how you're thinking about the different ways you get invested.

Yeah, I mean, I'll take the first part. I mean, certainly, you know, the businesses are all doing well. I mean, yes, I mean, you're right. I think the growth opportunities in all three of our segments are somewhat limited. We're working hard trying to find new opportunities internationally and, you know, et cetera, like in mortgage and insurance for sure. But, you know, you know, at this point, it's harder to see how the market will support, you know, massive or outsized growth in each of any of our segments. So yeah, I mean, the share buybacks, again, like as we generate, we keep generating meaningful earnings. I think, you know, that we don't want to accumulate excess capital beyond what we think is prudent. So we're certainly looking to return it or do something with it. M&A is, you know, we look at a lot of things, but, you know, we want, you know, you know, for us to do something, given our scale, we, truly think it has to be something that is additive. We're not interested in doing deals just for the sake of doing deals. It has to make us better. It has to make us more competitive, you know, increase our presence or our scale in a market, et cetera. So we're very selective there. But, you know, we're trying to think outside the box, too. I mean, if there's things that, you know, we don't do currently that could make us better, we'll explore those. In terms of AI, I mean, it's certainly something that is coming at us really quickly, really fast. We're trying to think of ways where we can kind of, again, automate things, and we're doing some of that. But I think it's still very early innings, very early days of that. So I think that will evolve, and we'll see where it goes.

Yeah, definitely. We've been investing in AI for the last 10 years, both in mortgage and PNC, so we've deployed a bunch of AI in machine learning models, but it's changing really fast. I think the industry in our struggle is really to really show results while at the same time working on our data strategy and our integration of our system to really support you know, AI at scale. And third, you know, really figure out what AI would look like three years from now, because it's changing so quickly. You know, if you look at the anthropic models, you know, they open huge, huge opportunities to do certain things, but what's next? So I think we, you know, we, you really have to take, uh, and it's a lot of investment at the same time, you know, you're, you're trying to create the productivity and the insight for you on the riders to be able to compete. So I think it's a,

Yeah, all helpful. Thanks. And as a follow up, I wanted to see if you could talk a little bit about exposure to private credit. I know I think in the past you've talked about the alternatives portfolio allocation of private credit. So I have a rough idea of that, but wanted to see if you could tell us about anything that would be sort of considered private credit within the fixed maturity part of the book.

Yeah, we have some, but limited, right? So we have it both in our, again, public markets and private markets. The general thinking, you know, the strategy with our investment guys has been to go more on the high-quality loans, so kind of low loan-to-value and kind of very good collateral supporting the investments. So, you know, yes, it's something we're watching like everybody else, but at this point, there's no red flags, nothing that really is, you know, rising to a level where we have to take action. Got it.

Thank you.

You're welcome. Our next question comes from Matthew Helmerman with Citi. Please go ahead.

Good morning, everybody. I just wanted to follow up on your call related to using AI in the technology rollover of mid-corp and just curious how that experience has been different than past. I recognize that you're not a significant acquirer, so the universe of past might be smaller, but just thought that was provocative comments.

Yes, so I think the way it really helped us and speed up the process is to write some of the codes. I think we really didn't do enough there, but when we did, it was really helpful. And the big help was on the testing. A lot of the testing was done by AI, and that really accelerated the time to market. So those are the two aspects. that when we talk to the teams, they really highlight as, you know, the impact of AI on this shift, on this cutover.

Because, again, right now, just quickly, I mean, again, it was a build-out of a brand-new, effectively, platform infrastructure, right? So it's unusual in that sense that we bought the business, but without the systems, we had to, you know, create this infrastructure, this platform, you know, brand new that we ourselves at Arch did not have. So it's, you know, that's where I think that to Nicholas's point, the AI kind of capabilities really came through and helped, you know, speed up the process.

That's helpful. I just want to make sure I understand the using, you said the word testing correctly. Is that, should I, should I think about that as auditing outputs of?

