Arch Capital Group Q1 2026 Earnings Call - Disciplined Underwriting and AI-Driven M&A Integration Drive Returns Amid Softening Property Rates

Andrew Kligerman, Analyst, TD Cowen2: 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 8-K 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. Nicolas Papadopoulo and Mr. François Morin. Sirs, you may begin.

Andrew Kligerman, Analyst, TD Cowen1: Good morning, and welcome to Arch’s first quarter 2026 earnings call. We delivered a 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 Arch’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, Arch 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 1st quarter. It compares favorably to the 1st quarter in 2025 that was impacted by the California wildfires. Overall, market condition remained favorable. 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 lines casualty, construction, alternative market, 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 lines property, as well as in 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. 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 own systems. The ability to complete this effort in just 18 months speaks not only to the dedication of our teams, but also represents a strong use case for artificial intelligence in accelerating systems and platform transformations.

With a significant step completed, the business can now pursue its objective of creating 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 cedents contributed to a 6% decline in net premiums written versus the same quarter last year. Shorter lines, including other 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.

This additional supply continues to put downward pressure on property catastrophe and shorter rates, while also moderating the push for needed rate increases in some casualty lines. Underwriting performance remained excellent. Our focused and disciplined underwriting led to the reinsurance group’s 76% combined ratio, marking the fourth straight quarter of sub 80% 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 written.

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 our mortgage insurance portfolio remains excellent, with delinquencies normalizing from seasonally higher levels in the fourth quarter of 2025. We continue to pursue growth through 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 $408 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 in investment portfolio provides a material contribution to earnings and book value growth, effectively raising our quarterly earnings flow. In the first quarter, we repurchased $783 million worth of Arch 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 disciplined 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 cycle and into the future. I will now turn the call over to François, who will talk through the financials in more details. François?

François Morin, Chief Financial Officer, Arch Capital Group: 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 ex-cat, 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 5 points on the overall combined ratio.

We recognized 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 year 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 Nicolas explained, the non-renewal of 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 ex-cat 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. We 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-cat 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-GSE 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 a 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 Somers 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%-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, 1 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 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.

Andrew Kligerman, Analyst, TD Cowen2: Thank you. If you would like to ask a question, please signal by pressing star one 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. We’ll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Elyse Greenspan from Wells Fargo. Elyse, go ahead.

Elyse Greenspan, Analyst, Wells Fargo: Hi, thanks. Good morning. My first question is on, you know, property cat on the reinsurance side. 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?

Andrew Kligerman, Analyst, TD Cowen1: Yes. Good morning. We don’t, you know, as we always say, we don’t have a crystal ball, but, you know, for the 6/1, I think we really expect the market to remain competitive and to adjust underwriting standards based on the, you know, the actual rate decrease that we will see at that time. We don’t really have a forecast there. On the overall, you know, trend of the catastrophe portfolio, I think we have huge, huge headwinds, you know, because of the, you know, double-digit rate decrease. 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.

If I go back two years ago, they were all green. Now we have a bunch of them that are still green. I think Florida is still green. We have a bunch of them that are yellow and some of them that have turned red. I think it’s, you know, depending if the way of the business we knew and our perception of the attractiveness of that zone, our underwriting team will make the decision.

Elyse Greenspan, Analyst, Wells Fargo: Okay, thanks. 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?

Andrew Kligerman, Analyst, TD Cowen1: Yes. I think the, you know, the. 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, you know, I think we’re still seeing some little development from the year 2016 and 2017. The most recent years, 2021, 2022, 2023, 2024, we’ve seen additional, you know, adverse development. That should, in our view, continue to sustain, you know, price increases above trend. In term of our risk appetite on the insurance and reinsurance, I think it hasn’t changed. I think we like the specialty casualty, you know, the excess and surplus lines casualty, you know, primary position on the large account.

That’s where we play. We stay away from, you know, the commercial auto and also, you know, the large account excess towers, which we think are still very challenging despite some of the rate increases that we’ve seen.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from David Motemaden from Evercore ISI. Please go ahead.

David Motemaden, Analyst, Evercore ISI: Hey, thanks. Good morning. I was hoping, 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.

