Arch Capital Group (NASDAQ: NASDAQ:ACGL) has reported strong financial results for the third quarter of 2024, showcasing an annualized operating return on equity of 14.8% and a significant 8.1% increase in book value per share over the quarter. The period saw the company absorb $450 million in catastrophe losses, largely due to Hurricane Helene, which constituted approximately 45% of their total catastrophe losses for the quarter.
Key Takeaways
- Arch Capital Group's total net premiums saw substantial growth, with the insurance segment up by 20% to $1.8 billion and reinsurance by 24% to $1.9 billion.
- The company recorded strong underwriting income across its segments: $120 million in insurance, $149 million in reinsurance, and $269 million in mortgage insurance.
- Net investment income from the investment portfolio was reported at $399 million.
- Book value per share increased to $57, marking a 21.4% rise year-to-date.
- The acquisition of Midcorp and Entertainment business from Allianz (ETR:ALVG) was completed in August.
Company Outlook
- Expectations for the property catastrophe market to stabilize following recent events.
- Casualty market experiencing double-digit rate increases driven by social inflation and severity trends.
- The reinsurance market is seen as attractive with quality quota shares and excess of loss programs presenting opportunities.
Bearish Highlights
- The company faced significant catastrophe losses during the quarter, with Hurricane Helene accounting for a substantial portion.
Bullish Highlights
- Arch Capital Group completed strategic acquisitions, enhancing its market presence.
- The company is capitalizing on favorable rate environments in the casualty lines.
- A disciplined underwriting approach has been maintained across all segments.
Misses
- There was a mention of low origination activities in the mortgage insurance sector.
- A slight uptick in delinquency rates was observed, although it was within expected seasonal patterns.
Q&A Highlights
- CEO Nicholas Papadopoulos emphasized Arch's commitment to underwriting excellence and selective growth in profitable casualty lines.
- CFO Francois Maurin highlighted the positive environment for the reinsurance business.
In summary, Arch Capital Group has navigated the challenges posed by natural catastrophes while achieving growth in premiums and maintaining a disciplined approach to underwriting. The company's strategic acquisitions and favorable rate environments in certain markets have positioned it well for the future, even as it deals with the impacts of social inflation and other market trends.
Full transcript - Arch Capital Group Ltd (ACGL) Q3 2024:
Conference Operator: Good day, ladies and gentlemen, and welcome to the Q3 2024 Arch Capital 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 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. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10 ks for the 2023 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 references 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 reports 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. I would now like to introduce your host for today's conference, Mr. Nicholas Papadopoulos and Mr. Francois Maurin.
Sirs, you may begin.
Nicholas Papadopoulos, CEO, Arch Capital Group: Good morning, and welcome to our Q3 earnings call. I'd like to begin by wishing the best to my friend and my business partners of 23 years, Mark Oleson, who retired earlier this month. Arch had a fantastic run under Mark's leadership. While we will miss him, I'm very excited about the opportunities before us. My message to our shareholder, employees, brokers, clients and business partners is that it is business as usual at Arch.
Our core objective remains unchanged, to be the best in class specialty lines insurer in the market. We'll continue to execute on the key pillars of our strategy, which are build a diversified mix of businesses, actively manage the underwriting cycle, remain prudent stewards of capital, be dynamic managers of a data driven enterprise and foster a culture that attracts best in class talent. Back to the quarter, where ASH generated strong top and bottom line results with an annualized operating return on equity of 14.8 percent and an 8.1% increase in book value per share. Our 3rd quarter results included $450,000,000 of cat losses across multiple events including Hurricane Ivan. It's worth noting that this cat loss is within our Q3 seasonally adjusted cat load.
Overall, the P and C environment remains very favorable despite increasing competition in many lines of business, making underwriting and risk mitigation increasingly important. Underwriting strategies empower our businesses to respond quickly to their trading environment. This has been and remains a competitive advantage as we pursue those opportunities with the best risk adjusted return. Industry cat losses have once again exceeded $100,000,000,000 for the Q3. We should continue to support increasing demand for property insurance and reinsurance.
Even with this increased cat activity, we believe the property market remains attractive and one in which disciplined underwriters can produce attractive return on casualty rates continue to outpace trend, which is consistent with our hypothesis of a hardening casualty market. We have selectively increased our casualty riding in both insurance and reinsurance as the market respond to claims inflation and uncertainty around those trends with higher prices. Turning now to our underwriting segments. Our insurance segment was $1,800,000,000 of net premium and delivered $120,000,000 of underwriting income in the Q3. Acquisition of the Midcorp and Entertainment business from Allianz in August helped drive a 20% growth over the same quarter a year ago.
We are confident that the Midcorp team will be an important part of our growth story as we further enhance our capabilities in the middle markets. Excluding Midcorp, insurance growth was mid single digit as we continue to find attractive growth opportunity in casualty programs and our London Market Specialty Business. Premium rates remain competitive in E and S Property and Professional Lines. Reinsurance had another excellent growth quarter with net premium return up more than 24% to over $1,900,000,000 along with underwriting income of $149,000,000 as our team continued to benefit from more robust relationship with our brokers and seasoned. Growth was driven by property ex cat, including facultative business, casualty and other specialty.