Yeah, learning scenarios to make sure. Yeah, so it's running scenarios to make sure that every time you create, we created a new platform to a good point, Francois, for context. And so every time you create a new software, you have a lot of testing that, you know, to make sure that the software is doing what it's supposed to do. And a lot of it today can be done through AI. As opposed to individuals going in and asking the underwriter to test, the guys that collect the cash to test that, you know, what the answers get to the right places and so on.

Our next question comes from Meyer Shields with KBW. Please go ahead.

Great. Thanks so much. Francois, starting question for you. I guess I expected operating expense and reinsurance to go down because you should have more Bermuda tax credits. And I guess I didn't see that. I was hoping you could talk us through the moving parts.

Down relative to last year or last quarter? Last year. For sure up from last quarter. Yeah, they're certainly up from last quarter. From last year... I mean, yes, there's some, no question that there's, you know, some QRTCs this quarter in reinsurance. I mean, what explains the increase is more investments in staffing and billing out further the insurance, the reinsurance group. So I think there's, well, I know that there's been kind of hiring around, like, you know, technology and improving systems. So that's certainly a big part of it. And then a little bit of noise around some of our structured deals that we wrote a year ago. I mean, they were actually beneficial to the expense ratio, the OPEX ratio a year ago. So if you adjust for that, you know, that explains a little bit of the difference as well. But nothing, I'd say nothing, I'd say structural that we, you know, was a surprise to us. Okay, that's very helpful.

And then shifting gears, there are some reports of, you know, very significant rate increases for product lines exposed to the Iran conflict. And I was wondering whether Arch is trying to write more of that business or being more cautious because of the risk.

So we do that, as I would be with our London office, where we write... some political violence and uh war on land so we we've been cautious but we you know the right side spikes up so we we we actually wrote a little bit more business but in a very cautious way our next question comes from roland mayer from rbc capital markets please go ahead

Hi, good morning. I just wanted to ask on your PML disclosure, because I found it curious, do you think that the catastrophe models are fully capturing the improved loss environment in Florida from AOB benefit reform?

The PMLs that we report?

Yeah, I'm just curious on when you model the cat losses out in the state, if it's fully capturing how the personal line side of the business has seen significant reports in the loss environment.

It's been reflected. I think we historically, you know, we have, you know, as we do our modeling, we have loads for certain features of those specific to the Florida market that, you know, with the reforms, I think have changed. So we changed how we, you know, how we model those things on fraud and fraud. you know, additional expenses around kind of claim handling, et cetera. So that's all captured right now. So, yes, our thinking has changed. And, you know, what we report to you is how we see the business, how we expect the environment to respond given what we know about the latest reforms.

All right. That's perfect. Thank you so much.

Yep. Our next question comes from Brian Meredith with UBS. Please go ahead.

Yeah, thanks for fitting me in. Back on the PMLs, I noticed your PMLs did not decline. I kind of stayed the same at 4.1 versus your 1.1 disclosure, but you're declining property cut and everything. Can you help us reconcile kind of what's going on with the PMLs relative to what you're doing with property reinsurance and insurance?

Yeah, I think, right, Brian, it's the 4-1 number, so not a ton. Again, think of it as the peak zone. So I would expect changes at 7-1 next quarter. There's not a ton of activity for us necessarily at the 4-1 renewal that impacts our peak zone. So that would be the answer being Florida tri-state, tri-county in particular. Uh, no, we'll see what, what six one and seven one does for us, but that's where I would expect maybe a more meaningful change. Gotcha.

But I mean, even if I look at, or if I even look at, you know, what happened between nine, you know, or September and, and, and one, one, it still was up despite the reduction in, in business you had at one, one renewals. Right. So, so is it like, is it simply, we're just looking at changes in rate or you're dropping exposure as well?