Andrew Kligerman, Analyst, TD Cowen1: Yes. Good morning. On, you know, starting with the U.S. I think on the U.S., I think we are broadly getting rate at trend. I think so as I mentioned earlier, we are getting rate above trend on the casualty lines of business. We are getting, you know, as detractor on the trend is really the short tail property lines of business where, you know, we’ve seen rapid rate decrease. When you sum it up for North America, I think we’re seeing rate slightly below trend. If you go to international, I think we have more shorter lines on the international book of business. We’re seeing some rate pressure on the shorter lines.

Overall, a low 1 digit rate decrease of a trend overall. You know, we started there with pretty high margins, so we feel very good about the business there.

David Motemaden, Analyst, Evercore ISI: Got it. Thanks. Then, I believe you mentioned just in reinsurance, some of the supply there, you know, 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?

Andrew Kligerman, Analyst, TD Cowen1: On the casualty, on the reinsurance side, I think we’re mainly talking about quota shares. I think the, you know, as I mentioned earlier, I think we like the fundamental of the specialty casualty business. The difficulty there is really the ceding commissions. I think, you know, based on the past experience of the casualty market, ceding commission should have gone down. 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 that business. That allows for the ceding commission to stay flat and on the best account to continue to grow up. The sidecars, you know, the latest flavor of the day with the casualty sidecar is just gonna add to that dynamic.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Tracy Benguigui from Wolfe Research. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen7: 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. The culprit is cheaper forms of capital coming in from MGAs, reinsurers, and alternative capital. From your vantage point, is this a real structural shift in the market, and how does that influence your underwriting appetite?

Andrew Kligerman, Analyst, TD Cowen1: Yes. For us, it’s more business as usual. The advantage that we have is that we are not retail large account players. We don’t play in that space. It has gone up. It has rapidly going down, so we don’t play in that space. We play in the excess and surplus lines property business and so that space is getting competitive and, you know, we are taking a very careful approach to that line of business right now, so.

Andrew Kligerman, Analyst, TD Cowen7: Excellent. There was also a recent settlement development early in the second quarter around Francis Scott Key Bridge collapse. How are you currently sizing the industry loss, and has that pushed your loss estimate upward?

Andrew Kligerman, Analyst, TD Cowen1: In that particular case, I think we were holding much more conservative estimates than loss estimate than the market, so no real change for us.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Michael Zaremski from BMO. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen0: Hey, thanks. Good morning. In the insurance segment, the underlying loss ratio, you know, continues to show some healthy improvement. 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 the dynamics we should consider. Thanks.

François Morin, Chief Financial Officer, Arch Capital Group: Yeah. Good morning, Mike. This quarter in particular was, you know, we benefited from a relatively benign, you know, amount of activity in attritional losses in London in particular. Our international segment or, you know, book did very well this quarter. That explains most of the favorable or reduction in the kind of ex-cat loss ratio compared to a year ago. You know, again, as a reminder, we’d encourage you all to look at trailing 12-month kind of rolling numbers to kind of get a view on performance of the book. The impact of the MC&E non-renewals is yet to be seen, right? I think it’s, you know, we’re. As the business earns out, it’s, you know, it will show up in the numbers.

At this time, we don’t think it’ll be material. I think it’s still a relatively small part of the book. On, you think of an $8 billion insurance segment book of business, the impact of non-renewing some of these programs will be somewhat, you know, immaterial or limited. Hopefully that explains it. Really, the quarter was all about kinda really good performance out of London.

Andrew Kligerman, Analyst, TD Cowen0: Got it. François, 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 or are there real losses or? Thank you.

François Morin, Chief Financial Officer, Arch Capital Group: I mean, there’s nothing paid, it’s certainly there are some real losses. You know, specialty book out of London, like terror, political violence, I mean, those are the some of the lines that are exposed, will be exposed. It’s ongoing. We took a first stab at it this quarter based on what had happened in the month of March. You know, we do expect more losses to come through in the second quarter. Yeah, we’ll keep reporting on it. It’s, yeah, it’s ongoing.

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. It’s a man-made, we call that, you know, man-made cat, but we still report it as part of our cat losses to the out, to the street, and that’s kind of included in the overall number.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Andrew Kligerman from TD Cowen. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen: Hi. Good morning. I know you’ve gotten a lot of questions about property, and 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. Again, this is blunt.

