Arch Capital Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2023 Arch Capital Earnings Conference Call. 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 today'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.

Operator

For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward statements in the call to be subject to the Safe Harbor created thereby. Management will also 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 on Form 8 ks 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.

Operator

I would now like to introduce your host for today's conference, Mr. Mark Grandison and Mr. Francois Moren. Sirs, you may begin.

Speaker 1

Thank you, Gigi. Good morning, and thank you for joining our earnings call. Our 4th quarter results conclude another record year as we continued to lean into broadly favorable underwriting conditions in the property and casualty sectors. Our full year financial performance was excellent With an annual operating return on average, common equity of 21.6 percent and an exceptional 43.9% increase in book value per share, which remains an impressive 34.2% if we exclude the one time benefit from the deferred tax asset we booked in the 4th quarter. The $3,200,000,000 of operating income reported in 2023 made it Arch's most profitable year to date.

Speaker 1

Growth was strong all year as we allocated capital to our property and casualty teams. We showed over $17,000,000,000 of gross premium and over $12,400,000,000 of net premium. And while most current growth opportunities are in the P and C sector, it's important to recognize a steady, Quality underwriting performance of our mortgage group. Although mortgage market conditions meant fewer opportunities For top line MI growth, the business unit continued to generate significant profits totaling nearly $1,100,000,000 of underwriting income for the year. As we have mentioned on previous calls, those earnings have helped fund growth opportunities in the segments with the best risk adjusted returns, demonstrating that the disciplined underwriting approach and active Capital allocation are essential throughout the cycle.

Speaker 1

Our ability to deploy capital early in the hard market cycle is paying dividends as we own the renewals. A phrase I learned from Paul Ingrey, What Paul meant was quite simple. When markets turn hard, You should aggressively write business early in the cycle. This puts your underwriters in a strong position to fully capitalize on the market opportunity. You grow alongside your clients who then want to do more business with you.

Speaker 1

In some ways, the growth becomes self sustaining, which explains part of our success throughout this hard market. At Arch, our primary focus has always been on rate adequacy regardless of market conditions. Our underwriting culture dictates that we include a meaningful margin of safety in our pricing, especially in softer conditions. And we also take a longer view of inflation and rates. For these reasons, Arch was underweight in casualty premium from 2016 to 2019 when cumulative rates were cut by as much as 50%.

Speaker 1

I thought I'd borrow a soccer analogy to help explain the current casualty market. In soccer, players who commit a deliberate foul are often given a yellow card. 2 yellow cards mean the player is ejected from the remainder of the match and their team continues with a 1 player disadvantage. Today's casualty market feels as though some market participants took to the field with a yellow card from a prior game. They're playing in match, but cautiously not wanting to make an error that will put their entire team at a disadvantage.

Speaker 1

So whilst Arch sometimes plays aggressively, We've remained disciplined and avoided drawing a yellow card. At a high level, we must remember that casualty lines take longer to remediate than property. So if insurers are being cautious and adding to their margin and safety, we could experience profitable underwriting opportunities in an improving casualty market for the next several years. Now I'll provide some additional color about the performance of our operating units, starting with Reinsurance. The performance of our Reinsurance segment last year was nothing short of stellar.

Speaker 1

For the year, Reinsurance net premium written were $6,600,000,000 an increase of over $1,600,000,000 from 2022. Underwriting income of nearly $1,100,000,000 is a record for this segment and a significant improvement from the cat heavy 2022. Reinsurance underwriting results remain excellent as we ended the year with an 81.4% combined ratio overall and a 77.4% combined ratio ex cat and prior year development, both significant improvements over 2022. Turning now to our Insurance segment, which continued its growth trajectory by writing nearly €5,900,000,000 of net premium in 2023, a 17% increase from the prior year. While the business model for primary insurance means that shift may not appear as dramatic as our reinsurance groups, A look at where we've allocated capital year over year provides meaningful insight into our view of the market opportunities.

Speaker 1

In 2023, the most notable gains came in from property, marine, construction and national accounts. The $450,000,000 of underwriting income generated by the insurance segment in 2023 doubled our 2022 output as we continue to earn in premium from our deliberate growth during the early years of this hard market. Underwriting results remained solid on the year as the Insurance segment delivered a combined ratio of 91.7% and a healthy 89.6%, excluding Katz and prior year development. Now on to mortgage. Our industry leading mortgage segment continued to deliver profitable results despite a significant industry wide reduction in mortgage originations last year.

