Arch Capital Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 11 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2023 Arch Capital Group Learning 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 call is being recorded. Before the company gets started with its update, management wants to First, remind everyone that certain statements in today's press release and discussed on this call may constitute forward looking statements under the federal security laws.

Operator

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 on the company filed by the company with the SEC from time to time. Additionally, certain statements contained In the calls 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.

Operator

Management also may 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 ks furnished on the SEC yesterday, which contains the company's earnings press release and is available on the company's website and on the SEC's website. I would now like to introduce your host for today's conference, Mr. Mark Grandison and Mr. Francois Mauryn.

Operator

Sirs, you may begin.

Speaker 1

Thank you, Lisa. Good morning and welcome to Arch's earnings call for the Q1 of 2023. I'm pleased to report that as a direct result of our premium growth momentum from the past few hard market years, We reported an excellent start to the year. Financial highlights include book value per share growth of 8.4% in the quarter and an annualized operating ROE of 20.7%. Our P and C underwriting teams continued to lean into attractive market conditions, but excellent risk adjusted returns remain available, growing net premiums written by 35% over the same period last year.

Speaker 1

A key element of cycle management is to respond aggressively when you see conditions change. Since 2019, we have seen the market psychology pivot to underwriting discipline and our underwriting teams were prepared The current property cat dislocation has resulted in us targeting growth in property lines And this should further improve our returns as we continue to benefit from the cumulative effect of improved rates, terms and conditions. The $327,000,000 of underwriting income generated from our 2 P and C segments this quarter is a testament to our commitment in the improved market. Our mortgage segment operates on a different cycle than the P and C, But it remains a significant contributor to earnings, generating a healthy $243,000,000 of underwriting income in the quarter As our high quality insurance in force portfolio remained stable at $513,000,000,000 And in our P and C growth, I want to emphasize that Arch is 1st and foremost an underwriting company. Being an effective underwriting cycle manager means that our underwriters know that they have degrees of freedom in choosing to deploy capital across our diversified specialty focused platform.

Speaker 1

Because we have a wider range of choices to allocate underwriting capital at any time, We can generate more consistent and stable underwriting income over the long run. Our growth in this hard market would not exist without our unwavering underwriting integrity. Our focus on underwriting leads to profit stability and better reserving visibility. And over time, these more stable results lead to greater balance sheet strength, which in turn enables us to more aggressively deploy capital when we see market conditions change in our favor. At Arch, we're deeply committed to the art and science of underwriting because we know that underwriting integrity over time solidifies our conviction and agility to proactively respond to changing market conditions.

Speaker 1

I'll now share a few highlights from our segments. First with P and C. Overall, the P and T environment continues to offer plenty of opportunities as evidenced by our growth. As you see in our premium numbers, The reinsurance market in particular is very attractive right now. Reinsurance typically reacts more quickly to the changing environment and primary insurance and we are witnessing this phenomenon in these early stages of improvement in the property market.

Speaker 1

In our Insurance segment, we continue to take advantage of favorable market conditions. For the past few quarters, Property has seen significant rate escalation, which supported our 37% net premium written growth in that line of business during the Q1 of 2023. The property market is still broadly dislocated and we believe it will take further rate improvement before it finds equilibrium. Elsewhere, general liability rates have picking up again and large accounting always won a very few P and C lines that has decelerating rates. Overall, the market remains disciplined in its behavior and we continue to obtain rate above trend.

Speaker 1

On our last earnings call, we noted property cat reinsurance, dislocation and the oneone renewals, which led to significant effective rate increases. For the Q1, reinsurance GAAP net premiums written roughly doubled over the last over the same period in From our perspective, the improved conditions at Oneone are a positive leading indicator as we prepare for the mid year renewals where peak zone capacity remains tight. We are well positioned to take advantage of this opportunity. Arch is an increasingly prominent provider of choice in the property and casualty space. This is to be expected over time because of our differentiated cycle management To execute our strategy, we continuously invest in improving our capability.

Speaker 1

We hire and retain top tier talent and teams And we seek to enhance our tools and technology with the aim of becoming a more intelligent, stable and able provider of insurance products for our clients. Finally, our compensation structure rewards underwriting performance 1st and foremost. This is a powerful group that aligns strategy with execution. Now let me move to mortgage. Our mortgage segment continues to generate solid underwriting income and risk adjusted returns, largely because our portfolio was shaped with a focus on credit quality and data driven risk selection.

Speaker 1

Credit quality in our mortgage portfolio is excellent as demonstrated by our 1.65 percent delinquency rate, the lowest since March of 2020. Our disciplined underwriting approach has produced a portfolio with a more favorable risk profile, including higher FICO scores and both lower loan to value and debt to income ratios than our peers in the sector. Typical seasonality and tempered demand for housing in the Q1 affected new insurance written. However, Production was in line with our expectations given the holiday market conditions. We're seeing pricing discipline across the Mi industry as rates have increased over the past year.

Speaker 1

The Mi industry's underwriting discipline is encouraging It allows us to maintain our focus on risk selection to achieve adequate risk adjusted return. The Mi industry is competitive, but Faced with the current risk factors in the broader economy is acting rationally. As a result, our MI team continues to have opportunities To the Joy Catholic. It isn't football season yet, but with the NFL draft beginning tonight, Football was on my mind. Back in the 1960s, a football team from a small Wisconsin town Dominated the sport, winning 5 championships in a decade.

