Arch Capital Group Ltd. (ACGL) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the 2Q 2026 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2025 fiscal year. Additionally, Certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking 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 report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your hosts for today's conference, Mr. Nicolas Papadopoulo, and Mr. Francois Morin. Sirs, you may begin.

Good morning, and welcome to Arch's second quarter earnings call. We reported strong earnings this quarter with solid underwriting performance from each of our 3 segments. After-tax operating income in the quarter was $893 million or $2.56 of earnings per share. slowing top line growth and strong earnings freed up capital for additional share repurchases in the quarter. bringing the total for the first half of the year to $1.95 billion. Book value per share grew by 2.8% in the quarter and has increased by 4.5% in the first half of the year. While the underwriting environment is increasingly competitive, it is important to note that we are still in the early stages of this softening market. Overall, fundamentals are attractive with some line experiencing increased competition while others continue to see rate increases. Arch's diversified business model ensures that we can find opportunities to deploy capital that generate appropriate risk-adjusted returns. Our position as an industry leader in specialty insurance, reinsurance and mortgage insurance provides us with a meaningful competitive advantage. Clients come to us not only for capacity, but also for our underwriting expertise, claim capabilities and valuable perspectives that help them better manage risk. Our commitment to cycle management is embedded in our culture and guide our underwriting approach. This is reinforced by a compensation structure that incentivizes quality underwriting, aligning performance with long-term profitability and shareholder returns. Let us now turn to our segment performance, starting with insurance where results were negatively affected by catastrophe losses related to the Iran conflict. Arch is a leading writer of political vires, terrorism and Marine War in the London market. So while losses affected this quarter's results, we are seeing ongoing opportunities to support clients with assets in the region. Underwriting income of $27 million does not reflect the good underlying performance of the segment, which delivered a current accident year combined ratio ex cat of 91.6%. As reported by others, and consistent with our comments last quarter, competition is increasing, particularly in property and short-tail lines. That said, the middle market commercial business and casualty-oriented lines continue to experience rate increases. Additionally, pricing in directors and officers is rebounding slowly or rate declines in cyber insurance have moderated. Our gross and net premium return were negatively impacted by the nonrenewal of certain program business as discussed in prior calls and were also impacted by reduced writing of our Excess and Surplus property business. We continue to see premium growth in casualty-oriented lines in North America, including Excess and Surplus casualty construction and national accounts. And we also saw positive trends in certain specialty London market lines, including war and terrorism. Looking ahead, our diversified platform provides us with the flexibility to grow in those areas where pricing supports our return objectives. Reinsurance underwriting results were excellent aided by relatively light catastrophe losses, resulting in $410 million of underwriting income in the quarter. The current quarter accident year ex-cat combined ratio was 79.9%, a 270 basis point increase from last year due to changes in mix and lower pricing in property lines. Net premiums written were down 10% from the same quarter last year. as some of our clients opted to retain more risk and increasing competition, lowered rates, particularly in property. We increased our session to traditional reinsurance and third-party capital which impacted our net to gross ratio. Our ability to leverage these capabilities enables us to provide solutions to our brokers and cedent while maintaining flexibility to manage our net risk portfolio. Similar to insurance, casualty reinsurance is an area where we see attractive business. Opportunities remain though competition is elevated due to abundant to insurance capacity. Within our Reinsurance business, our focus is on maintaining our position as a leading reinsurance partner through disciplined underwriting and by consistently delivering business expertise across market cycles. The mortgage segment continued to provide strong, stable results, delivering $220 million of underwriting income in the quarter. Our mortgage portfolio performed well driven by a resilient economy and high-quality risk in force. Our U.S. MI portfolio delinquency rate remained flat at 2.1%. Favorable reserve development continued, although slower than in prior quarters. While affordability and housing supply constraints limit new mortgage origination, mortgage insurance remains a consistent contributor to earnings as the strength of the in-force portfolio and favorable credit characteristic continue to support steady profitability. Investment contributed $417 million or $1.20 of net investment income per share in the quarter. This is supported by our conservatively managed portfolio which maintains an average credit quality of AA minus. We continue to benefit from an asset base that has grown to $49.5 billion, supported by strong cash flows. Investments accounted for using the equity method, which are excluded from operating earnings, performed well, adding an additional $196 million or $0.56 per share to net income reflecting strong returns across the portfolio. Over the last 5 years, we have enjoyed favorable market conditions in property and short-tail lines and consequently, we now face the early stages of a competitive market, driven by an influx of capacity. This part of the cycle is to be expected. Importantly, a more competitive environment doesn't mean a lack of opportunity. It simply requires greater discipline in where and how capital is deployed. Our playbook is built upon our enduring strengths, a diversified platform, best-in-class cycle management, a strong brand that enhances our relationship with clients and distribution partners as well as disciplined capital management. In sum, we remain well positioned to consistently deliver superior results for our shareholders. As Arch approaches its 25th anniversary, one thing is clear. While the company has evolved, the principal and playbook will rely upon create long-term shareholder value. With that, I will turn the call over to Francois. Francois?