Speaker 1

The high persistency of our insurance in force portfolio, which carries its own unique version of owning the renewals, enables the segment to consistently serve as an earnings engine for our shareholders. The credit profile of our U. S. Primary MI portfolio remains and the overall MI market continues to be disciplined and return focused. These conditions should help to ensure that our mortgage segment remains a valuable source of earnings diversification for Arch.

Speaker 1

On to investments. Net investment income grew to over $1,000,000,000 for the year due to rising interest rates that enhanced earnings from the float generated by our increasing cash flows from underwriting. The significant increases to our asset base provide a tailwind for our Creative Investment Group to further increase its contributions to Arch's earnings. Over the past several years, ours has leaned into both the hard market and our role as a market leader in the specialty insurance space. We have successfully deployed capital into our diversified operating segments to fuel growth, while also making substantial operational enhancements to our platform, including entering new lines, expanding into new geographies and making investments into new underwriting teams, technology and data analytics.

Speaker 1

Finally, as we bid adieu to 2023, want to take a moment to thank our more than 6,500 employees around the world who helped deliver so much value to our customers and shareholders. Our people are our competitive advantage and without their creativity, dedication and integrity, None of this will be possible. So thank you to team Arch. Francois?

Speaker 2

Thank you, Mark, and good morning to all. Thanks for joining us today. As Mark mentioned, we closed the year on a high note with after tax operating income of $2.49 per share for the quarter for an annualized operating return on average common equity of 23.7%. Book Value per share was $46.94 as of December 31, up 21.5% for the quarter and 43.9% for the year, aided by the establishment of a net deferred tax asset related to the recently introduced Bermuda corporate tax, which I will expand on in a moment. Our excellent performance resulted from an outstanding quarter across our 3 business segments, highlighted by $715,000,000 in underwriting income.

Speaker 2

We delivered strong net premium written growth Across our Insurance and Reinsurance segments, a 22% increase over the Q4 of 2022 after adjusting for large non recurring reinsurance transactions we discussed last year and an excellent combined ratio of 78.9 percent for the group. Our underwriting income reflected $135,000,000 of favorable prior year development on a pre tax basis or 4.1 points on the combined ratio across our 3 segments. We observed favorable development across many units, but primarily in short tail lines in our Property and Casualty segments and in mortgage due to strong cure activity. While there were no major catastrophe industry events this quarter, a series of smaller events that occurred across the globe throughout the year resulted in current accident year catastrophe losses of $137,000,000 for the group in the quarter. Overall, the catastrophe losses we recognized were below our expected catastrophe load.

Speaker 2

As of January 1, our peak zone natural cap PML, for a single event, 1 in 2.50 year return level on a net basis, increased 11% from October 1, but has declined relative to our capital and now stands at 9.2% of tangible shareholders' equity, well below our internal limits. On the investment front, we earned $415,000,000 combined from net investment income and income from funds accounted using the equity method, up 27% from last quarter. This amount represents $1.09 per share. With an investable asset base approaching $35,000,000,000 supported by a record $5,700,000,000 of cash flow from operating activities in 2023 and new money rates near 5%, we should see continued positive momentum in our investment returns. Our capital base grew to $21,100,000,000 with a low leverage ratio of 16.9 percent represented as debt plus preferred shares to total capital.

Speaker 2

Overall, our balance sheet remains extremely strong we retain significant financial flexibility to pursue any opportunities that arise. Moving to the recently introduced corporate Bermuda corporate income tax. As mentioned in our earnings release and in connection with the law change, We recognized a net deferred tax asset of $1,180,000,000 this quarter, which we have excluded from operating income due to its non recurring nature. This asset will amortize mostly over a 10 year period in our financials, reducing our cash tax payments in those years. All things equal, we expect our effective tax rate to be in the 9% to 11% range for 2024 with a higher expected rate starting in 2025.

Speaker 2

As regards our income from operating affiliates, it's worth mentioning that approximately 40% of this quarter's income Is it attributable to non recurring items such as Copas' adoption of IFRS 17 and the establishment of a deferred tax asset at Summers in connection with the Bermuda corporate income tax. With these introductory comments, we are now prepared to take your questions.