Where are you seeing risk-adjusted returns in property cat catastrophe reinsurance? I know there are, you know, different layers and risks on lines, et cetera, but, like, if you had to gauge a risk-adjusted return range, what are we seeing today? Maybe, maybe the same question with the E&S property that you’ve been writing.

Andrew Kligerman, Analyst, TD Cowen1: The way you have to understand is that, as I explained, we property CAT manage very dynamically based on the actual underlying profitability we see in 50 zones. 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 riding some of the business that we think has fallen below the threshold for us to ride the business. We think the business, it’s a different mix than it was probably three years ago. The mix has shifted, the business that we have today remains attractive on our books.

You know, we are still in the high teens, I think.

Andrew Kligerman, Analyst, TD Cowen: I see. I see. It sounds like-

Andrew Kligerman, Analyst, TD Cowen1: On the E&S.

Andrew Kligerman, Analyst, TD Cowen: Yeah.

Andrew Kligerman, Analyst, TD Cowen1: Go ahead.

Andrew Kligerman, Analyst, TD Cowen: Yeah, yeah. Just following up on that, Nicolas. It sounds like that there is business out there that Arch Capital won’t write that is well below your upper team’s return threshold. Is that fair?

Andrew Kligerman, Analyst, TD Cowen1: That’s fair.

Andrew Kligerman, Analyst, TD Cowen: Okay.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Caveh Montazeri from Deutsche Bank. Please go ahead.

Caveh Montazeri, Analyst, Deutsche Bank: 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. Without any obvious M&A 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 don’t... when you’re shrinking? I guess I don’t want to sound greedy, but, like, I’m wondering what held you back from doing more this quarter.

François Morin, Chief Financial Officer, Arch Capital Group: I mean, there’s nothing stopping us. You know, we don’t set targets in how much we’re gonna buy back. We, we go at it, we look at what’s in front of us, we look at, you know, what, you know, both in terms of the stock price and also liquidity in the stock, which is still very liquid. That means so far it hasn’t been a problem. You know, in terms of like, could we buy back 100% of our, of our income for the year? We could. I mean, we, but that’s not how we think about it. It’s more, I’d say, an outcome, if, you know, things work out in a certain way in terms of, kind of, again, the stock price and, and the volume, et cetera.

You know, you saw the reauthorization by the board. I think hopefully that gives you a little bit of a, you know, some direction in terms of how we think about the opportunity there and how much, you know, how much capital we think we can buy back or are looking to buy back. You know, whether it happens this quarter or next quarter or next year, I think that’s, you know, nothing’s set in stone. We’ll react to what’s in front of us. To answer your question, there’s really no structural limitations, you know, beyond, again, the regulations around buying back stock that we have to deal with.

Caveh Montazeri, Analyst, Deutsche Bank: That’s great to hear. Thank you. My second question, just want to pivot to cyber insurance, maybe if you can help us separate the cyclical versus structural pieces for us. I guess first question, where are we in the underwriting clock today for cyber? Structurally, like, given the recent developments in AI, and the potential for cyberattacks to become more, more frequent and more destructive, does that change your view of tail risk, aggregation risk, or even the long-term insurability of the product?

Andrew Kligerman, Analyst, TD Cowen1: I think in terms of the ongoing clock, I would say cyber is probably around three P.M., I think so. You know, it’s still okay, but it’s, you know, it’s getting to that point. In term of the recent AI, you know, Anthropic Mythos, we see it as a real current threat, but we don’t really see it’s changing the cyber product. I think the cyber market as more of an arm race between the attacker and the defender. Certainly Mythos is accelerating that trend.

You know, the Mythos can help, you know, the attacker, but, you know, the defender can also, you know, reinforce in defense, you know, using the same model. We think it’s really an acceleration of the speed at which, you know, maybe cyberattacks can be conducted. It’s and to your point, it’s also an acceleration of the scale. I would think because the scale would be larger, I would think, we see it more as an increased systemic risk. We are, so we take it, we are taking a very careful approach to that and, you know, in our RDS scenarios.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Josh Shanker from Bank of America. Please go ahead.