Our industry leading mortgage segment again contributed significantly to our earnings with $269,000,000 of underwriting income for the quarter. Underlying fundamentals remain excellent for the mortgage insurance industry, including strong credit conditions and continued favorable house price appreciation. Mortgage origination activities remained light, but new insurance return of $13,500,000,000 was in line with our expectation as relatively high mortgage rates and continued house price appreciation have kept most buyer on the sidelines. Finally, the contribution from our investment portfolio were substantial. In the quarter, Arch Investment Management generated $399,000,000 of net investment income.
Significant operating cash flows from our underwriting unit should support continued growth of our asset under management, setting us up for strong investment contribution in the years to come. Looking ahead, we lack our position in the market opportunities. This is true as we enter a responsible growth part of the PMC cycle where disciplined underwriting and thoughtful risk selection are essential to success. A few final comments in closing. Ours has proven to be an exceptional company defined by a culture of underwriting excellence, underpinned by our core strategies of cycle management and fruitful capital allocation.
That was true yesterday, it is true today, and it will be true tomorrow. I'm very excited and proud to lead this company and work with our leadership team as we continue to strive to deliver the greatest value to our clients and shareholders over the long term. I'll now turn it over to Francois to provide some more color on our actual results in the quarter and then we will return to take your questions. Francois?
Francois Maurin, CFO, Arch Capital Group: Thank you, Nicholas and good morning to all. As you know by now, we reported 3rd quarter after tax operating income of $1.99 per share for an annualized operating return on average common equity of 14.8%. Book value per share was $57 as of September 30, up 8 0.1% for the quarter and 21.4 percent on a year to date basis. Once again, our 3 business segments delivered excellent underlying results highlighted by $538,000,000 in underwriting income and an 86.6 percent combined ratio, which was slightly elevated from an active catastrophe quarter. Our combined ratio was 78.3% on an underlying ex cat accident year basis.
Overall current accident year catastrophe losses were $450,000,000 for the group in the quarter split roughly 80%, 20% between the Reinsurance and Insurance segments. Approximately 45% of our catastrophe losses this quarter are due to Hurricane Helene, with the rest coming from a series of events, including Canadian events, smaller named hurricanes, U. S. Severe convective storms, flooding in Europe and other events across the globe. As of October 1, our peak zone natural cap probable maximum loss for a single event, 1200 year return level on a net basis increased slightly and now stands at 8.1% of tangible shareholders' equity as we incorporated exposures from the Midcorp acquisition on August 1.
Our PML remains well below our internal limits. Our underwriting income included $119,000,000 of favorable prior year development on a pre tax basis in the quarter are 3 points on the combined ratio across our 3 segments. We recognize favorable development across many lines of business, but primarily in short tail lines in our property and casualty segments and in mortgage due to strong cure activity. As you know, we closed on our purchase of the U. S.
Midcorp and Entertainment Insurance Businesses from Allianz on August 1st, and I would like to expand on a few items that impacted our financials this quarter. First, the net written premium coming from the acquired businesses was $209,000,000 for the 2 month period, contributing to the reported year over year premium growth for our insurance segment. 2nd, in accordance with U. S. GAAP, the fair value of the acquired balance sheet does not include an asset for deferred acquisition costs.
Therefore, since there is no amortization of deferred acquisition costs associated with the in force business at the time of the acquisition, the current quarter's acquisition expense ratio is lower than in the Q3 of 2023. This item resulted in a benefit this quarter of approximately 1 point 9 point in the insurance segment's acquisition expense ratio. Although we would expect this benefit to become less significant over the next 3 to 4 quarters as a larger proportion of our earned premium relates to premium written after the closing date. Operating expenses in the new business were also somewhat lower than ultimately expected as we ramp up operations contributing to a 60 basis point benefit in the quarter. 3rd, as is required with business combinations, we recorded goodwill and intangibles in connection with the transaction, primarily from the value of the business acquired, distribution relationships and the present value adjustment related to the reserves for losses and loss adjustment expenses.
This quarter, we incurred an expense for the amortization of intangibles of $88,000,000 $63,000,000 of which was for the Midcorp and Entertainment acquisition. We expect our overall amortization expense across the group to be approximately $100,000,000 in the Q4 of this year and $195,000,000 in 2025 spread evenly throughout the 4 quarters. While still early, the mid core business is performing as expected or even maybe slightly better and we are satisfied with the progress we are making in our integration activities. Turning to our reinsurance group, the team delivered a very solid 92.3% combined ratio in an active catastrophe quarter. Of note, the reported net written premium growth of 24.5 percent in the quarter was augmented by reinstatement premiums.
Adjusting for this item, the growth rate would have been approximately 22.4%. The mortgage segment reported an excellent 14.8 percent combined ratio as cure activity on delinquent mortgages is strong and the underlying credit quality of the book remains very high. The reported delinquency rate at USMI inched up slightly this quarter and was impacted primarily by seasonal factors. On the investment front, we earned a combined $570,000,000 pre tax from net investment income and income from funds accounted using the equity method or $1.49 per share. Our investment income reflects approximately $20,000,000 earned during the 2 month period from the assets we received in connection with the Midcorp acquisition.