Operator

Thank Our first question comes from the line of Elyse Greenspan from Wells Fargo.

Speaker 3

Hi, thanks. Good morning. Good morning. My first question, I wanted to on some of your introductory comments just on the casualty side, right? We've started to see some reserve additions this quarter.

Speaker 3

And I think you alluded to that last quarter as being what was going to drive the market turn. So how do you see it playing out from here. I know you said it should play out over the next several years. Could you just give us a little bit of a road map how you think about this opportunity emerging for Arch?

Speaker 1

Yes, great question. I think that we're observing our own book of business. We also look at the information around. I think from an actuaries perspective, both Francois and I have maybe dusting off our actuarial diplomas. You rely on data that's historically stable or at least has some kind of predictability.

Speaker 1

And I think what we've seen over the last 2, 3 years As a result of the pandemic largely in the courts being closed and everything else in between, all the uncertainty and then the bouts of inflation, there's a lot of data that's Really hard to pin down and get comfortable with to make your prediction for what you should be pricing the business. As we all know, reserving leads to the pricing, right? By virtue of reserving and having the right number for the reserving, you then feed that into your price. So we're in a situation where people have lesser visibility or about what the reserving will ultimately develop 2. So I can totally understand our clients and our competitors having to adjust on the fly, we're having to adjust a little bit progressively, incrementally.

Speaker 1

The issue with casualty, Elyse, as you know is, even if you have that information and you make some correction of corrective It still takes a while to evaluate whether what you did was enough or was what you needed to do. So I think right now we have we already had a couple of rate increases in casualty starting in 2020. But I think that now we're realizing that maybe it's a little bit worse collectively as an industry than we thought And there's a lot more uncertainty, a lot more and inflation certainly as we all know is a big factor. So what I would expect right now is People will start refining their book of business. They will try to re underwrite away from the source of inflation impacted lines.

Speaker 1

They'll probably push for rates. Some of them might kick some business to the E and S. Until such time as we have more stability In the reserving, I mean, now the loss emerges as it relates to what your initial pricing assumptions was. And in casualty, that's why it takes several years. And if history is any indication, If you look back at the even the A3-two eighty seven market and then the year of 'ninety nine-two thousand to 2,003, It took 3 to 4 years from the start of that, even in the middle of it to really get clarity and the market got much harder in fact in 2004, 2005 than it was in 2,002, just because you have to do the action and see what the actions did, what you thought.

Speaker 1

And I think that's what we're going to collectively as an industry are going through and we're seeing it with our clients and that's really what's happening.

Speaker 3

Thanks. And then my second question, 2nd quarter in a row, right, we've seen the underlying loss ratio within your reinsurance business come in Sub-fifty percent and you guys are obviously earning in right cat business written at strong rates last year. How should we think about the sustainability of a sub-fifty underlying loss ratio within your reinsurance book?

Speaker 1

Well,

Speaker 2

sustainability is a great question. I think you're absolutely right that we have more property premium that is more short tail and should have a lower loss ratio ex cat than not, right, compared to other lines. It's a good market. So Obviously, profitability embedded in the business should be strong. But we send you back to kind of quarterly volatility where Sometimes, we have a better than, call it, normal quarter even as a function of the book and sometimes not.

Speaker 2

There's going to be volatility. We said it before, we'll say it again, the 12 month kind of rolling average is to us a better way to look at it. And that's how we see it. But Certainly, we like the profitability in the book and it should be it should remain strong.

Speaker 1

Yes. One thing I will tell you, Elyse, for you probably heard on the other call is The market reinsurance market is continuing to improve somewhat into the oneone renewal. So it is still a very, very good market base. So What it means for the loss ratio, I don't know, but certainly we're seeing improvement.

Speaker 3

And then just one last one on capital, right? I believe there were some pushes and pulls from the S and P capital changes on your capital, but should be positive relative to your mortgage business. Can you just help us think through your capital position and relative to just organic growth opportunities you see at hand over the next year?

Speaker 2

Well, certainly I mean S and P is one thing that we look at. We look at Many different way I mean, we have different looks at capital adequacy. We have our own internal view, which drives really how we make our decisions. Rating agencies are an important factor, but I think more importantly is how we think about it. But you're right.