Josh Shanker, Analyst, Bank of America: Yeah. You know, I know you don’t give guidance certainly on margins. 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. Growth is about zero. I guess maybe it’s another clock question. As you sort of give an outlook to internally for the next year, do you expect Arch’s and the industry’s loss ratios to begin to deteriorate from here, or do you think the current levels are supportable?

Andrew Kligerman, Analyst, TD Cowen1: You know, I don’t know about the industry, to be honest. It’s hard to predict because as far as we are concerned, you know, we are confident in our ability to manage a cycle. That’s what we do. 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. I think we have, you know. Certainly, the property market is coming down, you know, everybody can see that, we still think we have a good opportunity on the casualty side.

Overall, I think, again, as I said, you know, based on our own mix of business, we think that we see rates just below trend. That would support the thesis that margins are sustainable, at least for the near future.

Josh Shanker, Analyst, Bank of America: Then in terms of SME, the commercial business, the MidCorp 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?

Andrew Kligerman, Analyst, TD Cowen1: Again, we just. As I mentioned in my remark, we just finished the cutover. The main, I mean, the main focus for us has been to roll over the portfolio and to get, you know, to create an entirely workbench, with, you know, with which we can underwrite the business on Arch paper. Those have been the primary goal. Now that this is done, you know, it opens abilities to, as, you know, to try to enhance the value proposition of that business and build scale. 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, you know, we’re focusing on building new tools to really help underwriters with better risk selection, you know, triage and so on that will make them, you know, more productive, so.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Robert Cox with Goldman Sachs. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen4: Hey, good morning. Just a question on premium leverage. On the one hand, the business is shifting away from property and property cat, which should allow for an increase to premium leverage. In the past, we’ve noticed it’s been hard to right size leverage in a softening market like this due to lack of growth opportunities. I guess the question is, you know, do you foresee premium leverage would continue to fall like this as we get further into the soft market? How does that impact your view on the future ROEs?

François Morin, Chief Financial Officer, Arch Capital Group: Well, certainly we’re managing the equity side of the leverage. 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. That’s certainly a tool we have that we have been using, we’ll keep using, and make sure that, you know, our ROEs remain attractive. I’d say for sure, like if the mix goes more long tail than short tail, it helps on the leverage. Again, the, the equity part of it is something we’re, you know, watching careful.

Andrew Kligerman, Analyst, TD Cowen4: Thanks. That’s helpful. Just to follow up on terms and conditions, just curious if any negotiations on terms and conditions started to change in the quarter. You know, like which terms you think could start to get further negotiated as we move deeper into the soft market?

Andrew Kligerman, Analyst, TD Cowen1: Which lines of business are you talking about? Property cat?

Andrew Kligerman, Analyst, TD Cowen4: Yeah, particularly property cat reinsurance.

Andrew Kligerman, Analyst, TD Cowen1: We’ve talked to our team and we, you know, we are seeing a bit more, but you know, it remains a very small portion of, you know, some of the aggregates, a bit more aggregate, a bit more top-and-drops. You know, it’s at the margin so far. You know, as the market gets more competitive, we’d expect more of those structure that are much more difficult to price to come back to the market.

Andrew Kligerman, Analyst, TD Cowen4: Thank you.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Ryan Tunis with Cantor Fitzgerald. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen6: Hey, thanks. Good afternoon. The company’s obviously a much larger company today than it was 7 years ago, both from a premium side but also from an OpEx side. I imagine a lot of that increase in OpEx is in support of hard market growth. 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?

Andrew Kligerman, Analyst, TD Cowen1: I think the answer is yes. We, you know, that’s something that’s in our mind. You know, I think the loss ratio part is probably more important as the market gets softer. Yes, I think, you know, which especially in the insurance group, I mean, the expense side is important, and we actually paying attention to it.

Andrew Kligerman, Analyst, TD Cowen6: Okay. Just a follow-up for François. Underlying loss ratio and the mortgage insurance segment looked a little elevated. Nothing really stood out to me, maybe a little bit higher reserve for default. Not sure if that’s seasonal, you know, how should we interpret, yeah, that loss ratio result this quarter, never mind?

François Morin, Chief Financial Officer, Arch Capital Group: Yeah. It’s definitely some of it is a result of the change or the growth in the average mortgage that goes into NOD. 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, the post-COVID effectively, right? That’s when, you know, mortgage loans were up in size. 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 wanna say.