Thank you, Nicolas, and good morning to all. Before I provide some additional color on our results, I wanted to walk you through our capital allocation and management actions this quarter. Capital management is an essential tool to help us to manage our business through the insurance cycle. The latest hard market provided Arch the opportunity to generate significant excess capital that as the market transitions cannot be fully deployed into our business. Our preferred option has first been to return excess capital to our shareholders through share repurchases and secondly, through special dividends. After considering the opportunities available to us to deploy capital in the business, both existing and new we determined that share buybacks remain an accretive use of excess capital in enhancing shareholder returns at current prices. As a result, we repurchased 12.4 million shares at an aggregate cost of $1.2 billion in the quarter. Through the first half of the year, we have repurchased approximately 94% of our net income in our own shares. As you know, we also accessed the debt market in May raising $2 billion in a combination of 10-year and 30-year senior notes. The proceeds from this issuance will be used to: one, redeem the $500 million of 10-year senior notes maturing later this year; two, purchased $418 million of our 2043 and 2046 senior notes through a recently completed tender offer with the remainder for general corporate purposes. The tender offer was designed to replace debt that no longer meets updated regulatory capital requirements with fully compliant capital instruments. As a result of the debt raise, we expect our interest expense to be approximately $60 million to $63 million for each of the next 2 quarters. As of the end of the second quarter, our debt our debt plus preferred to capital leverage ratio stands at a conservative 18.1%. Turning back to our operating performance for the quarter. Our 3 business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 82.5%, up 160 basis points from the same quarter last year. Our underwriting income included $165 million of favorable prior year development on a pretax basis in the quarter or 4.1 points on the overall combined ratio. We recognized favorable development in all 3 of our segments and in many of our lines of business, but mainly in short tail lines in our P&C segments and in mortgage due to strong cure activity. Current year catastrophe losses were $201 million, net of reinsurance and reinstatement premiums and were a combination of losses from the Iran conflict and severe conductive storms in the U.S. The insured segment's net premiums written declined 5.1% year-over-year due in part to the nonrenewal of certain program business. The ex-cat accident year loss ratio net of reinstatement premiums improved by 90 basis points to 56.4% compared to the same quarter 1 year ago due primarily to strong performance in our international operations. The acquisition expense ratio for the current accident year increased by 30 basis points as the benefit we observed from the write-off of deferred acquisition costs for the MCE acquired business rolled off. Our operating expense ratio was higher this quarter due to the transition of our middle market business to Arch systems. As mentioned last quarter, we would expect our operating expense ratio to revert back to historical levels during the second half of the year. Turning to the Reinsurance segment. Net premiums written were down 10.4% from the same quarter 1 year ago, reflecting reduced writings from lower rates and a higher level of retrocession purchases, primarily in the specialty and property catastrophe lines. Overall, our ex catastrophe accident year combined ratio of 79.9% is up from last year due to the shift in line of business mix and a more competitive rate environment for certain subsegments. Our mortgage segment produced another very strong quarter with underwriting income of $220 million. Net premiums earned were flat from last quarter, with a reduction in our U.S. MI business mostly offset by higher levels of earned premium in Australia. On the investment front, we earned a combined $613 million of net investment income and income from funds accounted for using the equity method or $1.76 per share pretax up from the $1.57 per share we earned last quarter. We note that the returns of equity method funds contributed 340 basis points to our annualized net income return on average common equity in the quarter. Cash flow from operations remained very strong at $1.3 billion for the quarter. Income from operating affiliates was $46 million for the quarter, slightly higher than the $40 million from the same quarter 1 year ago. Our effective tax rate on pretax operating income was 15.1%, reflecting the mix of income by tax jurisdiction. As of July 1, our peak zone natural gas probable maximum loss for a single event at a 1 in 250-year return level on a net basis is down slightly to $1.8 billion and now stands at 8% of tangible shareholders' equity. With these introductory comments, we are now prepared to take your questions.

[Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo.

My first question is on the insurance segment. I was hoping to both just get a sense of the sustainability of the underlying loss ratio you saw in the quarter. Francois, I think you pointed out strong international results for the second quarter in a row. So just trying to get a sense of the sustainability there. And then was there any change in your loss pick assumptions within your insurance book in the quarter?

Yes, 2 things or a few points on that, Elyse. First, international, as you know, it's more of a short-tail book. So it's been running very well. And there's always potential volatility that we have to think about. So I mean, hard for us to know how that's going to play out, but the business is doing extremely well, so we're happy with that. On the North American side, I mean, what's also helped a little bit is the nonrenewal of some of the programs that started out earlier this year. So as those kind of earn in, right, the premium earns in or the lack of premium, I think that will that has brought down the loss ratio a little bit. So I mean, where did it go from here? I think -- I mean, at a high level, we think we're comfortable with the levels where we're at and I think there's a good chance or there's a possibility that we stay at levels around this number.

And no movement in loss trends?

No movement in specific aspects. I mean it's really -- I mean absent just the normal adjustment of rate over trend that we go through each of our lines of business, but we haven't like systematically decided to move down the loss ratio pick for one line in particular or another. So nothing new there.

Elyse remember, in insurance, you can actually adjust the mix of the book. So we -- every -- most of our books today are split in what we call quartile or quintile, where some of the book is running at a lower expense -- lower loss ratio and the other side is running at a higher loss ratio. So the work of the underwriter is really to get pricing or manage a higher loss ratio out. So we have more propensity to keep the loss ratio where it is.

And then my follow-up was just on capital. Obviously, buyback right picked up in the quarter. I think you guys just mentioned, right, slower growth, obviously, strong earnings and capital position. How are you guys thinking about the level of buybacks from here recognizing obviously we're in the midst of wind season? Would you expect to slow down this quarter and then pick back up? Or just how you're thinking about the level of capital return going forward?

Yes. We don't -- certainly don't have targets or plans to buy back a certain number or dollars of shares. We certainly thought that in the second quarter, the price of the stock was very attractive to us. So that's why we were able to certainly buy back more than we had done in the past. Does that stay at this level? I don't know. At the current prices, we like the stock still we think it's very attractive. And we have capacity to buy back more. So we'll see if that plays out. Wind season is always something that -- a little bit of the back of our minds that we have to think about. But going forward, I think we're in a position where, again, the growth is going to be harder to come, we think and share buybacks will remain part of the arsenal that we have to manage our returns.

Your next question comes from the line of Pablo Singzon with JPMorgan.

Retention in the insurance business has ticked down over the past couple of years. Is there a approach to keep retention the same? Or could you potentially increase that and internalize more of the underwriting income. I'm just not sure seating is economically more attractive like it is in reinsurance today.

Sorry, can you repeat the question? Are you asking about retention of...

In the insurance segment, your retention has been going down, right? You've been essentially seeding that just not over growth right? And I think in the soft market -- yes, yes.

Yes. So again, it's a function of really the market we are in. So I think in reinsurance, we've set it a little more because I think we -- if I remember, we placed a little bit more on the shorter lines because as the rate was going down. And we also increased our capacity as we increase our limit we buy more insurance. So there's many factors that influence the net to growth. But the market is certainly a factor we look at as well. We -- I said it -- we're here to solve the problem for our insured and for our brokers. So the reinsurance is a good tool to stay in front of the client ultimately figure out what we want to keep after it, so.

Understood. And in insurance, the insurance segment, what's your stance on net to growth there.

The question I asked you earlier was more on the -- it works on both the same way, but I'll answer more on the insurance side. I'm sorry. The line is really -- your line is really bad. So on the insurance, I probably gave you the answer. On the reinsurance, I think we are much more active, I would say, on the on the buying, especially because the property cat business, specifically, we think it's quite stressed. So we have to manage the net portfolio. And the tool we've used is relying on capacity out there that have a lower cost of capital to help, again, solve the problem for the clients or distribution partners.

Your next question comes from the line of Andrew Kligerman with TD Cowen.

