Arch Capital Group Ltd. Q2 FY2024 earnings call

• Marc Grandisson stated the company had a highly profitable quarter with $762 million of underwriting income and an annualized operating ROE of 20.5% due to contributions from all three underwriting segments and strong investment results. • The P&C environment remains excellent with opportunities for attractive returns. The company intends to deploy capital into underwriting units first and announced the intent to acquire Allianz's U.S. MidCorp and Entertainment businesses. • The Mortgage segment delivered solid underwriting income and saw a 12% increase in new insurance written in the U.S. • Francois Morin mentioned after-tax operating income of $2.57 per share, up 34% from Q2 2023, and book value per share of $52.75. Favorable prior development on a pretax basis, catastrophe losses in line with expectations, and the Mortgage segment's acquired book of business impact on delinquency rate. • Both Marc and Francois paid tribute to Dinos, an industry legend who led the company for over 15 years.

Reinsurance and Insurance segments combined to deliver $475 million of underwriting income and just over $5 billion of gross premium. Reinsurance generated $366 million of underwriting income. The Insurance segment contributed $109 million of underwriting income in the quarter. The Mortgage segment generated $287 million of underwriting income while increasing new insurance written at the U.S. by 12% from the same quarter a year ago. The investments portfolio increased to $37.8 billion, generating $364 million of net investment income in the quarter.

• Francois Morin mentioned the effective tax rate on a pretax operating income was 9.5% for Q2, with the full-year 2024 expected range of 9% to 11%. • Disclosed the expected August 1 close of the transaction to acquire Allianz's U.S. MidCorp and Entertainment insurance businesses. Starting next quarter, the company will update information on the financial impact of this transaction.

• Casualty lines face uncertainty with slow evolution of price increases and long tail effects. • Reinsurance has volatility due to catastrophic events, both in the U.S. and internationally. • Cyber insurance risk from events like CrowdStrike, with uncertain loss range and potential impact on renewals. • Claims payment patterns extending affecting expected losses in certain lines of business.

Q: Elyse Greenspan asked about the casualty market turn and margin run rate.

A: Marc Grandisson said the casualty turn takes time, several years, and current returns on insurance are in excess of the long-term target.

Q: Elyse Greenspan asked about mortgage releases.

A: Francois Morin said there was favorable development in mortgage due to better cure activity, but directionally, the company did not expect the same level of reserve releases going forward.

Q: Jamminder Bhullar asked about reserves and susceptibility to casualty issues.

A: Francois Morin said the book of business was not a standard commercial general liability book, mix mattered, and favorable development was mostly in short-tail lines.

Q: Jamminder Bhullar asked about buybacks or dividend.

A: Francois Morin said the company will return capital if no opportunities, which could be in the form of share buybacks or dividends.

Q: Joshua Shanker asked about the market opportunity and capital deployment.

A: Marc Grandisson said the market was reaching equilibrium, and the Allianz transaction uses $1.8 billion of capital.

Q: Michael Zaremski asked about casualty and social inflation.

A: Marc Grandisson said large accounts are ground zero for pressure, and reserve review is done quarterly.

Q: Michael Zaremski asked about catastrophe levels.

A: Marc Grandisson said Reinsurance has volatility, and this quarter there were no lower attritional losses.

Q: David Motemaden asked about the underlying loss ratio in the insurance business.

A: Marc Grandisson said the small increase was due to mix and noise.

Q: David Motemaden asked about actual to expected losses.

A: Francois Morin said the A versus C work was done by line and year, and aggregate results were running ahead of expectations.

Q: Charles Lederer asked about property cat growth and the cyber event.

A: Marc Grandisson said property cat growth flattened due to retrocession, and the cyber event had a wide loss range.

Q: Andrew Kligerman asked about net written premium in professional lines and reinsurance property ex catastrophe.

A: Marc Grandisson said professional lines had various factors, and reinsurance property ex catastrophe had quota share and risk excess.

Q: Brian Meredith asked about the share buyback payback period and M&A capacity.

A: Francois Morin said the payback period was a practice, and M&A capacity depended on opportunities.

Q: Meyer Shields asked about cat portfolio reshaping and public D&O pricing.

A: Marc Grandisson said the portfolio was reshaped via retrocession, and no inflection was seen from recovering capital markets activity.