Total (EPA:TTEF) return for the portfolio came in at 3.97% for the quarter as there was significant price appreciation on our fixed income portfolio due to lower interest rates. The appreciation of our available for sale investment portfolio resulted in a book value increase of $1.56 per share net of tax. Cash flow from operations remain strong and exceeds $5,000,000,000 on a year to date basis. Our effective tax rate on a pre tax operating income was an expense of 8% for the Q3 and our annualized effective tax rate remains in the 9% to 11% range for the full year 2024. In closing, our balance sheet is strong with common shareholders' equity of $21,400,000,000 and a debt plus preferred to capital ratio of 14.2%.
This level of financial resources gives us flexibility to deploy capital as needed and continue delivering outstanding results for the benefit of our shareholders. With these introductory comments, we are now prepared to take your questions.
Conference Operator: Thank Our first question comes from the line of Elyse Greenspan with Wells Fargo (NYSE:WFC). Please go ahead. Hi, thanks. Good morning.
Analyst: Good morning.
Elyse Greenspan, Analyst, Wells Fargo: I guess my first question is on the Allianz deal. You gave us some good color on the expenses, but anyway could you give us a sense of just the impact on the underlying loss ratio within the insurance segment in the quarter?
Francois Maurin, CFO, Arch Capital Group: Yes, sure. I mean, just to give you a bit more details on that. Yes, the call it the normalized meaning ex cat, ex euro loss ratio for this segment was 57.6, right? And the standalone for the mid core business was 62% in the quarter. So that's how it came up.
So effectively kind of increased, call it, by 70 basis points and increased the reported loss ratio for the ex cat loss ratio.
Elyse Greenspan, Analyst, Wells Fargo: Okay. And then in reinsurance, the margin sometimes does fluctuate quarter to quarter, but the underlying loss ratio did trend up in the Q3. Was there anything business mix in there that might have impacted that in the quarter?
Francois Maurin, CFO, Arch Capital Group: Nothing specific. Again, we will keep we'll go back to our trailing 12 months way of looking at things. I mean, I took another look this morning and there's nothing unusual in the quarter. I mean, the trends are very consistent. The trailing 12 months are doing very well.
So the answer is nothing to report. I mean, there's just kind of some claims happen, some don't. And over the last 12 months, we're very comfortable with the loss picks and how things are behaving.
Elyse Greenspan, Analyst, Wells Fargo: And then my last question is on capital, right? You guys have left the door open, just given your excess capital position to doing something to return to shareholders be that right a quarterly dividend, a special or even a return to repurchase. So, what's the timing there? I thought maybe it was post the end of wind season. Does that still apply?
And how are you thinking about how you might look to return capital to shareholders?
Francois Maurin, CFO, Arch Capital Group: I mean, you hit all the good points. I think it's very much a conversation and it's not a new conversation. It's conversation we have all the time. And yes, we had certainly mentioned that we wanted to wait till the end of the wind season, which is coming close to an end. And as we get ready for 2025, certainly part of the outlook for 20 25 growth opportunities, how where we may be able to deploy the capital is something we'll consider as well.
But no question that this is an area that we're focused on and I'll say you should we're not sleeping on it and we'll report back when there's more to say on that.
Elyse Greenspan, Analyst, Wells Fargo: Okay. Thank you.
Francois Maurin, CFO, Arch Capital Group: You're welcome.
Conference Operator: Our next question comes from the line of Andrew Kligerman with TD Cowen.
Andrew Kligerman, Analyst, TD Cowen: Good morning. Maybe following up on the insurance division and MidCorp and I think Francois, if I heard correctly, the MidCorp impact on the underlying loss ratio was about 60 to 70 basis points. And if that's the case, it kind of moved up a fair amount like 2 50 bps year over year. So I'm trying to get a sense of
Nicholas Papadopoulos, CEO, Arch Capital Group: should we be thinking that this is kind
Andrew Kligerman, Analyst, TD Cowen: of a good run rate underlying number for the loss ratio? How should we think about it going forward?
Francois Maurin, CFO, Arch Capital Group: Well, I mean we indicated that we thought initially, I mean we have to get call it under the hood, we have to understand the business, but we certainly had said that in the 1st year we thought this business was going to be breakeven for us. So yes, we should expect a little increase in the loss ratio and the combined ratio for the segment, no question. In terms of run rate, I'd be a little bit hesitant to commit to anything beyond call it the 1st year. I think we're already making adjustments, taking underwriting actions in terms of what we like, what we don't like as much. I think there is good traction, good opportunities in terms of the casualty business that they write, the rates rate environment is very strong.
So that will help, we think. So that's again, the short term answer is yes. I think the combined ratio will probably inch up a little bit, but we have very definitive ideas and plans on how to bring that down as we move forward.
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. And I think it's dynamic. I mean, again, we if you look at the insurance group overall, it's heavy non property lines. So the property line, that's like lower loss ratio. So we were growing in the property line in the last couple of years and the market now it makes it more difficult.
And we have a large component of professional lines where rates have been challenging, so that probably income our loss ratio. And then we have casualty where I think we think there is opportunities potentially to grow more with higher margin, but it may come also with a higher loss ratio than property. So that's a playbook that we are facing.
Andrew Kligerman, Analyst, TD Cowen: Interesting. And maybe breaking down some of the lines of business in insurance, what kind of rate are you seeing? And is this rate exceeding loss costs? I suspect it's not in property, but maybe you could talk
Mike Zaremski, Analyst, BMO Capital Markets: a little bit about some
Andrew Kligerman, Analyst, TD Cowen: of the key lines in insurance.