Speaker 1

The team, as you all know, was the Green Bay Packers and their coach was Vince Lombardi, Widely regarded as one of the greatest coaches of all time in any sport. One thing that made Lombardi a great leader was his obsession with During their dominance, a key part of their offense was a very simple play called the power sweep. The quarterback would hand the ball to the running back, who ran the ball to one side of the offensive line and then the offensive line acted as blockers allowing the running back to plow ahead. No frills, no surprises. Opponents knew what was coming, but Because of management, nobody could stop it.

Speaker 1

We talk a lot about cycle management and underwriting discipline on these calls and for good reason. It's hardwired into how we operate the company. They are not novel concepts. They're actually quite simplistic. The key, Like with Lombardi's Green Bay Packers is conviction and execution excellence.

Speaker 1

So day after day and year after year, we line up And essentially run the same play, write a lot of business when rates are high and a lot less when rates are low. Francois?

Speaker 2

Thank you, Mark, and good morning to all. Thanks for joining us today. As Mark highlighted, we kicked off 2023 with excellent underwriting results across all segments and our investment income continued its upward path, benefiting

Speaker 1

from a

Speaker 2

higher interest rate environment and strong operating cash flows. For the quarter, we reported after tax Operating income of $1.73 per share for an annualized operating return on average common equity of 20.7%. Book value per share was up 8.4% in the quarter to $35.35 Reflecting not only our strong results, but also the unwinding of approximately 350,000,000 of unrealized losses on our fixed income portfolio

Speaker 1

net of taxes.

Speaker 2

Turning to the operating segments. Net premium written by our Reinsurance segment remained on its strong trajectory and grew by 51.5% over the same quarter last year. This growth occurred across most of our lines of business with a particular emphasis on property lines, Marine and Aviation and Other Specialty. The overall bottom line of the segment was also very good with a combined ratio of 84.3 percent and a relatively small impact of $59,000,000 from current accident year catastrophe losses. It's worth mentioning that our top line reflects the impact of some larger transactions, which are not uncommon during periods of significant market dislocation.

Speaker 2

We cannot tell whether the frequency and size of these transactions will recur in future periods, But we are optimistic that market conditions will remain attractive for the foreseeable future. The Insurance segment also performed well with 1st quarter net premium written growth of 19.1% over the same quarter 1 year ago And an accident quarter combined ratio excluding cats of 89.8%. There were a handful of items affecting our top line more Significantly this quarter, such as a large transaction in the lenders and warranty line of business and very strong market conditions in the property, energy and Marine Loan Business, both positives, which were partially offset by the headwinds of weaker foreign currencies against the U. S. Dollar compared to a year ago.

Speaker 2

We estimate that on a constant dollar basis, our net still benefit from excellent market conditions, both in the U. S. And internationally, and we remain positive about our ability to grow in the right business at Premiums earned were up slightly on a sequential basis, reflecting the increased persistency of our insurance in force during the quarter at USMI and good growth in our units outside of U. S. Marsh.

Speaker 2

We recorded approximately $73,000,000 of favorable reserve development in the quarter with approximately 2 thirds coming from USMI and the rest spread across our other units. Queue activity this quarter at USMI was particularly strong as we benefited from the highest first quarter cure rate we have seen in the past 6 years, excluding 2020. At the end of the quarter, over 80% of our net reserves at USMI are from post COVID accident periods. Overall, our underwriting income reflected $126,000,000 of favorable prior year reserve development on a pre tax basis or 4.3 points on the combined ratio and was observed across all three segments. Quarterly income from operating affiliates stood at $39,000,000 and was generated from good results at Coface, Summers and Premier.

Speaker 2

As you may already know, Coface recently declared a dividend of €1.52 per share, which should result in a €6 €8,000,000 dividend to Arch in late May, subject to Copas shareholder approval. Although this amount will not benefit our income statement next quarter, We believe it reflects very well on Cohos' results and prospects for the periods ahead. Pre tax net investment income was $0.53 per share, up 10% from the Q4 of 2022, as our pre tax investment income yield Exceeded 3% for the Q1 since 2011. With new money rates in our fixed income portfolio holding relatively flat In the 4.5% to 5% range, we should see further improvement in our net investment income returns in the coming quarters. Total return for our investment portfolio was 2.54% on a U.

Speaker 2

S. Dollar basis for the quarter, with all our strategies delivering positive returns. The contribution to the overall result was primarily led by our fixed income portfolio, which benefited from slight downward pressure on interest rates during the quarter. While fixed income market volatility was elevated intra quarter Because of the stress in the U. S.

Speaker 2

And Swiss Banking Systems and the implications for monetary policies at central banks, Spreads at quarter end were generally consistent with those at year end 2022. The overall position of our investment portfolio remains Neutral relative to our target allocation and we are well positioned to capitalize should there be further dislocation in the capital markets. Of interest, our commercial real estate exposure is distributed across a variety of strategies, accounts are only 6 Percent of Arch's investment portfolio is highly rated as a low loan to value ratio and is more concentrated in multifamily housing With minimal positions in office properties. On the slide, acquisitions are concentrated with large money central banks with no significant exposure to U. S.