Speaker 2

I No question that from the S and P point of view, we did I mean the change in their model was a net benefit and that's reduced can give us, I'd say, a bit more excess capital. But we know and we look at it very carefully. We want to make sure that We're able to seize the opportunities that will be in front of us and we see plenty for 2024. So, right now, we're very our main focus is growing the business and kind of deploying that capital into what's in front of us and then we'll see how the rest of the year plays out.

Speaker 3

Thank you.

Speaker 4

Thanks. You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Andrew Kilgeman from T. D. Cowen.

Speaker 5

Hey, good morning. Good morning. Good morning. First question would be around M and A. We've seen a lot in the media about other specialty players that could be acquired, Arch has been mentioned along with other companies.

Speaker 5

And I know you can't comment on specific transactions, and that you've talked a lot about 15% return on capital over time. But when you do transactions, could you give us a little color On what the parameters might be, what's really important to Arch when you do deals?

Speaker 1

Yes. On the M and A front, we're very prudent and careful when we do if we do anything. And I think historically our historical track is probably the best way to look at this. We'll look for something where our opportunities to earn a return is with a proper margin of safety, it is fairly healthy. We're not There's no desire to grow for growth sake in this company.

Speaker 1

It really has to do with the return on capital. And as Francois mentioned, the fact that we have opportunities to above 15% opportunities in this marketplace certainly makes it a little bit more harder. Having said all this, we might be might mix it not exceptions, but there might be some other considerations As it relates to maybe a strategic, maybe a different kind of product, maybe a geography or maybe and we prefer that maybe a new team can really bring the expertise on a non running basis. So it's a very, very disciplined approach to M and A that we take. And we have the luxury because we have plenty of organic growth available to us.

Speaker 1

So something has to be very compelling for us to engage in those and also other risks, as you all know, that we don't want to take on necessarily. The number one is the culture. We're very, very Adam and about keeping our culture the way it is and that's really something and quite oftentimes the thing that makes the most is probably the one that makes the most difference in whether or not we'll entertain an M and A or not.

Speaker 5

That makes a lot of sense. You mentioned on the favorable developments that short tail property was a big driver. So looking at insurance at $21,000,000 favorable, reinsurance at $7,000,000 favorable. Just trying to understand, were there any large casualty offsets that might have played in? And if so, what would they be?

Speaker 2

Yes. Well, there's no, I'd say, offsets. I mean, we look at each line on its own. There's always going to be pluses and minuses Every single quarter, we look at the data, we react to the data. I think as you can imagine or I mean very much a function The type of business that we've written the last few years in reinsurance in particular, we've grown a lot in property.

Speaker 2

We've taken our usual used our same methodology, same approach to reserve and that Generated a little bit of redundancies or releases this quarter on the short tail side. There's always a little bit of noise on Any line of business, yes, we have a couple of sub lines or kind of sales and casualty work. We had a little bit of adverse, absolutely. But it's not I wouldn't call it an offset. I mean, we book every single line on its own.

Speaker 2

We react to the data and then when numbers come up is what we end up with. One thing

Speaker 1

I would add to this is our reserving approach at a high level is to typically recognize bad news quickly and good news over time. So again, our philosophy hasn't changed at all in all those years.

Speaker 5

Got it. Maybe if I could sneak one quick one in. You mentioned during the call that One of the growth areas in insurance was national accounts. What type of limits do you write on national accounts?

Speaker 1

Well, statutory, right? So and it's on an excess of loss basis. And these are loss there's a lot of sharing of experience Plus or minuses with clients, they tend to be larger clients. The national account is 90%, 95% plus workers' comp. It's really a self insured sort of structure that of sort.

Speaker 1

We provide the paper and the actual the document to allow to operate in their state because you need the required thing to be able to demonstrate that you have workers comp insurance as a protection. This is statutory, so it's unlimited. By definition, we have some reinsurance that protects some of the capping. That's really what it is.

Speaker 5

Got it. Helpful. Thank you.

Speaker 6

Sure.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Jimmy Bhullar from JPMorgan.

Speaker 4

Hey, good morning. So first, just a question on the casualty business. We've seen significant growth in your property exposures with the hardening of the market or significant hardening of the market since early last year, What are your views on just overall market trends on the casualty side? And are you comfortable enough with pricing in terms to increase volumes in that area?