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, has, you know, remains stable, but it’s the average size of the loan that’s hitting the loss ratio. I think it’s, you know, it’s a little bit kinda like an evolving kinda 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.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Alex Scott with Barclays. Please go ahead.

Alex Scott, Analyst, Barclays: Hey, thanks for taking it. 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 the business that you can really lean into growth in right now like you have in sort of most environments in the past. It’s been one of your three businesses has been attractive to really leg into. Does it create any need to sort of look at, you know, potentially diversifying transaction? 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 to get invested.

François Morin, Chief Financial Officer, Arch Capital Group: I mean, I’ll take the first part. I mean, certainly, 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, you know, we’re working hard trying to find new opportunities internationally and, you know, etc., like in mortgage and insurance for sure. You know, at this point, it’s harder to see how the market will support, you know, massive or outsized growth in any of our segments. I mean, the share buybacks, again, like as we keep generating meaningful earnings. I think, you know, we don’t wanna 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, that is additive. We’re, 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, etc. We’re very selective there. You know, we’re, we’re trying to think outside the box too. I mean, if there’s things that, you know, we don’t do currently that can make us better, we’ll, we’ll explore those.

In terms of AI, I mean, it’s, you know, it’s certainly something that is coming at us really quickly, really fast. You know, we’re trying to think of ways where we can kinda, you know, again automate things and we’re doing some of that, but it’s still very early innings, very early days of that. I think we’ll that will evolve and we’ll see where it goes.

Andrew Kligerman, Analyst, TD Cowen1: Yeah. We, you know, we’ve been investing in AI, you know, for the last 10 years, both in mortgage and P&C. We’ve deployed a bunch of AI and machine learning models. But it’s changing really fast. I think the industry and our struggle is really to really show results while at the same time, you know, working on our data strategy and our integration of our system to really support, you know, AI at scale. Third, you know, really figure out what AI will look like 3 years from now because it’s changing so quickly. You know, if you look at the Anthropic models. You know, they open huge opportunities to do certain things, but what’s next? I think we, you know, you really have to take.

It’s a lot of investment. At the same time, you know, you’re trying to create productivity and the insight for your underwriters to be able to compete. I think it’s.

Alex Scott, Analyst, Barclays: Yeah, all helpful. Thanks. 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 you know, have a rough idea of that. Wanted to see if you could tell us about, you know, anything that would be sort of considered private credit within the fixed maturity part of the book.

François Morin, Chief Financial Officer, Arch Capital Group: We have some, but limited, right? We have it both in our, again, call it public markets and private markets. The general thinking and, you know, the strategy with our investment guys has been to go more on the high quality loans. Kinda low loan-to-value and kinda very good collateral supporting the investments. 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.

Alex Scott, Analyst, Barclays: Got it. Thank you.

François Morin, Chief Financial Officer, Arch Capital Group: You’re welcome.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Matthew Heimermann with Citi. Please go ahead.

Matthew Heimermann, Analyst, Citi: Hey, good morning, everybody. I just wanted to follow up on your call related to using AI in the technology rollover of MidCorp, and just curious how that experience has been different than past. I recognize that you’re not a significant acquirer, the universe of past might be smaller, just thought that was provocative comment.

Andrew Kligerman, Analyst, TD Cowen1: I mean, the way it really help us and speed up the process is to write some of the codes. I think, you know, we really didn’t do enough there, but when we did, it was really helpful. The big help was on the testing. A lot of the testing was done by AI, and that really accelerated the time to market. Those are the two aspects that we when we talk to the teams, they really highlight as it, you know, the impact of AI on this shift, on this cut-over.

François Morin, Chief Financial Officer, Arch Capital Group: Right. ’Cause again, right now, just quickly, I mean, again, it was a build-out of a brand new effectively platform infrastructure, right? 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. It’s, you know, that’s where I think that to Nicolas’ point, the AI kinda capabilities really came through and helped, you know, speed up the process.

Matthew Heimermann, Analyst, Citi: Good. That’s helpful. I just wanna make sure I understand the use of the word testing correctly. Is that, should I think about that as auditing outputs?

Andrew Kligerman, Analyst, TD Cowen1: Yeah. It’s running scenarios.