Speaker 2

Regional banks. Turning to risk management. Our natural cat PML on a net basis stood at $1,069,000,000 as of April 1 or 8.1 percent of tangible shareholders' equity, Again, well below our internal limits at the single event 1 in 2 50 year return level. Our peak zone PML is currently the U. S.

Speaker 2

Northeast and reflects some pockets of increased capacity we deployed at April 1 in response to good market opportunities ahead of the more active renewal period of June 1 July 1. In summary, we remain very positive on the current market and the opportunities ahead of us across all our segments. At the current expected returns, we believe deploying meaningful capacity in our businesses Currently represents our best option to maximize returns for the benefit of our shareholders. Our commitment to being active Yes, disciplined capital allocators remains a core principle of ours that should lead to long term value creation and success. With these introductory comments, we are now prepared to take your questions.

Operator

Thank One moment while we ask, we'll go to the first question. The first question comes from Elyse Greenspan of Wells Fargo. Your line is open.

Speaker 3

Hi, thanks. Good morning. My first question, Mark, in your introductory comments, you said that we're in the Early stages of improvement in the property market, right? We've seen strong rates at January 1 that have persisted into April 1 and My sense is could persist through the mid year. So could you just comment on what you mean by early stages and how you could see this playing out in during the rest of 2023 and into 2024?

Speaker 1

Very good question, Elyse. Good morning. I think the when we have a dislocation such as the one we Sort of realized and experienced at the end in the Q4 of last year, the renewals took place on the reinsurance place at Much higher rates by 30%, 50%, 60% price and the rate increases. Obviously, you've heard that on other calls. We had the same experience.

Speaker 1

The reason specifically the first to move reacting to deploying capacity and they should because they have to commit the capital for a 12 month period. Now we have a lot of portfolio switch now to the insurance side. This is where I think is going to be leading the market and continue to underscore and Support the market is the insurance portfolios, ours included at the insurance level, they're going through a Re optimization, realigning of capacity, realigning of pricing, terms and conditions. And this is widely spread across the industry. But an insurance product does not get all renewed at oneone, right?

Speaker 1

The renewal takes place over a 12 month period. So what we're seeing and hearing right now is the market psychology is William McCandt of getting improved terms and conditions on the primary side, which will then lead to, obviously, further improvement From the distance of the reinsurer. Now this will take 12 to 18 months to really take hold and we believe, which is actually a little bit Positive from our perspective, we should see that improvement carrying on and staying around for more than this year. We expect The underlying property improvements will be there for 2, maybe 2.5 years, maybe 3 years, which is a great, great leading position to be from the insurance. First, the reinsurance react, the insurance is reacting, it takes a longer time to modify and correct itself.

Speaker 1

There's momentum being built in creating a better equilibrium on the insurance The reinsurance will get renewed again at 1onetwenty 4. We most likely have more things to improve on the portfolio. I think this is how the hard market takes place over time, how It develops and unfolds over time. So that's what we mean. We think that we have a little bit quite some nice One way ahead of us because of that reason.

Speaker 3

That's helpful. Then Could you give us a sense if in your margins in both insurance and reinsurance, did social inflation or financial inflation, Did that impact how you booked the current accident year in both insurance and reinsurance?

Speaker 1

Yes. So the way we operate and the way we put our reserving our loss ratio, you won't be surprised to hear from us Yes, we tend to take a prudent stance. That's the first step that you need to understand and we could call realize and I know we saw that historically. This is one of the key things that we need to that we work on. Our game plan is to look at the trend and look at the rate level on a quarterly basis, Modify it if we have a good reason to modify it and book it to a, shall we say, maybe a 60th percentile confidence interval, Not playing too close to the average because we want to have some protections because who knows what the future will hold.

Speaker 1

So if you look at the reserving overall in our company, We look line by line. We look at inflation, the financial or social, by layer, by attachment point, by region and we correspondingly a loss ratio for the overall portfolio. And what you see in our results, in our numbers It's a sum total of the aggregation of all these various decisions within our insurance or reinsurance units. And I think that And then at the end of the day, Francois and I look at it to make sure that we have we feel more comfortable than possibly the average of error out there and we Make sure that it's on a trajectory that is responsible and prudent as well. So our tendency will not take all the good news right away.

Speaker 1

We will probably wait and see and we've grown as well, Elyse, as you know. So it means that we have to be a little bit Careful and thoughtful in the way and the pace in which we would recognize some of these improvements.

Speaker 3

And maybe just one more sticking Mark, right. In the Reinsurance segment, right, the growth exceptional, really strong, but the underlying loss ratio, right, was Did tick up from last year and I think part of that there's always noise in each quarter and it does take time Earn in this business written at January 1, but can you help us kind of put that all together and just give us a sense of The margin profile of the reinsurance business over the balance of the year?