Speaker 1

Yes, I think our comfort great question, our comfort On the casualty, on liability in general, it's more general liability, right, it's through professional lines. I think we're The market is turning or has more pressure on the primary side. So I think that our focus right now is we're on the primary as they can see on our reinsurance, What we did in the reinsurance for the last year, we think the reinsurance market is a little bit delayed in reacting to what's happened as in some of the development that we see and some of the increase in inflation and of course, we are putting that we mentioned. So I think that we'll probably see, first, An insurance market that really takes it to heart, like I mentioned, all the remediation that they need to do, and I think the reinsurance market will probably follow suit with their own possibly their own way to look at this, if the prior hard markets are any indication. On the reinsurance side, one thing that's a little bit beneficial at this point in time and there's a reason why reinsurers are not reacting possibly As abruptly as they probably should as in regards to City Commission is that we collectively understand as an industry that our clients are trying to make those changes.

Speaker 1

So we're trying to go along with them and help them support them in their efforts. We'll see whether that's enough. Our team is a little bit waiting to see whether that develops. But I do expect this to also come around and also provide another opportunity for us to grow.

Speaker 4

And then on mortgage insurance, I would have that reserve releases would moderate over time and they've actually become even more favorable. And I think there's a shift in what's driving that, it used to be COVID reserves last year and now it's stuff written post COVID. As you think about your just want to get an idea on what are you assuming in your reserves that you're putting on the book right now? Are you assuming experience commensurate with what you're seeing in the market? Or is it reasonable to assume that if the environment stays the way it is, there's more room to go in terms of reserve releases?

Speaker 2

Great question. I'd say reserve releases This year in general, we're somewhat driven by our the views we had on the housing market at the start of the year, Right. So if you roll back the tape a year, we were more concerned about home prices dropping fairly rapidly, recession, no soft landing, etcetera. So those reserves we set, call it, a year ago were very much a function of those assumptions and they've just been materialized throughout the year. So throughout the year, we saw very strong or very well performing housing market.

Speaker 2

People are hearing their delinquencies much higher than we'd actually forecasted. Home prices are holding up unemployment remains relatively low. So you put it all together, I mean, it really what transpired in 2023 is very much a function of the reserve releases reflect kind of how things how much better they played out relative to what we thought a year ago. Where we are today at the start of 2024 is certainly a bit more, I would call it, I mean, optimistic in the sense that we see Good home prices and the solid housing market for 2024. So on a relative basis, basis, the reserves that we're holding today are not as high as they were a year ago.

Speaker 2

So if you extrapolate from that, is there room for as much in reserve releases going forward, probably not, but we just don't know. I mean, the data will again play out as it does and we'll react to it. But hopefully that helps you kind of compare and understand how where we sit today versus a year ago.

Speaker 4

Okay, thanks. And just lastly, your comfort with your the reserves in your casualty book despite all the industry wide issues, Does that apply to the business that came over from Watford as well? Because that company obviously had a decent amount of exposure to casualty.

Speaker 1

Well, That's an easy one. Watford, really the underwriting is managed by our team here. So the reserving and

Speaker 7

Thanks.

Operator

Our next question comes from the line of Michael Zaremski from BMO. Hey,

Speaker 1

good morning.

Speaker 8

First question for Francois on Capital in regards to mortgage specifically. My understanding of the mortgage reserving rules is that after a decade or so, you can start releasing a material amount of reserves, and mortgage obviously isn't growing now. So is I know, but you also have a Bermuda, I think some captives there too. So just curious, Is there a material amount of capital coming or expected to come from releasing from the legacy mortgage or old mortgage business?

Speaker 1

Okay.

Speaker 8

That's helpful. And Sticking with capital, did when Elyse asked about you mentioned the S and P Capital model, but I don't think you actually gave any quantitative or the answers on the benefit because when we on paper, we see that Our shares to be one of, if not the most diversified. Any help there on how much of a benefit or how to think about how Okay. And lastly, since everyone else is sneaking in A lot more questions. Based on the remarks you've made, unless I'm understanding it incorrectly, it sounds like The growth might be, you're more excited about the primary insurance segment.

Speaker 8

Can primary insurance potentially grow just as much in 2024 as it did in 2023?