Nicolas, I was intrigued by your early comments, prepared remarks, where you talked about an influx of capacity and that we're in the early stages of a soft market. So I'm hoping you can elaborate a little bit separately on property and casualty. Do you think property rates could come down materially more and to what potential degree? And you mentioned that casualty was decelerating. Do you think we could start to see that turn negative.

Yes. First, I think we -- I truly believe that the market that we are trading in is a favorable market. So they are business that our teams can on the insurance side. And to a large extent, on the reinsurance side, there's new business that we can write. So we were made to trade in this type of environment. So specific to property, yes, it's a big headwind, okay. Rates have been coming down. And there, I think we trade quite carefully. And you saw both on the insurance and reinsurance on net premium going down. We are much more optimistic on the casualty side. I think there's more competition there. But the market is remaining disciplined, especially on the insurance side. We haven't seen any -- we've seen management of limit, which is a critical aspect of what we track our competition stays very disciplined.

Yes. And I'd say to -- I mean, property, I mean, the can activity will have an impact. I mean it's still early in the season. So far, it's been quiet, but things could change depending on -- as we look into 2027.

Got it. So in terms of of casualty and maybe this is just like kind of a 2 part. When you say you're disciplined are you keeping up with loss costs on your rate? And then the prior year development was 1.4 favorable in insurance, 5.3 favorable in reinsurance. And I know in the prepared remarks, you said it was mainly short tail stuff. But could you give a little color on the amount and geography by accident year in casualty or maybe it was just insignificant. But I'd be curious around how casualty played out in prior year development.

Casualty at a high level is kind of neutral. I mean -- so there's some -- by year, by subline, there's some up, some down. In total, it's about neutral. So yes, the short answer is like most of the favorable in the short-tail lines in the last 2 to 3x and then slash underwriting years.

Your next question comes from the line of Cave Montazeri with Deutsche Bank.

Just want to follow up on the $1.2 billion of share repurchases you did this quarter. I think it's the first time in a while, we went over 100% of operating income. And I know part of that is dictated by the stock price, but there's still a pretty meaningful gap between where you're trading and kind of like the intrinsic value based on 3-year forward book value. So at current levels, like how -- I'm trying to get a sense of how long you can sustain share repurchases above 100% of the operating earnings you generate. So you did mention you've built up a decent amount of excess capital during the hard market, despite a bit more debt you can issue if you wanted to. Just wondering kind of like can you give us a sense of like could you sustain above 100% payout throughout the soft cycle, not knowing how long soft cycle will last, but -- like is it like a multiyear [indiscernible] that you have?

You're asking me if we have to, first of all, which we don't. But let's just say that we've got -- again, we are very confident in our ability to generate strong earnings through all phases of the cycle. We got 3 kind of pillars or operations through life of the stool, they're all performing well. So we believe strongly that we have an ability to generate earnings for the maybe not forever, right, but for the foreseeable future at a minimum. So you're asking me, are we able to return if we're not growing, can we return all those earnings in back and back to the shareholders? The answer is yes, we could. Could we do something else? Again, that's like I don't want to speculate what we're going to do in a year or 2 years because is there M&A? Is there other things that we -- where we need the capital before what we deploy it differently. But again, the quarter -- second quarter was, again, hopefully a good demonstration that we are active and like the stock and think it's an attractive way to return to our shareholders, and we'll keep doing the same as long as unless things change materially.

And I guess linked to this, your TML went down a bit this quarter. I guess not as much as your premium on a net basis. Can you maybe give us some color what kind of business you are sent to the retro market? And should you expect your PML to kind of go down over time as the cycle softens? And -- because I guess that could be an additional source of capital to be released that you could use for share repurchases or whatever else you want to do with it?

So the PMLs that you look at, I think, is Florida, Tri-County. So it's 1 of the 50 zones that we monitor. So mean Florida business is our peak zone. So it's a big zone for most of the reinsurers in the field. So that is historically has had the highest margin. So that's why I think the rate reduction pretty much across the board on the property cat. So we would expect that the PML could reduce, but think of Florida as the highest-margin business in our property cat books.

But the percentage of shares equity, we were at 8%. We've been in the soft market, the last off market. We were at 4%. So we're a different animal, we're much more relevant. We're much more -- I mean bigger partner to many of our clients and brokers. So yes, could our PML come down? Absolutely. Does it go down to the same level back that we said we don't know.