Speaker 2

Yes, I'll take that one, Elyse. I think a lot of interest people Obviously, look at the quarterly numbers, our view is we look at it, but we don't lose sleep over it. I think we look at long term trends, we look at quality of the business and how it prices and what the expected returns are at and when we find the deals. But Specific to this quarter, as I mentioned, didn't give you really a whole lot of specifics, but there was 2 transactions that really distorted a little bit our ratios With basically higher loss ratios and lower acquisitions, so yes, you saw a little bit of movement on Both the loss ratio and the combined ratio, the impact on the ex cat accident year loss ratio was 2.2 points. So it's there.

Speaker 2

We know it's there. We don't again, I wouldn't make it a trend. I mean, it's just The reality of the business we've had in this quarter, that's why I mentioned that, hey, these are nonrecurring items, but in this market, who knows, there could be more in coming quarters.

Speaker 1

So that's kind of how we that's

Speaker 2

the result of the business we had this quarter.

Speaker 3

Thank you.

Operator

Welcome. Thank you. One moment. While we prepare for the next question. And the next question is coming from Jimmy Bhullar of JPMorgan.

Operator

Your line is open.

Speaker 4

Thanks. Good morning. So first, I had a question on your comments on pricing, obviously, very positive both in reinsurance and insurance. But Can you distinguish between pricing in both reinsurance and insurance on property and more of the cat exposed business versus the casualty lines?

Speaker 1

Yes. So the last numbers we heard, it's a good question, last numbers we heard on the primary side, we're looking at pricing depending on the zone. If you're cat exposed, obviously, it's more But rate increases 40% to 50% plus definitely a little bit less if you're intercoastal, if you win inland, it's probably 10% to 15% increase, but it's clearly, clearly a push for rate increase. But what's not really fully reflected and you should Here there are other things going on underneath the terms and conditions. Deductibles are going up.

Speaker 1

That's also a really important factor, also helps If you're a reinsurer of this portfolio, there's a statement of value, which pretty much states that any company now Providing coverage needs to have a up to date valuation of the property you're trying to insure. And that is a big deal because the industry has been frankly laxed in updating these numbers. And once you have the right exposure, It actually makes the pricing that much more effective and accurate. So the whole market is moving in that direction. And thirdly, I think that's also important, which creates more dislocation is there is a shrinking of capacity at the individual players.

Speaker 1

So when people were putting $25,000,000 $30,000,000 worth of capacity on even a catheter, so these are going down 2.5 to 2.5, maybe 10,000,000 On an exceptional basis. So I think that the so the insurance portfolio, the rates are going up A lot of reflection, I go back to one of the questions about inflation on property side that is reflected in the statement of value. So we're definitely clearing that one. So depending on where you are, you're working 15, less or get exposed to 40, 50, if you get exposed. On the reinsurance side, it's a little bit Similar, although it's a bit more of a monolithic marketplace, the rates are going in a more narrow range.

Speaker 1

It's almost like more commoditized, if you will. It's a little bit between 30 to 50 pretty much broadly across. Of course, there'll be differences. We'll The June 1 reserve for us. But the more acute the cat needs, the more acute in the key zones of capacity demand, The higher the pricing.

Speaker 1

But the general the overall general pricing is in sync. The insurance one will be able to Grab those increased rates and improve terms and conditions over the next 12 months. The arrangements were able to get there Quicker.

Speaker 4

And then just on the Mi business, you had very high KOs. I'm assuming most of these are On reserves you put on around COVID when there were forbearance programs and if that is the case, how much more Such reserves do you have that will most likely I'm assuming will be released over the course of this year?

Speaker 2

Well, we still have we definitely do have still some delinquencies that are in forbearance programs. I quoted 80% of our loss reserves are from post COVID periods. We don't have all the detail around How much by year, etcetera, but just hopefully that gives you a flavor of like what maybe Could potentially be down coming down the pike in terms of more releases if we're able to cure. I think The fact that unemployment levels are still performing very well, I think that's a good sign, right? I mean that's There's some pressure on home prices, etcetera, but for the in force book, we think again, the credit quality has been excellent and we think there's performing well.

Speaker 2

And When we're able to explore those delinquencies over time, hopefully that should help the bottom line.

Speaker 1

Okay. Thank you.

Operator

Thank you. One moment while we prepare for the next question. The next question is coming from Tracy Banghi of Barclays, your line is open.

Speaker 3

Thank you. Hey, I'm trying

Speaker 5

to understand mechanically why an LPT type of transaction could add noise to your underlying loss ratio on the reinsurance side. Is it that you're not imposing a loss corridor and you're assuming losses would At inception or is it accounting on the premium recognition? If you could explain the mechanics, that would be helpful.

Speaker 2

Sure. I mean, at a high level, what these transactions typically look like is They limited so in terms of A, the acquisition expenses is 0, if not very, very small. So if you think in a traditional quarter share deal where the assume the acquisition ratio could be 30 Well, that goes away. And then you're effectively just picking up losses And the investment income on the float is effectively part of the overall return of the transaction. So It changes the dynamic and that's what we're trying to convey here is that on the underwriting side, it's usually booked closer to 100% combined within that kind of range, but the investment income that you pick up is significant.

Speaker 2

So that impacts the overall bottom line returns on the business.

Speaker 3

Okay. Also, it may be

Speaker 5

a little bit early, but can you discuss how June 1 July 1st renewals are shaping up at this point? Like how would you compare pricing to what you saw in January?