Well, at 1.1, I mean, we held on to most of the business. We actually grew a little. So, yes, you know, we gave up some rate, but we still found that that business met our, you know, was still attractive in terms of returns. So dollars of PML didn't really change a whole lot. There's always, you know, you lose one account, you replace it with another. So it might on the margin change the PMLs a little bit. But you're right. I mean, the rates went down. So we gave up some returns weren't as good as they had been a year before. But, again, looking ahead, 6-1, 7-1, don't know how it's all going to shake out. But, you know, that's when you may want to – I mean, there could be some more significant changes in the PMLs depending on kind of what we were doing or not.

As we said earlier, we put Florida was green. So I think for us, you know, we're getting the return. We're not going to – to renewals and we're going to try at the margin to write more. So I think that was not a zone where we decided to come back.

Great. Thanks. I appreciate it.

You're welcome. Our next question comes from Pablo Sison with JP Morgan. Please go ahead.

Hey, thanks for speaking and this will be a quick one. Nicholas, I just want to follow up on your comments regarding casualty sidecars. Do you think this is a blip, or is there a risk of casualty refacing the same structural hesitance that PropertyCat experienced with alternative capital exacerbating the soft market cycles there? Thanks.

I couldn't hear you well. Which line of business?

Just the casualty sidecars, and do you think that ultimately it will have the same effect that alternative capital had on PropertyCat?

I mean, it's hard to tell. You know, the thing we know is that it's not helping. I think the thing that may, you know, the thing that may mitigate that is the security risk. You know, I think the people that have used those sidecars, they usually use it because they want to write the business, but they don't like it. You know, I haven't seen people, you know, that are in the market like Arch using those tools yet. So I think it's for the buyer and for the broker, I mean, they have a decision to make because those claims are going to get paid five, six years, seven years from now. will the vehicle and the sedent which are usually not the best way that sedent be there to pay the claims i think that that may be a mitigation factor compared to property cats where the loss is imminent and we know the capital loads are high so i think that that thank you that would be the difference here our next question comes from jaron

Kinnar with Mizzou. Please go ahead.

Thank you. Good morning. I just want to circle back to the man-made Iran-related losses. Can you break them out for us for insurance and reinsurance and then maybe what the associated premiums are as well, aren't premiums?

Well, we don't break out any. We report everything as part of CATS, but, you know, again, the, you know, It's priced, right? So when we write some of these payrolls or these lines of business, again, political violence, terror, et cetera, which in this case are generating CAT losses to us, again, just in terms of how we report them to you, you know, it's part of the pricing, but it's not really captured in the, call it our CAT load per se that we report to you.

Yeah, I think to give you an idea, I think when we talk to our teams, we think that political violence, war on land, loss, all is about $3 billion. And we think it's about the premium that you collect for those lines of business. So that gives you, I mean, it's not a precise information, but that's the sense that we have. $2 billion, maybe.

$2 billion. And that's across both reinsurance and insurance.

So the loss for the market today, I think, is estimated at $3 billion. We estimate, it's an estimate, the premium for those lines of business that have been impacted to be around $2 billion. Got it.

Because I guess what I'm trying to get at here is when I look at the underlying loss ratio here, it now doesn't capture some losses, but we still have the premiums associated with that book and the attritional. So I... Like, as we think forward, I want to make sure that we're using the right base for the underlying loss ratio.

Yeah, good point. And maybe, I mean, we can do that offline with you if that's okay. I mean, I think we can kind of walk you through what the, yeah.

That would be perfect. And then my other question was, in the insurance book, I saw that the other liability claims made line grew quite nicely in the quarter. Can you talk about what drove that?

Yeah, it's really the transaction liability. I think we ride transaction liability both in North America and in our London office. And it's really driven by higher pricing in that line of business, as well as the M&A activity that has picked up in the last couple of quarters.

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

Yes, I want to thank you all to participate to our call and feel good about the business as it is challenged with the market condition for sure. But I think as we said, we think we are equipped and our teams are equipped and ready to compete in that market environment and generate you know, decent return for our shareholders. So thank you.

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