Your next question comes from the line of Rob Cox with Goldman Sachs.

First question was just on casualty reinsurance. I think you all had taken maybe somewhat differentiated view on casualty Re versus peers in 2025 by leaning in with some of these selective cedents. As we think about the deceleration in casualty reinsurance growth year-to-date, is that reflective of those outperforming cedents choosing to retain more risk? Or has Arch changed its view on casualty returns?

No, I don't think we've changed our view. I think we -- as I think I mentioned in my prepared remarks, we stay I think it's an attractive line of business. We like the fundamentals of the underlying business in the specialty casualty area. The issue, it's not new, it's too much capacity, reinsurance capacity chasing too little business. And the way we see it is he don't miss on the terms and conditions. So there are certain terms and conditions that works. And for others, we think that sometimes it's mostly quota share contract, the same commission is too high. So I think we're still looking if for the right opportunity to add reinsurance casualty to our books in the right lines of business and with the right setting companies.

Okay. And I just want to follow up on the Middle East some losses this quarter from a cat perspective, but it also seems like there's some incremental opportunities to write new business. Could you just give us some sense of what the strategy is to write new business and how you go about managing that and determining what's a good risk.

Yes. So obviously, following the losses in the iron regions that we're all aware about prices have adjusted. And for us, we -- prices at some point were a multiple of what they were before the conflict and so we decided to deploy a bit of capacity and stay with our insurance. Some of our insured, there's -- we may do 1 annual business. Now they suddenly figure out that the war, which was excluded from their property policies, they'd like to buy some coverage. And so selectively, we've deployed more capacity in the region making sure that we avoid concentration. So we have a careful approach to continuing to service our distribution partner and our clients in the region.

Your next question comes from the line of David Motemaden with Evercore.

Wondering if you guys could just quantify the Iran losses this quarter that impacted the insurance segment? And then maybe just elaborate on how you're thinking about them and the cat load within insurance going forward? I'm interested also in any sort of IBNR versus actual loss detail you could share?

Well, I mean the majority of the insurance cat losses come from Iran. Cat load going forward. I mean, we quoted the 6% to 8% kind of for the -- on an annual basis for the group. That hasn't changed. I think the losses that we -- the Iran conflict is more -- is actual refineries, it's actual claims. So case reserves have been set up. It's not a hypothetical IBNR, we'll put it up in case something happens. And those are large refineries, et cetera, that people are well aware of. They've been kind of hit and they there's damage associated with them. There's always questions around business interruption. And so we don't know what the magnitude of the outcome, but the claims are real and tangible. So that's how we think about it. I mean it's -- again, we -- Nicolas mentioned it, we are out of London at Lloyd's, we are leaders in the political violence terrorism kind of market. And that's -- the losses when they happen, we expect them. And we think the pricing supports it, and that's why we've been in that space in a more meaningful way in the last few years, and we're still in it.

Got it. That makes sense. And then maybe just on the Reinsurance segment. The accident year loss ratio ex cat deteriorated 370 basis points year-on-year. It sounds like that's well within expectations that you guys have had, just given the mix shift away from property and then also just the pricing pressure there on that line. I mean is that the same sort of deterioration we should expect as we head throughout the rest of this year? Or yes, sort of wondering how you guys are thinking about that.

Yes. As we said before, David, I think we -- I mean, our view is we look at trailing 12 months as -- first of all, like our kind of the lens we like to put at the results specifically on reinsurance because there's going to be more a little bit more volatility in the ex-cat loss ratio, no matter what. So that's the first thing we'd say. Two, you're right. I think the mix has changed a little bit less short tail, which is reflected in that increase in the loss ratio. Three, yes, the market, a little bit more kind of competition but the rates are down a little bit more, that hasn't fully earned in, so that may earn in kind of over time. So you put it all together, like the last kind of quarter, if you focus on the quarter, we'd take it's probably a little bit higher than we would think the run rate is or kind of reflecting all these moving parts, but we're not surprised by it or think -- I guess to your point, it's very much within our expectations, but we'll see how things play out going forward.

Your next question comes from the line of Tracy Benguigui with Wolfe Research.

You quantify that prop cat rate decreases you saw at midyear renewals and share your view of rate adequacy. Looking at 1 broker survey looks like pricing is back to 2021 levels, but a competitor had said look more like 2023. So where in the spectrum is your view?