Nicholas Papadopoulos, CEO, Arch Capital Group: So let's talk about casualty, which is a talk of the time. I think in casualty, we're definitely seeing rate of a trend, but there are really good reasons for that. I think the market is going through some pain. And so I think we are underweight casualty. We historically underweight casualty.
So now I think based on our own analysis of the pocket of casualty business that we like, we are selectively growing both from the insurance and the reinsurance side. So today, I expect margin to expand. I think if you mention property, if you talk about insurance versus insurance, we are mostly focusing on insurance. On E and S property, we think the profitability is actually very attractive. I think over the last few years and post hurricane in, I think the business has reacted with a lot of rate increase and a lot of change in terms and conditions, which make the business really attractive.
So there, I think after a year without losses, people have a very short memo, we see a lot more competitions coming from Lloyd's, coming from MGAs, coming from new insurance that want to have a piece of that business. So I think we our rates are pretty flat, but I think we would expect that margin on the business will be will depend on the reaction to the catastrophes that just happened. So I think with Midtown and Helene, we fight my expectation with things would stabilize. But ultimately, it's the supply and the demand. There's more supply.
We think there's more demand. I think the demand has been constrained by the high price and high deductible and the high retention on the reinsurance side. So I think we're close to an equitable year. So I think the business will remain attractive for a while.
Josh Shanker, Analyst, Bank of America: Awesome. Thank you very much. Thank you.
Conference Operator: Our next question comes from the line of Mike Zaremski with BMO Capital Markets.
Mike Zaremski, Analyst, BMO Capital Markets: First question, thanks, is on catastrophes. So I don't know if you disclosed what you are assuming for Hurricane Salim. I know you're I think the cats were a bit higher than consensus, but you guys have done a good job of giving us disclosure that you've been taking more risk in Florida specifically and just overall. And then also should we be thinking about Milton as well? I think there's some conflicting numbers out there.
Milton, I'm sure PCS is only at $5,000,000,000 so far, but there's some much bigger numbers out there.
Francois Maurin, CFO, Arch Capital Group: Yes, sure. On Helene, our view is that it's going to be the type of event that probably will have a bit more leakage than you would otherwise expect. I mean, it's just multiple states and it's a lot of flooding. So we are currently assuming, call it, a $12,000,000,000 to $14,000,000,000 industry loss, which is maybe higher than others and but that's how we see it today. I mean things could change, but that hopefully informs how we thought about the event initially and is reflected in our Q3 numbers.
As it relates to Milton, we need to do a bit more work, but we will certainly give you our initial thoughts on that, I think in the coming weeks in terms of what a loss, what a range of estimates could be for us. But no question that what we thought what people thought might have been a really scary and large event doesn't seem to have materialized. I think industry estimates are coming down as we speak. So call it the $30,000,000,000 plus or minus market loss seems to be about right given what we know today. And in terms of our own loss related to that, I mean, again, more to come, but you shouldn't expect anything unusual from us.
I think it from what we can tell at this point, it should be in a relatively consistent kind of market share for us for an event of that size.
Mike Zaremski, Analyst, BMO Capital Markets: Got it. That's helpful. And my last question for Nicolas. Is there any context or color you can add to the what why the CEO change took place? That's been the number one question.
I'm sure you all have received and we have 2. People are wondering if it's performance related versus just some other events or anything else? Any color you'd be able to add?
Nicholas Papadopoulos, CEO, Arch Capital Group: I didn't understand the deal.
Francois Maurin, CFO, Arch Capital Group: No, the CEO, Mark's departure. Sorry.
Mike Zaremski, Analyst, BMO Capital Markets: Yes, sorry.
Nicholas Papadopoulos, CEO, Arch Capital Group: Should know that. No, I mean, again, it was a personal decision of his. I think, Mark as I said, Mark and I, we have the trend. It's a bit bittersweet for me, but based on his decision, I'm actually very excited about the opportunity in front of us. I think Mark is I think Arch is bigger than any one of us.
And I think we have a lot to do and we have a lot of exciting things to continue to do in the coming years. And I think we have a really good management team. We have 7,000 employees that are really engaged. And as I said, I think Art is an exceptional company, and I'm really looking forward to continue this journey. And certainly, I think Mark's departure is not performance related.
That's the guy under his leadership, as I said, the company had performed amazingly well.
Mike Zaremski, Analyst, BMO Capital Markets: And I guess, Nicolas, that's helpful. Obviously, you put your own stamp on the company over time and you're a different type of leader and we're all excited about your position. But I'm just curious is there now that you are the boss, are there certain things we should kind of stay tuned for that have kind of been on your wish list that you'll be able to kind of push through? Or do you kind of expect just more of the same directionally? Thanks.
Nicholas Papadopoulos, CEO, Arch Capital Group: No, Matt. And the message to it's really business as usual. I think I've been with the company for 23 years. I've worked very closely with Mark in the last 5 or 6 years in setting up strategies, looking at operation changes, looking at culture. So I think we him and I, we are extremely aligned.
So I think I will not expect any changes in the way we operate.
Josh Shanker, Analyst, Bank of America: Thank you.