Speaker 1

We heard from our team, we've been talking to them quite a bit of late And the I can't talk about all specifics, but at high level, a continuation of the hard market that we saw at 11. We're seeing A continuing hardening or continue or on the same level as 118, it's not that a bit better. Well, that's I want to Tracy, I want to tell you 61 and 71 are not done yet, right? People are still very actively working at it. But it's the momentum is there clearly.

Speaker 5

So how would that compare when you see momentum the same or better since January?

Speaker 1

It's early, I think. It's early right now. I don't want to venture because Also, Tracy, what we all have collected the effort to keep in mind is 7.1 of 2022 was also pretty good renewal for Florida, for instance, right? So It may not need as much of a pricing because of what we believe were specifically in Europe that we're, we believe not as well priced as ought to be Based on the risk that you're taking. So it's still going to be return wise better, most likely better return than possibly most likely the one that we saw because it's the peak zone.

Speaker 1

Everybody's source of capital or use of capital.

Speaker 3

Thank you.

Operator

Thanks. Thank you. One moment while we prepare for the next question. Next question is coming from Yaron Kinar of Jefferies. Your line is open.

Speaker 6

Thank you. Good morning. I want to go back to the margins in reinsurance, the underlying margins. And I think that even with the LPTs, The accident year loss ratio ex cats still deteriorated a bit. And I just want to Understand kind of the context or why that would be if we are seeing business mix shifting more to kind of inherently lower Loss ratio aligns on an underlying basis and with the rate environment?

Speaker 2

Yes. Three things I'd say. A is, I mean, we focus on returns. And while the obviously, what's in front of you is just the underwriting part of it. We focus on overall Returns, which is the first thing.

Speaker 2

Second thing I'd say is

Speaker 1

you got to give us a

Speaker 2

little bit of a chance to earn the premium. I mean, The market was solid in 2022. It got better at 1123. We're a quarter into the year. I think there's More benefits or more improvements that come, but it doesn't all show up initially.

Speaker 2

And 3rd thing, as Mark said earlier, I think we're being prudent. I mean, the math may suggest that, A, if you did this and that, that the Combined ratio or loss ratio should be ex, but we are proof in how we look at things. And When the data tells us that maybe we were a bit high, we'll be more than happy to release those reserves, but We're not going to declare victory quite yet. Okay.

Speaker 6

And then a second question just on cats. Can you maybe offer us some color on the distribution between the various sources, whether it's Turkey or New Zealand floods, the European Like storms and so on, in both reinsurance and insurance?

Speaker 2

Yes. I mean, Small ticket items, I'd say the biggest one for us was we had $25,000,000 loss in Turkey, which is Kind of what we do is not a huge deal, but that was the biggest item. Yes, we had some kind of participations in New Zealand with the cyclone And also some floods and in the U. S, kind of the normal run of the mill Yes. And the tornadoes, Quebec and storms that hit, that was mostly insurance, but a little bit of noise there as well in reinsurance.

Speaker 2

So Yes, it's call it a hodgepodge of small things, but the biggest one was for us this quarter was Turkey earthquake.

Speaker 6

And was Turkey and New Zealand, were those mostly reinsurance?

Speaker 2

Yes. Turkey was only reinsurance, yes.

Speaker 6

Okay.

Speaker 2

Thank you. And so I mean both of them are only reinsurance.

Speaker 6

Got it. Thanks so much.

Speaker 1

Yes. Welcome.

Operator

Thank you. One moment while we prepare for the next question. Next question will be coming from Josh Shanker of Bank of America, your line is open.

Speaker 7

Yes. Hi there, everybody. Good morning. I was looking at the investment I mean, there's a lot of ways to measure yield. I would just take the net investment income divided by the float.

Speaker 7

I'm getting about 2.76 percent for the quarter, which makes Arch by material amount the lowest Earner on its float in your peer group. I know you guys have a more conservative portfolio that's also allowed you to redeploy higher pretty quickly. But with new money yields maybe in the 5% range, without taking any equity risk or whatnot, you have an opportunity to increase that yield. Are you still keeping some powder dry? You still think it's time to be fairly conservative in seeking yieldless points?

Speaker 2

I mean, it's something we obviously realize that there's new money yields are higher and For us, it becomes a question of like crystallizing losses. There's implications around statutory versus GAAP accounting. We have restrictions in some places. So I think for us, we do the analysis very carefully in trying to Make sure that we're doing what's best for the ultimately the shareholders. Sometimes we're better off kind of Holding some investments to majority until and not kind of taking on the loss and reinvesting the money faster.

Speaker 2

But in terms of opportunities, whether we see more or want to take on more risk, it's something that we are Thinking about and we have grown our presence in alternatives in the last few years and that's something that And Russ alternatives is, call it more right structure kind of investments and that's where we see the better opportunities and we've been pretty aggressive in growing money there, but obviously the returns there don't show

Speaker 1

up in investment income. They show up in equity method funds for

Speaker 2

the most part. And that's where we expect to see a little bit of pickup as well going forward.

Speaker 1

But you're also just thinking about the overall risk side of The enterprise, right? So we have a lot of underwriting push and growth. So that's also factored in our risk. Not that we're Sorry, but just it's not one of the other part of the equation that we get to factor

Speaker 6

in as well.

