Arch Capital Group Ltd. (ACGL) Earnings

Management highlights

- Overall Quarterly Financial Results * After-tax operating income was $893 million, or $2.56 earnings per share. * Book value per share grew 2.8% in the quarter, and 4.5% in the first half of 2026. * $1.2 billion in share repurchases were completed in the quarter, bringing first half 2026 total repurchases to $1.95 billion, equal to ~94% of net income for the period. - Capital and Debt Management * In May 2026, the company raised $2 billion in new 10-year and 30-year senior notes. * Proceeds will be used to redeem $500 million in maturing 10-year notes, purchase $418 million in outstanding 2043 and 2046 senior notes via a completed tender offer, with remaining proceeds for general corporate purposes. * The tender offer replaces non-compliant debt with instruments that meet updated regulatory capital requirements. * As of quarter-end, the debt plus preferred to capital leverage ratio is a conservative 18.1%. Expected quarterly interest expense for the next two quarters is $60 to $63 million. - Market Position and Underwriting Strategy * The company is in the early stages of a softening underwriting market, driven by an influx of new capacity. Competition is elevated particularly in property and short-tail lines, while casualty-oriented lines continue to see rate increases. * The diversified business model across specialty insurance, reinsurance, and mortgage insurance provides competitive advantage via scale, underwriting expertise, and claims capabilities. * Cycle management discipline is embedded in company culture, with compensation structures aligned to long-term profitability and risk-adjusted returns. Underwriters actively adjust portfolio mix to exit underpriced business and retain attractive risk. * In the political violence/terrorism London market, the company continues to selectively deploy additional capacity in the Middle East following Iran conflict losses, as prices have adjusted upward, with concentration risk controls in place.

Guidance

Management did not issue formal full-year numeric guidance, but provided the following forward-looking commentary: * Operating expense ratio is expected to revert to historical levels in the second half of 2026, after a one-time increase in Q2 from the transition of middle market business to Arch internal systems. * Annualized group catastrophe load expectation remains unchanged at 68%. * Share repurchases will remain a core capital allocation tool as long as organic growth opportunities are limited and the stock price remains attractive; the company has capacity to sustain returning 100% of operating earnings via repurchases for the foreseeable future if market conditions persist. * Special dividends are currently less attractive than share repurchases at the current stock price range of 1.45x to 1.6x book value; the company will re-evaluate if the stock price approaches 2x book value as it did in 2024.

Segment performance

1. Insurance Segment: Underwriting income of $27 million, negatively impacted by $201 million in total net catastrophe losses (primarily from the Iran conflict and U.S. severe convective storms). Net premiums written declined 5.1% year-over-year, driven by non-renewal of certain program business and reduced writing of excess and surplus property business. The ex-catastrophe current accident year combined ratio was 91.6%. The ex-catastrophe accident-year loss ratio net of reinstatement premiums improved 90 basis points year-over-year to 56.4%, driven by strong international operations. This segment contributed 4.5% of total quarterly underwriting income. 2. Reinsurance Segment: Underwriting income of $410 million, supported by relatively light catastrophe losses. Net premiums written declined 10.4% year-over-year, reflecting lower rates, increased client risk retention, and higher retrocession purchases primarily in property catastrophe lines. The ex-catastrophe current accident year combined ratio was 79.9%, up 270 basis points year-over-year due to line mix shifts and a more competitive pricing environment. This segment contributed 67.4% of total quarterly underwriting income. 3. Mortgage Segment: Underwriting income of $220 million, delivering strong stable results. Net premiums earned were flat quarter-over-quarter, as a reduction in the U.S. MI portfolio was offset by higher earned premium in Australia. The U.S. MI portfolio delinquency rate remained flat at 2.1%, with continued favorable reserve development (slower than prior quarters), supported by a resilient economy and high-quality in-force risk. This segment contributed 36.2% of total quarterly underwriting income. Investment Performance: Net investment income was $417 million ($1.20 per share), supported by a $49.5 billion conservatively managed portfolio with an average AA- credit rating. An additional $196 million ($0.56 per share) came from equity method investments, contributing 340 basis points to annualized net income return on average common equity. Overall, the company's aggregate ex-catastrophe accident year combined ratio across all segments was 82.5%, up 160 basis points year-over-year.

Risks & headwinds

* The early softening market has increased competition, particularly in property catastrophe lines, leading to lower rates and pressure on underwriting margins; the company expects further rate declines if catastrophe activity remains low through the 2026 hurricane season. * Catastrophe losses from the ongoing Iran conflict are case-by-case and may result in additional additional losses in future quarters if new events occur. * Social inflation and rising casualty loss trends continue to pressure underwriting results; the benefits of tort reform and increased defense pushback have not yet materialized in reported loss data. * M&A activity in the current soft market environment faces valuation risk, as most available targets still hold elevated price expectations. * When working with MGAs, long-tail line reinsurance carries residual counterparty risk if the MGA ceases operations before claims are settled.

Analyst Q&A

• Q: How sustainable is the insurance segment's current strong underlying loss ratio, and were there any changes to loss pick assumptions this quarter? /

  A: The international short-tail book has performed very well, and management is comfortable keeping loss picks at current levels, with volatility always possible. The non-renewal of lower-quality program business has modestly reduced the overall segment loss ratio, and underwriters actively adjust portfolio mix by exiting higher loss ratio business to maintain current loss ratio levels. There were no systematic changes to loss picks across lines this quarter, outside of normal routine rate and trend adjustments.

• Q: Can you elaborate on how competitive pressures differ between property and casualty lines in this early soft market, and what is the rate adequacy outlook? /

  A: Property faces significant headwinds, with material rate declines that have pushed the company to reduce net exposure in both insurance and reinsurance, leading to lower net written premium. Management noted mid-teens rate reductions at mid-year renewals, with the overall rate index still above pre-2020 hurricane levels. Casualty remains far more attractive, with overall market discipline holding, and rates still keeping up with loss costs; management remains optimistic and continues to find attractive opportunities in casualty. Favorable prior year development was concentrated in short-tail lines, with casualty overall roughly neutral.

• Q: How do you view M&A opportunities in the current soft market environment? /

  A: Arch only pursues M&A for strategic, capability-building purposes, not as an alternative to organic growth or capital return. Management looks for M&A to enter new lines of business where building scale organically would be slow, pointing to the prior middle market acquisition as an example. Currently, valuations for available targets are too expensive; management expects valuations may fall as the soft market progresses and weaker players balance sheets come under pressure, and remains very selective given the historical high failure rate of insurance M&A.

• Q: What is driving the quarter-over-quarter growth pop in the mortgage segment, and how will profitability evolve as the back book matures? /

  A: Q2 growth was driven by two one-time factors: a large new client win in Australia, and a reduction in the amount of reinsurance the segment purchases. Pricing competition in mortgage insurance is very muted, with only very small rate variations, and the major market participants have remained disciplined on pricing. Management expects profitability to remain steady moving forward, with additional growth expected from the new Australian client over the remainder of the year.