Conference Operator: Our next question comes from the line of Jimmy Bhullar with JPMorgan.
Analyst: Hey, good morning. So first, just had a question on your views on oneone renewals. And what do you think about the sort of supply demand imbalance? And has that sort of shifted given losses from Milton? Or is it is your view consistent with how you would have thought before?
Nicholas Papadopoulos, CEO, Arch Capital Group: So is the question on property cat, I assume?
Analyst: Yes, yes.
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. So I think on property cat, I think as you've seen, we've grown the book quite a bit in the last 2 or 3 years. So we think the returns are really attractive. Yes, I think the event of Midtown and Eileen, my view, what we hear is it should stabilize the market. I think there was some supply, as I said earlier, either from Lloyd's or from MGS or from our competitors.
After 1 year without losses really wanting to get back into business and realizing that they may have missed out on a profitable line of business. So what I would expect and we see it on the insurance side that things have stabilized. And I think my guess is at this stage is that you will do the same on the catheter insurance side.
Analyst: And more specifically, are you expecting pricing to be down, flat or and to whatever extent you're able to quantify would be helpful?
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. I don't have a crystal ball. But I would say, again, it's always the same. With programs that have been impacted by losses, I would expect prices to go up. In regions that have had no losses, you could see in the bottom of the programs, I think people are still really scared about frequency.
So I'd expect the bottom to middle side of the program to perform well. The upper layers where people seem to be more comfortable to play, where competition is coming because you are away from the midsized losses, it could be a little bit of weakness, but not really have a strong conviction in a way. But I think mostly stable.
Analyst: And then on casualty reserves, a lot of companies have had adverse development, some on recent years, some uneven, some on pre COVID years as well. Can you talk about your own comfort with your casualty reserves on your legacy book as well as the Watford business?
Francois Maurin, CFO, Arch Capital Group: Sure. I mean reserves is something we looked at regularly quarterly right. So it's nothing new here I think. We're to answer your question we're very comfortable with our reserve levels. I think from a couple of reasons.
One is we were as Nicholas said, we have been underweight in casualty for a number of years. So as much as yes, we do feel and see some of the impacts of social inflation and pressures on loss trends on casualty business in general, I mean, the fact that we're underweight in those lines has been very helpful. So yes, we are monitoring casualty reserves there. We have experienced some adverse development, but it's been overall very manageable. And that explains in our mind is a big reason as to why rates are moving up because the industry is seeing the pressure and a way to correct for those results is really by getting more rate.
Josh Shanker, Analyst, Bank of America: Thank you. Yes.
Conference Operator: Our next question comes from the line of KB Montezary with Deutsche Bank (ETR:DBKGn).
KB Montezary, Analyst, Deutsche Bank: Good morning. First question is on growth. I guess Francois, you've already explained the growth in primary insurance. I guess underlying once you exclude midcorp is about 5%. In reinsurance, you also mentioned the impact of reinstatement premium.
But I think you said it was still 22% growth even adjusting for that. That's still a big number. Could you give us a bit more color on like what drove that in terms of how much of that was pricing? How much of that was like unique growth? How much of that was maybe right more casualty business?
Any type of color on that would be quite helpful, please.
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. I think for the quarter, I think the driver of the growth was a bit of casualty, return mostly out of our U. S. Company where I think we selectively are trying to are getting on programs that we haven't been. As rates get better, we think there's opportunities for us to write attractive casualty business.
And the other side of the business that grew is the specialty business, the return. And that's more of a business that we wrote at 1.1 that is coming in on quota shares and some of it is we have a decent sized book of business that support Lloyd's, Lloyd's Syndicate, where it's called funds at Lloyd's where we get quota share of what they write net of their protection. So that business is growing. Lloyd is growing and we think it's profitable business. So we benefit from that.
And the second aspect is we have a decent sized book of Motor, United Kingdom (TADAWUL:4280) Motor and that business is really dislocated, has been dislocated and we've been playing in that field for a while. And as rates are continuing to go up, and I think they added at oneone an initial relationship, we're benefiting of this in the quarter. But it's not any action that we actually took during this specific quarter. So I think the last piece is our facultative operation that has an amazing track record and is one of the leading facultative operation, property operation in North America and they also have shown some excellent growth.
KB Montezary, Analyst, Deutsche Bank: Perfect. My follow-up is on the mortgage insurance business. I guess, 2 parts to that question. The first one is the growth in the quarter, was that primarily driven by the Fed cuts that just boosted demand? And I guess linked to that is the pickup in delinquency in mortgage insurance, is that also just linked to more activity?
I know you mentioned some seasonal factors. I don't know what those were. If there's any details we can have on that, please?
Francois Maurin, CFO, Arch Capital Group: Yes. I'll start with that. I think the delinquency, again, yes, itself, but it's absolutely very much within our expectations. The one thing maybe for people to remember or appreciate is given we refinanced a significant part of the book in 2020 2021, we're now entering the call it the prime years of when delinquencies get reported. So that's very much part of the again, within our expectations, right?