Speaker 7

And what's the new money yield right now for you?

Speaker 2

We're 4.5 to 5.

Speaker 7

4.5, okay. And then, look, I know that you do listen to your competitors' Conference calls and thinking about what they're saying. Looks like the pricing environment is pretty attractive. I think that's universally viewed. A few of your competitors have said as much.

Speaker 7

And then when we look at their premium growth in the quarter, it's kind of tepid, especially on the insurance side. You guys are growing your net premium written about 20% right now. It's been going that way for a little while. Is business hard to capture? Is it hard to get the business you want and you've been really successful outmaneuvering your competitors?

Speaker 7

I guess there's 2 things. 1 is, Why are you so successful growing when others have not been able to do so? And 2, can you give comfort to the fact that maybe some question, maybe the market is not as good as we think it is And maybe there should be more concern. So you guys think how can you get a comfortable with the rate adequacy and why are you successful where others have failed?

Speaker 1

So from the rate accuracy perspective, I mean, this is sort of a system that's well established in our company. I don't know how many times we verified the assumptions and the projections, We get at the individual underwriter level, group level, in segment level, at corporate between the holding company, including the Board. I There's a lot of vetting going on and comparing notes and triangulating. So we're pretty confident. We wouldn't be growing that level if we didn't think that the returns were In our favor.

Speaker 1

Does that mean that we're going to get all the returns that we expect for SiSeq to the decimal? Most likely not, Josh. We're in an uncertain world and we're making a bet on the longer term expected. And that's the best thing that we can do right now. We're big fans of thinking about the rate as being by far the most important A place to start to make sure that you have enough you put the odds in your favor and the rates going up, A lot of lines rates go up 60%, 80%, 70%, even some of them went to 2 times and even some of it decreased goes to 1.9 times.

Speaker 1

Well, we also look at the history of the industry and the industry was sprinting 5 or 6 years ago, 60%, 65% loss ratio, even if they were wrong on a reserve And you put all the factor in the trend and you put a cumulative rate impact, I think that there's no certainty, but there's certainly a lot of margins that you see that you've built within the price. And that's what makes us So that's more comfortable. Now in terms of our production in the marketplace, how we're able to lean in and see that business. 1st, We were early in 2019 to really lean into it. A lot of people were pulling back and that Create voice and vacuum for our clients and we were the ones that the beacon in the storm, if you will, Able to give them capacity and that goodwill, for lack of a better word, really builds upon itself.

Speaker 1

So it really creates more relationship built relationships that frankly Has been a little bit less strong because of our defensive mode prior to 2019, but we rebuild it very, very nice. We're always there, but we rebuild, we kindle them in a much major way. And if you look talk to our producers, they'll tell you that we're a great partner of theirs and that makes a big difference. So when the next piece of business comes in, you look at the people who could write that business and we've heard this from our insurance group. Well, if you look at 10 markets, The market that wants the business right now was on it 4 years ago.

Speaker 1

They'll probably not have the first bid at it. We'll probably have the first Look at it because we were there for 4 or 5 years. Also, I would add that we're an E and S player. And as you heard, the E and S market is growing. So the market is also going towards us, the tailwind going from our perspective on that note.

Speaker 1

And we're pretty good security, Josh. We're pretty good company. People want to deal with us. We're good for the money. We have a good expertise and Good teams that really can advise the client.

Speaker 1

I think we spend a lot of time not only providing coverage and policies, but advising clients and being a good market leader And right now and certainly that growth for the last 3, 4 years have created its own momentum and inertia. So the gravity, if you will, that's been creating has been pretty nice. It helps. It helps grow further even in that marketplace. And even the market gets a bit more competitive.

Speaker 1

I would argue that we'll be able to hold on to a lot of the business that we've written for the last 4, 5 years.

Speaker 7

Well, thank you for the fulsome answers and congratulations to everyone on Graduating from rounding to the nearest 1,000 to rounding to the nearest million.

Speaker 1

Thanks, Josh.

Speaker 7

Take care.

Operator

Next question is coming from Brian Meredith of UBS. Your line is open.

Speaker 8

Yes, thanks. A couple of them here for you. Just quickly, Francois, you gave us loss ratio impact of the LPT. Can you give us what the combined ratio and maybe the premium For modeling reasons purposes?

Speaker 2

Combined ratio was 1.1 points, 2.2 in the loss ratio, again, all that's GAAP and the premium was $118,000,000 Brilliant. Thanks. Second question,

Speaker 8

Mark, looking at the 6.1 renewals Florida, I guess, 1, what is the impact of the legislation that was Recently enacted having you think on that marketplace, will it have an impact on renewals pricing capacity coming into the market? And then how do you typically think about Florida from a reinsurance perspective? Is it a market that you'd like to play cat? Do you like to play quota share? How do you kind of think about it when you look at the Florida market?