Matthew Heimermann, Analyst, Citi: of AI.

Andrew Kligerman, Analyst, TD Cowen1: Yeah. It’s running scenarios to make sure that every time you create. We created a new platform to, that’s a good point, François, for context. 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. 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.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Meyer Shields with KBW. Please go ahead.

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

François Morin, Chief Financial Officer, Arch Capital Group: Down relative to last year or last quarter?

Meyer Shields, Analyst, KBW: Last year. Prefer up from last quarter.

François Morin, Chief Financial Officer, Arch Capital Group: 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 QRTC this quarter in reinsurance. I mean, what’s, you know, what explains the increase is more investments in staffing and building out further the insurance, the reinsurance group. Well, I know that there’s been kinda hiring around like, you know, in the technology and improving systems, so that’s certainly a big part of it. 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. If you adjust for that, you know, that explains a little bit of the difference as well.

Nothing, I’d say nothing, I’d say structural that we, you know, was a surprise to us.

Meyer Shields, Analyst, KBW: Okay. That’s very helpful. Then shifting gears, there are some reports of, you know, very significant rate increases for product lines exposed to the Iran conflict. I was wondering whether Arch is trying to write more of that business or being more cautious because of the risk?

Andrew Kligerman, Analyst, TD Cowen1: We do that, and that would be with our London office where we write some political violence and war on land. We’ve been cautious, but we, you know, the rates have spiked up, so we’ve actually wrote a little bit more business, but in a very cautious way.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Rowland Mayor from RBC Capital Markets. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen5: 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?

François Morin, Chief Financial Officer, Arch Capital Group: The PMLs that we report?

Andrew Kligerman, Analyst, TD Cowen5: Yeah, I’m just curious on when you model the cat losses out in the state, if it’s fully capturing how the sort of personal line side of the business is seeing.

François Morin, Chief Financial Officer, Arch Capital Group: Sure

Andrew Kligerman, Analyst, TD Cowen5: in the loss environment.

François Morin, Chief Financial Officer, Arch Capital Group: Yeah, 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. We changed how we, you know, how we model those things on fraud and, you know, additional expenses around kind of claim handling, et cetera. That’s all captured right now. 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.

Andrew Kligerman, Analyst, TD Cowen5: All right. That’s perfect. Thank you so much.

François Morin, Chief Financial Officer, Arch Capital Group: Yep.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Brian Meredith with UBS. Please go ahead.

Brian Meredith, Analyst, UBS: Yeah, thanks for fitting me in. Back on the PMLs, I noticed your PMLs did not decline. Fact kinda stayed the same at 4/1 versus your 1/1 disclosure. You’re declining, you know, property CAT and everything. Can you help us reconcile kinda what’s going on with the PMLs relative to what you’re doing with property reinsurance and insurance?

François Morin, Chief Financial Officer, Arch Capital Group: Yeah, I think, right, Brian, it’s the 4/1 number, so not a ton. Again, think of it’s the peak zone. It’s. 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. That would be the answer being Florida tri-state, the tri-county in particular. You know, we’ll see what 6/1 and 7/1 does for us, but that’s where I would expect maybe a more meaningful change.

Brian Meredith, Analyst, UBS: Gotcha. I mean, or sorry, even look at, you know, what happened between September and one one, it still was up despite the reduction in business you had at one one renewals, right? Is it, like, is it simply we’re just looking at changes in rate, or you’re dropping exposure as well?

François Morin, Chief Financial Officer, Arch Capital Group: Well, at 1/1, I mean, we held on to most of the business. We actually grew a little. Yes, the, you know, we gave up some rate, but we still found that business met our, you know, was still attractive in terms of returns. Dollars of PML didn’t really change a whole lot. There’s always, you know, you lose one account, you replace it with another. We might on the margin change the PMLs a little bit. You’re right, I mean, the rates went down, so we gave up some returns weren’t as good as they had been the year before. At, you know, again, looking ahead, 6/1, 7/1, don’t know how it’s all gonna shake out. You know, that’s when you may wanna.

I mean, there could be some more significant changes in the PMLs depending on kinda what we renew or not.

Andrew Kligerman, Analyst, TD Cowen1: Yeah. As we said earlier, we put Florida was green. I think for us.