So as new loans get on the books, usually it takes 3, 4 years for them to show a bit of just call it really predictable and normal delinquencies. So that explains why in aggregate, we're on delinquency rate is trending up a little bit. And more specifically on the seasonal aspect, I mean, every year, there's fairly predictable behaviors that we see from the borrowers, whether they get their tax refunds in the Q1 and then they catch up on their mortgages and whether they borrow more to buy holiday presents. So that happens. And then the Q3 typically expected and seen it as we I mean, we've seen that in the recent history that the delinquency rate just goes up in the Q3 without any more just seasonal.
So again, we're very comfortable with the overall rate. And again, there's a little bit the same differential that I mentioned last quarter related to the RMIC acquisition is still there. So it's a pre financial crisis book that is has its own set of characteristics. So we're again, overall very happy, very comfortable with the delinquency rate. And in terms of the premium, your first part of the question, there's a couple of accounting differences and nuances this quarter.
So I wouldn't read too much I think in the growth that we saw this quarter. There's a little bit of a catch up on premium that was related to old or related to Bellamy transactions on the ceded side. So generally speaking, I'd say the mortgage segment is relatively flat in terms of growth opportunities.
KB Montezary, Analyst, Deutsche Bank: Thank you.
Francois Maurin, CFO, Arch Capital Group: You're welcome.
Conference Operator: Our next question comes from the line of David Motamedian with Evercore ISI.
David Motamedian, Analyst, Evercore ISI: Thanks. Good morning. Francois, thanks. Thanks so much for all the detail you gave on the insurance underlying loss ratio, both including and excluding the MidCorp acquisition. So I guess just sort of running through those numbers there, it looks like if I take out MidCorp, it was about a 57% underlying loss ratio for the sort of core Arch Insurance business.
And so that kicked up a little over 100 basis points versus last quarter and also on a year over year basis. So I'm just wondering if you could help me think through some of the drivers of that increase.
Francois Maurin, CFO, Arch Capital Group: Yes. I'd say again, it's Nicholas touched on it, It's growth related in mix, right, in the sense that where you saw us grow this quarter. And I don't think you have the time to look at in the supplement how we report the lines of business, which is which we have changes quarter relative to the past. More growth in casualty and other liability lines of business both I mean primarily on an occurrence basis claims made which is more professional lines book and cyber that has come down. But that business typically carries a higher accident year loss ratio than property business once we remove the cat load.
So that is really the big driver of the pickup is really mix as we have grown in the last little while more in casualty and remain relatively flat on property.
David Motamedian, Analyst, Evercore ISI: Got it. Okay. That's helpful. I appreciate that. And then maybe a follow-up on the reserves just within insurance and reinsurance.
I was wondering if there's any way you could size those moving pieces for us between the short tail and the long tail development?
Francois Maurin, CFO, Arch Capital Group: Well, I mean, we in total, I mean, and that'll be in the Q. But, yes, we definitely very favorable on short tail lines of business, a little bit of adverse on long tail lines. So that's consistent with recent trends. I mean, as I mentioned earlier, we are seeing a little bit of pressure on casualty, longer tail lines of business. There's been some favorable on workers' comp as you've seen, I'm sure with many of our competitors.
I think that's been a consistent story for quite some time. But again, the bottom line in aggregate is we're able to we're observing kind of favorable development lower actual than expected and that is coming through in our numbers.
David Motamedian, Analyst, Evercore ISI: Understood. Thank you.
Josh Shanker, Analyst, Bank of America: You're welcome.
Conference Operator: Our next question comes from the line of Yaron Kinar with Jefferies.
Francois Maurin, CFO, Arch Capital Group: I think he might have dropped. We're not hearing anything.
Conference Operator: Our next question comes from the line of Meyer Shields with KBW.
Analyst: Great. Thanks so much. I think we've talked about this in the past, but I wanted to get Nicholas' thoughts on cycle management, specifically, I guess, with retail distribution and in particular, the mid core business. Is that less amenable to cycle management?
Nicholas Papadopoulos, CEO, Arch Capital Group: So I mean, my view is it's a different type of cycle management. I mean, the mid what's attractive with the mid core business is it's more stable. So which means that the cycle are more muted. You don't see the same price going up and down like excess DNO, public excess DNO. You go up 40 and you make up 20 or 10.
So I think in the middle market business, I think you have more it's going up slower and it's going down much slower. So I think that provide a the thing we like is that provides a much balance to our insurance book that has a large component of larger corporate risk that are more subject to large fluctuations in rates. So And the thing that's attractive to us is the value proposition of a carrier in the mid comp segment is better because usually the distribution partner, the broker rely on the carrier to provide more than one line of business. So you're more important to him. The The interaction with the carrier is more valued.
So you create a stickiness that really help you're not competing solely on price, where when you deal with a large account and a risk manager, price is an important component of the value proposition. But here, I think so it's less subject to in value price competition, which make it more stable and more attractive. And I think the thing that's interesting to us with the Midcorp acquisition is that the timing is pretty good because we've seen price increases on the property side because this book is more exposed to secondary payers and the liability component of the book is subject to the discussion that we talked about before. So I think we our timing is really good. I think the book looks to be performing well enough.
And so we're pretty excited to be able to finally get like a decent chunk of that business and to be at scale and being able to expand our footprint in what we think is a very attractive part of the market.
Analyst: Okay. That's very helpful. And then if I can switch gears a
David Motamedian, Analyst, Evercore ISI: little bit, I
Analyst: know it's early on the January 1 discussions for property cat. Is there anything you can share with regard to expectations for ceding commission trends in casualty reinsurance?