Speaker 1

But the second part, Brian, the second part of your question is easier. I think we're much more of

Speaker 2

an excess of loss Wider and slower. We believe this

Speaker 1

is a better play for us at this point in time. And that seems to be sort of where also where the market is The second part the first part of your question So the most interesting one is we're in Florida, we might as well be in Missouri, in the show me state, but we need to show we just start to see and evidence that those Total reform will take hold. It's going to take a while. As we all know, we've had a slew of claims that went in before the 1st April, the First, I'll make a memory somewhat. It's true of claims to make sure that we that they take advantage of the last remnants of the weaker tort area there.

Speaker 1

But that's going to take a while to work through. It also might mean that some of the losses from prior years are developing adversely, Which is not necessarily going to be useful and helpful for those who try to renew for on an ongoing basis, right, if you have more losses from that On the prior year's, the acceleration of losses, you may have to make up for a lot of that or some of that, a lot of it if you're a buyer of reinsurance. So I think overall, I think the market will take sort of a view that it's not there at 100% And they'll probably sort of factor in who is more or less exposed to those, probably get credit to those who are less exposed. But you're not going to get like everything else, we'll need to see it through to get full credit. I think the market will get some credit, Not at full extent.

Speaker 1

There's no way at least not in this time. Maybe in 2 years or next year or 2 years' time, but it's going to take a while because we need to show and see what's happening before. Great.

Speaker 7

Thank you. Sure.

Operator

Thank you. One moment while we prepare for the next question. And the next question comes from Myers Mill Okay, the Evelio, your line is open.

Speaker 9

Thanks. I had one, I guess, technical question on the LPT side of things. Is it fair to assume that this is 100% combined ratio business as you write it? Or does the fact that it pertains to well, let me stop there.

Speaker 2

Well, that's typically where we book it. I mean, plus the minus those types of transactions, that's kind of where they yes, that's where

Speaker 1

the combined ratio is on those. Because the contribution to profit and margin is where a lot more on the investment income side than it is on The underwriting income, pure underwriting income, Scott.

Speaker 9

Okay. And then speaking, I don't know if you want to talk about the transactions For the demand that you're seeing, you talked about that, I guess, understandably being a function of distress in the marketplace. Is this Is the market right now focusing on the, let's say, 2019 and earlier accident years where pricing was soft Or I should say and or is there interest in even more recent years because of loss trend?

Speaker 1

Yes. I think the market is Focusing on it because I think that and also if you add on top of it the reopening of the courts post COVID, there's a lot of uncertainty. We've heard about Inflation, financial inflation and social inflation, so it is a lot of scrutiny and the rates were much lower back then. So there is definitely less bank for those years to get the right number, the right loss ratio or pick. So yes, definitely people are looking as we are as well and when we are on the reinsurance side with your treaty, We can see, regarding any names, some companies have development that's adverse in those periods.

Speaker 1

Some of them don't. But Yes, it's definitely a point of discussion, which I think Meyer helps explain why we have the we continue to have the spike increase in the GL, for instance. I do believe that people are realizing it and understanding that for the recasting, right, the long term trend And long term loss ratio projection on a non level basis, you know how that works. So I think really that people are reflecting and that's also why we have this We don't have massive combined ratio above 100 across the industry, but we do have still a healthy level of price increase because of that phenomenon.

Speaker 9

Okay, that's helpful. And if I can just pick up on that because in your prepared comments also you talked about GL rate increases picking up a little bit. Haven't heard a lot of that. We've heard a lot on the property side. I was hoping you'd get a little more color.

Speaker 1

Yes. The liability lines are, of course, a lot of it has been historically led by auto, not specific on the umbrella. But the GL is Clearly, taken up again and it's of late and it's also international. And we have our lowest book of business as well as our Insurance portfolio in the U. S.

Speaker 1

I think that there's also a dislocation going on, on the GL side. People are reevaluating Align the business, the areas and the industry that they're providing GL coverage for. So this is happening Probably a bit more it sort of slowed down a bit towards the second half of twenty twenty two. And I think that's re optimizing or re on the underwriting and price for the GL and it also led, as you can appreciate, Maher, about some increase in trend, Specifically, if you're on the excess layers to get this lever. So I think that's what we're seeing some of that prior year coming through and having to recast The pricing, which you wouldn't have had or wouldn't have seen necessarily in 2020, 2021 because those years 2016 to 2019 were probably too young To really get the development coming out.

Speaker 1

So you probably can see that the duration of development of GL coming through and people reacting to it.

Speaker 9

Okay, fantastic. Thank you so much.

Speaker 1

You are

Operator

welcome. Thank you. One moment while we prepare for the next question. Next question comes from Mike Zaremski of BMO. Your line is open.

Speaker 1

Hey, thanks. Maybe

Speaker 10

a question or 2 on the catastrophe levels this quarter. Mark, you brought up Terms and conditions changes, I think it probably blows certain people's minds that the valuations on property And are just getting up to date and seems kind of antiquated, but that's just I guess the way that the reinsurance maybe with them or sorry, the overall marketplace works. But Just curious, so the PCS cat loss levels for the industry in the U. S. Were way above A normal 1Q.

Speaker 10

I know you guys aren't right. That's not the best guide for Arch. But it looks like Arch's Cat levels were normal ish, but you can correct me if I'm wrong. Any read throughs on the terms and conditions changes that have taken place that Is there any read through there that there's some good things coming through?