Operator

Thank you. One moment for our next question. Our next question comes from the line of Josh Shanker from Bank of America.

Speaker 9

Hey, everyone. I think there might be a problem with the phones. We heard Jimmy and Mike just fine, but we couldn't hear your answers to the questions. I don't know if so and I hear you. I don't know if anyone can hear me.

Speaker 9

Let me ask my team. Can you guys hear me on the phone? Okay, very good. So, yes, I got a couple of quick ones. So it's the lowest quarter of new insurance written in the mortgage insurance business since acquiring UGC And yet it looks like the capital utilization went up, at least the risk to capital and the team years Capital ratio went up.

Speaker 9

Can you sort of talk about the moving pieces that are driving that? That's obviously what it is. Yes, definitely that makes sense. And another easy one, It looks to me from quarterend 2017, September 30 to year end, COFA stock was about flat, although it round tripped through the quarter and yet you had very strong other income in the quarter. Obviously, there's some summers in that, there's other things in there.

Speaker 9

Can you talk about the moving pieces? Okay. And just so you know, I'm getting a lot of inbound call volume Okay. So just so you know, but I don't know. Anyway, they're addressing it.

Speaker 9

People can't hear the Arch team, but for people who are

Operator

Thank you. Our next question comes from the line of Yaron Kinar from Jefferies.

Speaker 6

Hey, good morning, everybody. Should I ask the questions or should we wait till this issue is fixed? Okay. Yes, no problem. So I guess first question, When you set loss picks into a year, do you update those other than for bad news or frequency?

Speaker 6

And what I'm trying to get at here is When we look at the reinsurance loss ratios, are they already incorporating the step change in the reinsurance market that we saw in 2023? Or were those losses or the loss ratio essentially a reflection of your expectations heading into 'twenty three and we should therefore see another step up and margins over the course of 24. Got it. And then my second question, Mark, I think in your Prepared comments, you'd said that casualty may be collectively worse than expected for the industry. And I'm curious, That comment, is that really referencing kind of the soft market years of 2013 through 2018 or 2019?

Speaker 6

Or do you think there could also be some of that emerging for the more recent accident years where market conditions were clearly good, but maybe the expectations of inflationary trends were still a bit lower than what they ended up being. Right. But I guess the question would be, even if they weren't as soft you were getting a lot of the industry was getting a lot of rate at that point. If the expectation was for an inflationary trend of 5% and it ended up being 7%, you could still see some deterioration of very profitable years nonetheless. Got it.

Speaker 6

I'll just end by saying, I think you disappoint a lot of Swifty fans, including my daughter by referencing rest of world football instead of U. S. Football this quarter. Anyway, best of luck. All right.

Speaker 6

Take care.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Bob Jian Huang from Morgan Stanley.

Speaker 10

Hey, good morning. Just two quick ones. First, I think 2 quarters ago on the earnings call you said, when we look at the insurance underwriting cycle, we were at about 11 that's kind of where we were implying improved rates and also loss trend stabilization. Just curious in your view, What time is it right now? Is it 11:30 or is it 11:59, 2 pm?

Speaker 10

Just kind of curious as to what you think. Okay. That's helpful. 11 to 11:30, that's very helpful. Thank you.

Speaker 10

My second question, Regarding MGA and capacity in general, there has been some concern that MGAs have been increasingly aggressive. Is this something you're seeing? Is this concern rightfully placed? Does it have any impact on how you think about your underwriting cycle management? Are you becoming more cautious, especially with any reinsurance?

Speaker 10

Not sure if you answered that before, so apologies. Okay. So property side not enough capacity, Professional line planned at full capacity, that's the way we should think about it. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Meyer Shields From Keith, Bruit and Woods.

Speaker 11

Hi. I think we're in the same situation where People can only hear the answers to their specific questions. So I'm hoping that comes through here as well. Similar question To Bob, we've seen obviously a number of companies report some reserve problems in the Q4. And I'm wondering when you look at the book of Steven that you have within reinsurance, is what we're seeing in the public companies a good representation of overall trends or is there something different in the non public world?

Speaker 11

Okay. No, that's perfect. Related I'm sorry, go ahead. Yes. No, I'm still here.