Nicholas Papadopoulos, CEO, Arch Capital Group: So I'm going to be the wise person here. I think as we ensure and including ourselves, see more bad news coming from the past, I mean, there will be pressure on sitting commission. You would expect that the question is the supply. I mean, the pressure on the sitting commission will be muted by the supply. I mean, because if there's more people wanting the business and there's a limited amount of business being placed, I think the brokers is going to play a big role in minimizing, I mean, the directions of where the ceiling commissions are going to be.
So it's going to be some sort of a conflict between what the reinsurance wants and what the ceiling companies are willing to do. But the driver would be the supply versus the demand. And I think and what I'm hearing is that there is ample supply in the marketplace.
Analyst: Okay, perfect. Thank you so much.
KB Montezary, Analyst, Deutsche Bank: Welcome.
Conference Operator: Our next question comes from the line of Yaron Kinar with Jefferies.
Nicholas Papadopoulos, CEO, Arch Capital Group0: Thank you. Good morning and I apologize for dropping earlier. I wanted to dive a little bit deeper into the other liability occurrence growth in insurance. How much of that came from MC versus just organic or legacy growth?
Francois Maurin, CFO, Arch Capital Group: It's a good question. There was a fair amount of E and S casualty business on our kind of like that was just organic, right? So that is an area of maybe the most exciting area for us. I mean, where rates are well into the double digits in terms of rate increases. So that is a very, very attractive area.
The MCE book is split. There's some commercial multi payroll, there's some occurrence or the liability occurrence. So it's a mixed bag. But I'd say, I don't have the exact numbers in front of me, but I think you're the you should the takeaway is that the rate environment in that particular line of business is very, very good right now.
Nicholas Papadopoulos, CEO, Arch Capital Group0: Okay. And what is it about this Q3 where the environment seems to have accelerated significantly or at least the opportunities that another liability occurrence accelerated significantly?
Nicholas Papadopoulos, CEO, Arch Capital Group: I think it's just the functions of people realizing that the way they were looking at the reserves in the last few years is not exactly playing out. I think COVID for a while muted the claims. So people kind of, in my view, sitting out there to make sure they were not making the wrong reason. And since COVID, I think we've seen some severity, large jewelry awards, plenty of jewelry awards, and we've seen more places where those jewelry awards are taking place, large jewelry awards. So I think you have like social inflation that's driving much more severity and you have also frequency of places used to be Cook County, South Texas, Mexican border, but now you have Georgia, you have some place in Nevada where certain juries have actually if you get caught in one of those juries, you're going to get a significantly larger war.
So I think it's a combination of frequency and severity and people realizing that they have to stay ahead of those. And the normal reaction, which I think is the right reaction for the market, has been to cut limits because if you're caught up in one of those difficult juries, you want to have small limits. And typically, when you had, I don't know, let's say, dollars 2,000,000 placement with 10 players and you suddenly you have 40 players to complete the placement, some of those players going to the E and S market, you're starting to see some drastic rate increases. And that's what we're witnessing right now.
Nicholas Papadopoulos, CEO, Arch Capital Group0: But if I could maybe flush this out a little more. What you're describing is not new. I mean, if we go back to previous management meetings, conferences, calls, we have been hearing management talk about this for several quarters, if not years even in some cases. So what's happened in this Q3 that seems to have triggered some significant change?
Nicholas Papadopoulos, CEO, Arch Capital Group: I think it's just the accumulation. I view that people took actions, but when actuaries or managements look at the chance for the business they're running today to be profitable, they ask themselves, they need more safety margin. I think it's a I think there was some rate increase, double digit rate increase 2 or 3 years ago. Then we for a little while, we went to single digit and suddenly we are back in double digit. It tells you that there is pain in the back years of people that have returned that business in the early years and in the last few years.
And usually the reaction, it's not unusual that the reactions are more abrupt because at some point, management lose faith in the story they've been told. So they require more drastic actions. That's a usual playbook of how market happens.
Josh Shanker, Analyst, Bank of America: Thank you. Welcome.
Conference Operator: Our next question comes from the line of Brian Meredith (NYSE:MDP) with UBS Financial.
Nicholas Papadopoulos, CEO, Arch Capital Group1: Yes, thanks. Nick, I want to follow-up on that a little just a little bit. So I understand what you're saying about your opportunities for growth here in some of the casualty lines. But maybe I can get your perspective a little bit more on what do you think casualty trend is and where is it going just because you must be pretty confident in kind of having a good grasp on where casualty trend is given that you're growing and some other are shrinking?
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. So I think I mean, yes, it's a tale of several stories. I think at the bottom of the program, I think people can have a pretty good idea what the casualty trend is, whether it's mid single digit. The issue is when you go excess. If you go excess of $50,000,000 if you go excess of $100,000,000 that's where the trend gets to multiply our effects.
And you are certainly in double digits. I think ourselves in a way we were lucky. We didn't have a huge footprint on the casualty business, but we have enough footprint to be able to do our own analysis. And again, it's selective. The thing, you have different class of business, different geographies, you have to be able to do really selective price increases.