François Morin, Chief Financial Officer, Arch Capital Group: Yeah. Right

Andrew Kligerman, Analyst, TD Cowen1: ... you know, we getting the return, we’re not gonna let go the renewals, and we’re gonna try at the margin to write more. I think that was not a zone where we decided to cut back.

Brian Meredith, Analyst, UBS: Great. Thanks. Appreciate it.

François Morin, Chief Financial Officer, Arch Capital Group: You’re welcome.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Pablo Singzon with J.P. Morgan. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen3: Hey, thanks for squeezing me in. This will be a quick one. Nicolas, just wanted to follow up on your comments regarding casualty sidecars. Do you think this is a blip, or is there a risk of casualty re-facing the same structural hazards that property CAT experienced with alternative capital exacerbating the soft market cycles there? Thanks.

Andrew Kligerman, Analyst, TD Cowen1: I couldn’t hear you well. Which line of business?

Andrew Kligerman, Analyst, TD Cowen3: Just the casualty sidecars, do you think that ultimately it will have the same effect that alternative capital had on property CAT?

Andrew Kligerman, Analyst, TD Cowen1: I mean, it’s hard to tell. You know, the thing we know is that it’s not helping. I think the thing, you know, 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, you know, using those tools yet. I think it’s for the buyer and for the broker, I mean, they have a decision to make because those claims are gonna get paid, you know, five, six years, seven years from now.

Will the vehicle and the cedent, which are usually not the best rated cedents, be there to pay the claims? I think that may be a mitigation factor compared to property CAT where the losses are imminent, and we know the capital loads are high.

Andrew Kligerman, Analyst, TD Cowen3: Thank you.

Andrew Kligerman, Analyst, TD Cowen1: That would be the difference. Yeah.

Andrew Kligerman, Analyst, TD Cowen2: Our next question comes from Yaron Kinar with Mizuho. Please go ahead.

Andrew Kligerman, Analyst, TD Cowen8: Thank you. Good morning. I just wanna circle back to the man-made kind of, Iran-related losses. Can you break them out for us for insurance and reinsurance, and then maybe what the associated premiums are as well, earned premiums?

François Morin, Chief Financial Officer, Arch Capital Group: Well, we don’t break out any. We report everything as part of CATs, you know, again, the, you know, It’s priced, right? When we write some of these perils 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 know, it’s part of the pricing, it’s not really captured in the, call it our CAT load per se that we report to you.

Andrew Kligerman, Analyst, TD Cowen1: Yeah. I think to give you an idea, I think when we do, when we talk to our teams, we think the political violence, run-off loss, is about $3 billion, and we think, it’s about, you know, the, the premium that you collect for those lines of business. I mean, it’s not a precise information, but that’s the sense that we have. $2 billion maybe.

Andrew Kligerman, Analyst, TD Cowen8: $2 billion? That’s across both reinsurance and insurance?

Andrew Kligerman, Analyst, TD Cowen1: No. The, 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 are being impacted to be around $2 billion.

Andrew Kligerman, Analyst, TD Cowen8: Got it.

Andrew Kligerman, Analyst, TD Cowen1: two bill-

Andrew Kligerman, Analyst, TD Cowen8: ’Cause I guess what I’m trying to get at here is when I look at the kind of 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. Like, as we think forward, I wanna make sure that we’re using the right kind of base for the underlying loss ratio.

François Morin, Chief Financial Officer, Arch Capital Group: Yeah, good point. Maybe, I mean, we can do that offline with you if that’s okay. I mean, I think we can kind of walk you.

Andrew Kligerman, Analyst, TD Cowen8: Yeah

François Morin, Chief Financial Officer, Arch Capital Group: through what the, Yeah.

Andrew Kligerman, Analyst, TD Cowen8: That’ll be perfect. 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?

Andrew Kligerman, Analyst, TD Cowen1: 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, you know, picked up, you know, in the last couple of quarters.

Andrew Kligerman, Analyst, TD Cowen2: I’m not showing any further questions. Would you like to proceed with any further remarks?

Andrew Kligerman, Analyst, TD Cowen1: Yes. I want to thank you all to participate to our call and feel good about the business as it is. I think we are 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. Thank you.

Andrew Kligerman, Analyst, TD Cowen2: Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may all disconnect.