Arch Capital Group Ltd.

Good day, ladies and gentlemen, and welcome to the 2Q2026 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 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 the forward-looking statements in the call to be subject to the safe harbor created thereby. www.archgroup.com and on the SEC's website, at www.sec.gov. I would now like to introduce your hosts for today's conference, Mr. Nicolas Papadopoulo and Mr. Francois Morin. Sirs, you may begin.

Good morning and welcome to ARCHE's second quarter earnings call. We reported strong earnings this quarter with solid underwriting performance from each of our three segments. After-tax operating income in the quarter was $893 million or $2.56 of earnings per share. Slowing top-line growth and strong earnings freed up capital for additional share repurchases in the quarter, bringing the total for the first half of the year to $1.95 billion. Book value per share grew by 2.8% in the quarter and has increased by 4.5% in the first half of the year. While the underwriting environment is increasingly competitive, it is important to note that we are still in the early stages of this softening market. Overall, fundamentals are attractive, with some lines experiencing increased competition, while others continue to see rate increases. Archer's diversified business model ensures that we can find opportunities to deploy capital that generate appropriate risk-adjusted returns. Our position as an industry leader in specialty insurance, reinsurance and mortgage insurance provides us with a meaningful competitive advantage. Clients come to us not only for capacity, but also for our underwriting expertise, claim capabilities and valuable perspectives that help them better manage risk. Our commitment to cycle management is embedded in our culture and guides our underwriting approach. This is reinforced by a compensation structure that incentivizes quality underwriting by aligning performance with long-term profitability and shareholder returns. Let us now turn to our segment performance, starting with insurance, where results were negatively affected by catastrophe losses related to the Iran conflict. AARCH is a leading rider of political violence, terrorism, and marine war in the London market. So, while losses affected this quarter's results, we are seeing ongoing opportunities to support clients with assets in the region. Underwriting income of $27 million does not reflect the good underlying performance of the segment, which delivered a current accidental combined ratio ex-cat of 91.6%. As reported by others, and consistent with our comments last quarter, competition is increasing, particularly in property and short-tail lines. That said, the middle-market commercial business and casualty-oriented lines continue to experience rate increases. Additionally, pricing in directors and officers is rebounding slowly, while rate declines in cyber insurance have moderated. Our growth and net premium return were negatively impacted by the non-renewal of certain program business as discussed in prior calls, and were also impacted by reduced writing of our excess and surplus property business. We continue to see premium growth in casualty-oriented lines in North America, including excess and surplus casualty, construction, and national accounts. And we also saw positive trends in certain specialty London market lines, including war and terrorism. Looking ahead, our diversified platform provides us with the flexibility to grow in those areas where pricing supports our return objectives. Reinsurance underwriting results were excellent, aided by relatively light catastrophe losses, resulting in $410 million of underwriting income in the quarter. The current quarter-accident-year XCAT combined ratio was 79.9%, a 270 basis point increase from last year due to changes in mix and lower pricing in property lines. Net premiums written were down 10% from the same quarter last year, as some of our clients opted to retain more risk and increasing competition lowered rates, particularly in property. We increased our session to traditional reinsurance and third-party capital, which impacted our net-to-growth ratio. Our ability to leverage these capabilities enables us to provide solutions to our brokers and cedent while maintaining flexibility to manage our net risk portfolio. Similar to insurance, casualty reinsurance is an area where we see attractive business. Opportunities remain, though competition is elevated due to abundant reinsurance capacity. Within our reinsurance business, our focus is on maintaining our position as a leading reinsurance partner through disciplined underwriting and by consistently delivering business expertise across market cycles. The mortgage segment continued to provide strong, stable results, delivering $220 million of underwriting income in the quarter. Our mortgage portfolio performed well, driven by a resilient economy and high-quality risk-in-force. Our USMI portfolio delinquency rate remained flat at 2.1%. Favorable reserve development continued, although slower than in prior quarters. While affordability and housing supply constraints limit new mortgage origination, mortgage insurance remains a consistent contributor to earnings as the strengths of the enforced portfolio and favorable credit characteristics continue to support steady profitability. Investment contributed $417 million, or $1.20 of net investment income per share in the quarter. This is supported by our conservatively managed portfolio, which maintains an average credit quality of AA-. We continue to benefit from an asset base that has grown to $49.5 billion, supported by strong cash flows. Investments accounted for using the equity method, which are excluded from operating earnings, performed well, adding an additional $196 million or $0.56 per share to net income, reflecting strong returns across the portfolio. Over the last five years, we have enjoyed favorable market conditions in property and short deadlines, and consequently, we now face the early stages of a competitive market driven by an influx of capacity. This part of the cycle is to be expected. Importantly, a more competitive environment doesn't mean a lack of opportunity. It simply requires greater discipline in where and how capital is deployed. Our playbook is built upon our enduring strengths. A diversified platform, best-in-class cycle management, a strong brand that enhances our relationship with clients and distribution partners, as well as disciplined capital management. In sum, we remain well positioned to consistently deliver superior results for our shareholders. As ARCH approaches its 25th anniversary, one thing is clear. While the company has evolved, the principle and playbook we rely upon create long-term shareholder value. With that, I will turn the call over to Francois.