Speaker 11

Similar question, I guess. We obviously, What we've seen here is a lot of domestic concerns over liability lines. On the international casualty side, is that concern worsening as well or should we think of that as just a domestic concern? Okay, fantastic. Thank you so much.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Elyse Greenspan

Speaker 3

Hi. Thanks for taking the follow-up. I will say, I think you have a lot of folks wondering who's writing coverage for your conference call provider. But My follow-up is on casualty insurance. Can you give us a sense of the loss trend that you're booking your casualty insurance book to and what rate you're getting and casualty insurance as well.

Speaker 3

So loss trends, you said 7%, 8%, 9%, 10%, but can vary by line and sometimes be 5%. Where would you put the price increase? Okay. Low to mid teens. I'm just also repeating, so folks listening in Can't hear the answer.

Speaker 3

So low to mid teens. Yes, I think that's one I guess your One last one, your cat, you said your PML went a little bit higher, right, but the percent of equity is lower given the Equity rise in the quarter, where would you put your cat load at the start of 2024? Okay, 6% to 8% cat load. Thank you for taking the follow-up.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Kavi Montazeri

Speaker 7

Good morning, guys. It's KP. Hey, I have a question On reinsurance terms and conditions and attachment points, does it feel like overall the industry probably took on more high frequency, low severity risk that issued out over the past couple of years. And now Maybe on aggregate, reinsurers are probably more willing to negotiate on price than on attachment points or terms and conditions. Just tell me what your view is on that topic.

Speaker 7

Yes, property.

Speaker 6

Yes.

Speaker 4

Okay. My follow-up

Speaker 7

Now you had been kind of pulling back even before activity came to a halt. But if the Fed rate cuts, if you do come, lead to a pickup in the U. S. Activity in the housing market, Would you be happy to grow in line with the market? Or should we expect you to kind of grow maybe less fast than the market?

Operator

Thank you. One moment for our next question. Our next question comes from the line of David Motamedin From Evercore.

Speaker 12

Hi, thanks. Good morning and apologies, I haven't been hearing the answers. So, not sure if you've answered any of these already. But just, Mark, you spoke a little bit The beginning of the call about the need or the strategy to lean in at the early part of a hard market. I guess, how do you manage that with potential false starts?

Speaker 12

It sounds like casualty market On the reinsurance side hasn't hardened as quickly as you've expected. But how do you manage that just internally between writing business that might be hardening, but not totally to where you think it should go, and the potential for false starts? Yes. No, understood. That makes sense.

Speaker 12

And then, Mark, you had mentioned that at oneone, the property market continued to improve, Property cat reinsurance market. I guess as we sit here today and sort of looking forward at the sustainability of that As we move through 2024, what's your view now on that and the growth opportunities In property cat. Got it. Understood. And I know in the past you've said, alternative Capital or ILS can has the ability to swing the market one way or the other.

Speaker 12

What exactly are you seeing there? Understood. Thank you.

Operator

Thank you. Arch Capital Group answers have been captured and will be available in the replay. I would now like to turn the conference over to Mr. Mark Grandison for closing remarks. Ladies and gentlemen, thank you for participating in today's conference.

Operator

This concludes the program. You may all disconnect.

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Key Takeaways

  • Arch achieved a record annual operating ROAE of 21.6%, a 43.9% rise in book value per share, and $3.2 B of operating income, driven by $17 B in gross and $12.4 B in net premiums.
  • The Reinsurance segment posted $6.6 B of net premium, $1.1 B of underwriting income, and an 81.4% combined ratio (77.4% ex-cat and PYD), while Primary Insurance grew net premium 17% to $5.9 B with a 91.7% combined ratio and $450 M of underwriting profit.
  • Arch’s Mortgage Insurance arm generated nearly $1.1 B of underwriting income, leveraging high policy persistency and strict credit discipline despite industry-wide origination declines.
  • Investments produced over $1 B of net income on a $35 B asset base at near 5% new-money rates, and Arch’s capital base expanded to $21.1 B with a conservative 16.9% debt-plus-preferred leverage ratio.
  • Management reiterated its focus on rate adequacy and disciplined capital allocation, seizing early hard-market opportunities, pursuing M&A with >15% returns, and recognizing a $1.18 B deferred tax asset from Bermuda tax changes, implying a 9–11% effective tax rate in 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Arch Capital Group Q4 2023
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