Speaker 1

I think on our results, I don't think you would Right, the improvement in terms of conditions, I think it's probably just a function of how the book where our exposures are, Right. We didn't have as much exposure in the areas where the big losses occurred. That's I guess I would say it's a miss That could happen. That happens sometimes. That's really all we can see right now.

Speaker 1

We haven't seen the impact of

Speaker 4

the things I mentioned already because they're Starting to

Speaker 1

take hold anyway. So it's going to take a while for them to see. So that loss, these losses next year would presumably be Because of all the conditions and terms that I told you are changing, it would be reasonable to expect that the losses will be less Right now, but we have yet to see whether the portfolios go through these changes. So nothing other than our exposure was not where the losses occurred.

Speaker 10

And as a follow-up, when we're hearing about the substantial rate increases, especially in property, Does that take into account the terms of condition changes? Or is that like are these kind of risk adjusted Rate increases that you're speaking to and some industry participants are speaking to?

Speaker 1

Yes. They're not fully risk adjusted. It's a really good question because It's a factor of a harder market or a softer market that when you see a rate the thing that you can measure, you will incorporate into your calculation, So there are things that you cannot calculate or specifically isolate for and put in your formulas, Right. There's some co insurance clause in there that are finally going to be put back in the marketplace that really prevents some of the collections and That could otherwise happen. That's not factored in the pricing.

Speaker 1

There's a I think the venue for litigation or mitigation of the losses to be in a different environment, One that's, for instance, more litigious to one that's less litigious. That's not you're unable to factor that in the pricing. So I would say to the extent that you factor in the deductibles, the sublimating and you could run the GAAP losses based on the layers where you attach if you attach higher, think that is reflected in the pricing that we mentioned. The other things that are also going in the same direction, that's the trademark of a hard market, That is not fully reflected. It's sort of the extra pickup that takes a breather that we don't see, but that we know collectively is there.

Speaker 1

And that also helps us Feel a bit more we have more conviction in writing more of that business.

Speaker 10

Got it. And maybe lastly, switching gears a bit. I believe Arch writes a decent amount of professional lines. That's one marketplace that we've seen some stats Pointing it to being more of a softer marketplace. Maybe you can comment if that's the case for Arch as well.

Speaker 10

And I don't know if you gave commentary also just on overall Kind of rate increases on your primary insurance book this quarter.

Speaker 1

Thanks. No. So thank you. It's a good question. So on the first part, For the D and O, we've our portfolio has been going down a bit further than the rate increase that we saw.

Speaker 1

The professional lines that we have on our financial supplement includes more than this obviously. But suffice it to say that we're like everybody else Seeing a little bit more aggressiveness in that segment. But the one thing that we're that makes us being still want to be in there And not declare that this is over by any means is that the trends have been favorable To the end of the FDA claims were down for last 2 years and a lot of clients got broad brush rate increase Rate increase and presumably did not fully deserve it. So there's a lot of pushback on this as we speak right now. So again, talk about underwriting and risk selection.

Speaker 1

There are ways and there are areas where you'll keep getting a 10% rate. There are areas where you're not okay giving a plus 5. So I think, Mark, our team is extremely experienced. I've been doing this for almost 30 years. So they're pretty good at picking and choosing their spot In that basis.

Speaker 1

The overall rate change, and I know we don't record it because the overall rate change, it's not a good indicator, especially Especially when you have so many varied line of business going up and down. I think that the delta between the rate and but you heard With other people and also our poker business, the average is not really a good indicator. But I think the pickup between the trend and the rate It's anywhere between 200 to 500 depending on the line of business. So we're still getting some pickup. And those that we may not be getting Pickup in margin at least on the appearance.

Speaker 1

The jury is still out as to whether the loss is the loss trend is truly positive. So it's still Not certain where these lines of volatility to be specific in the end of Q and A. Thank you. Welcome.

Operator

Thank you. And one moment, we have a follow-up question from Jimmy.

Speaker 4

On your PMLs, they've obviously gone off because you've written a lot more business and you're retaining a lot more. The 8.1% number that you mentioned, it's still lower than peers. Where would you feel comfortable taking it if the market environment remains favorable?

Speaker 1

Well, we think yes, just

Speaker 2

a quick reminder, I think these zones for us right now, we're kind

Speaker 1

Yes, okay.

Speaker 2

Northeast is our base zone, but we also have like Florida, Tri County, which is kind of at the same level. The oneone renewals were Full more national, so national accounts, not really Southeast specific. We expect to see More activity at 6.1% and 71%. So no question that we think it will go up. I mean, if the market stays as it is right now, Could it go up to 10%, 12%, we think so and we think it's a reasonable scenario, but Obviously, we'll have to wait and see and figure out and see how the riddles how everything gets lined up.

Speaker 2

But Directionally, I think that's kind of where we think we might be at July 1.

Speaker 1

Okay. Thank you.

Speaker 2

You're

Operator

welcome. Thank you. I'm not showing any further questions. Would you like to have further closing remarks?

Speaker 1

Thank you everyone for listening to our story. It's a great one and we are looking forward to get even more good news It's a July call, so thank you for everything that's been done.

Operator

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

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Earnings Conference Call
Arch Capital Group Q1 2023
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