Thank you, Nicolas, and good morning to all. Before I provide some additional color on our results, I wanted to walk you through our capital allocation and management actions this quarter. Capital management is an essential tool to help us to manage our business through the insurance cycle. The latest hard market provided Arch the opportunity to generate significant excess capital that, as the market transitions, cannot be fully deployed into our business. Our preferred option has first been to return excess capital to our shareholders through share repurchases and, secondly, through special dividends. After considering the opportunities available to us to deploy capital in the business, both existing and new, we determined that share buybacks remain an accretive use of excess capital in enhancing shareholder returns at current prices. As a result, we repurchased 12.4 million shares at an aggregate cost of $1.2 billion in the quarter. Through the first half of the year, we have repurchased approximately 94% of our net income in our own shares. As you know, we also accessed a debt market in May, raising $2 billion in a combination of 10-year and 30-year senior notes. The proceeds from this issuance will be used to 1. Redeem the $500 million of 10-year senior notes maturing later this year. 2. Purchase $418 million of our 2043 and 2046 senior notes through a recently completed tender offer with the remainder for general corporate purposes. The tender offer was designed to replace debt that no longer meets updated regulatory capital requirements with fully compliant capital instruments. As a result of the debt raise, we expect our interest expense to be approximately $60 to $63 million for each of the next two quarters. As of the end of the second quarter, our debt Our debt plus preferred to capital leverage ratio stands at a conservative 18.1%. Turning back to our operating performance for the quarter, our three business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 82.5%, up 160 basis points from the same quarter last year. Our underwriting income included $165 million of favorable prior development on a pre-tax basis in the quarter, or 4.1 points on the overall combined ratio. We recognize favorable development in 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. Current year catastrophe losses were $201 million net of reinsurance and reinstatement premiums and were a combination of losses from the Iran conflict and severe convective storms in the U.S. The insurance segment's net premiums written declined 5.1% year-over-year due in part to the non-renewal of certain program business. The XCAT accident-year loss ratio net of reinstatement premiums improved by 90 basis points to 56.4% compared to the same quarter one year ago, due primarily to strong performance in our international operations. The acquisition expense ratio for the current accident year increased by 30 basis points, as the benefit we observed from the write-off of deferred acquisition costs for the MCE acquired business rolled off. Our operating expense ratio was higher this quarter due to the transition of our middle market business to arch systems. As mentioned last quarter, we would expect our operating expense ratio to revert back to historical levels during the second half of the year. Turning to the reinsurance segment, net frames written were down 10.4% from the same quarter one year ago, reflecting reduced ratings from lower rates in a higher level of retrocession purchases, primarily in the specialty and property catastrophe line. Overall, our ex-catastrophe accident year combined ratio of 79.9% is up from last year due to the shift in line of business mix and a more competitive rate environment for certain sub-segments. Our mortgage segment produced another very strong quarter with underwriting income of $220 million. Net premiums earned were flat from last quarter with a reduction in our USMI business mostly offset by higher levels of earned premium in Australia. On the investment front, we earned a combined $613 million from net investment income and income from funds accounted for using the equity method for $1.76 per share pre-tax up from the $1.57 per share we earned last quarter. We note that the returns of equity method funds contributed 340 basis points to our annualized net income return on average common equity in the quarter. Cash flow from operations remained very strong at $1.3 billion for the quarter. Income from operating affiliates was $46 million for the quarter, slightly higher than the $40 million from the same quarter one year ago. Our effective tax rate on pre-tax operating income was 15.1%, reflecting the mix of income by tax jurisdiction. As of July 1, our peak zone natural cap probable maximum loss for a single event at a 1 in 250-year return level on a net basis is down slightly to $1.8 billion and now stands at 8% of tangible shareholders' equity. With these introductory comments, we are now prepared to take your questions.