And that is to get comfortable that in certain jurisdictions with certain class of business, you think the business based on your own actual experience, the business makes sense to be written. So it's not I will not say it's a sea challenge that suddenly any pieces of business that come across your desk is going to be profitable. You have to be selective and have a full full approach to what you want to underwrite. That's the market we are in.
KB Montezary, Analyst, Deutsche Bank: Got you, got you.
Nicholas Papadopoulos, CEO, Arch Capital Group1: And the same question, I guess, for reinsurance, right? Reinsurance are kind of relying on the decedents.
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. So again, I mean, the job of the reinsurer is to buy the right companies. So I think we are for a while, I think we've been really underweight on the casualty U. S. Quota shares and excess of loss.
And I think this dislocation in the marketplace has allowed us to get on program that we wanted to get on 2 or 3 years ago because we like the underwriting, we like the limit discipline, we like the class of business, they're right, but we couldn't get on because nobody was exiting. So I think we and I think there is some sort of a flight into quality of who is here for the long term and who is not. And I think we're benefiting from that.
Nicholas Papadopoulos, CEO, Arch Capital Group1: Makes sense. And then Francois, one quick one here for you. On the investment portfolio, I guess, one, where are we looking at new money yields versus current book yields? And where are you at deploying the assets you got out of mid corporates or some more potential book yield to come out going forward?
Analyst: Yes. I
Francois Maurin, CFO, Arch Capital Group: mean part of the transaction was certainly some of the a good chunk of the assets came in cash. So our investment team has been very disciplined and thoughtful on where to put that money to work. But the good thing is just on money market or cash we're still getting decent yields. But yes, I'd say call it 4.5% on new money yield. I mean as you see the book yield and the new money yields are kind of pretty close to each other right now.
We're still very short duration, very high quality fixed income book. So that's not changing. But yes, there's certainly been call it the $2,000,000,000 in assets that we got. We are putting that to work and trying to fit that into the portfolio as best we can.
Josh Shanker, Analyst, Bank of America: Great. Thank you. You're welcome.
Conference Operator: Our next question comes from the line of Joshua Shanker with Bank of America.
Josh Shanker, Analyst, Bank of America: Yes. Good morning or almost afternoon, everybody. How are you doing?
Francois Maurin, CFO, Arch Capital Group: Good. We're hungry.
Josh Shanker, Analyst, Bank of America: Good. I get it. I get it. There's less sports talk than ever. But I was wondering, in the past, we've talked about the ROIC on the different legs of the Arch, Stuwell reinsurance, insurance mortgage.
Could you review right now sort of state of the union and what the return on new capital is for the various businesses?
Francois Maurin, CFO, Arch Capital Group: We like all our businesses that has not changed. The one thing that I'd say right now is, I mean, Q4, we're a little bit kind of dependent on where the market goes at 1.1. So that is certainly reinsurance has been just a really, really good environment for 2024. How does it play out in 2025? It's still a little bit early to know for sure.
We think it's going to be still a very good market. Is it going to get better to the point where we have the ability to deploy that much more capital in reinsurance? We don't know quite yet. So that's kind of the answer. I mean, there were a little bit wait and see approach in terms of how the market plays out.
But again, what we talked about this morning, the growth opportunities in casualty in particular, I think are exciting to us. So both insurance and reinsurance, I think we are ready to play. And mortgage is don't want to forget about mortgage. I mean, this has been a terrific engine for us. Yes, no question that the origination market is not as large as we'd like it to be, but that's okay.
I mean, we've got terrific earnings coming from the in force book. And we're finding other opportunities outside of primary MI in the U. S. And we're deploying the capital in the right way. So we're very comfortable with the mix right now.
Josh Shanker, Analyst, Bank of America: Would it be wrong to paraphrase that reinsurance is better than insurance and mortgage, but that's pending what happens on oneone?
Francois Maurin, CFO, Arch Capital Group: It's not wrong. I think that's a fair statement. It's better right now. We like to think it's going to stay better, but just don't know quite yet.
Nicholas Papadopoulos, CEO, Arch Capital Group: It's a higher component. I mean reinsurance is a higher component of property business. So you have to think of the half of the business is property. So you it's high risk, high reward. So I think we have we get paid the high return, but it's also high risk as we saw this quarter.
I think the insurance book is much more heavily geared toward casualty and professional lines. So I think it's an environment that has his own challenges, but it's a different set of return values. I think you have to balance those 2. So and sometimes the E in the ROE doesn't do enough of that, I think.
Josh Shanker, Analyst, Bank of America: And Francois, you made the comment that the origination market in mortgage isn't quite as strong as you'd like it to be. But also Arch has lowered its market share of new business compared to where it was 3 years ago or so. If Arch wanted to ramp it up, is there a possibility of growing that business without improvements in the origination market or would that cause pricing and margins to weaken in that business?
Francois Maurin, CFO, Arch Capital Group: Yes, it's becoming a more kind of homogeneous market, right. So I think the risk of trying to grow market share is just as you said, I think you have to cut prices. I think we've built a very resilient, very high quality book through picking different types of loans to ensure different geographies. I think we are very comfortable with what we've done. But for us to move from the call it 16%, 17% market share and say we want to be at 18%, 19%, 20%.
Right now, we just don't see that happening because the market, I think, will just react with us and it will just push prices down. So I think right now, I mean, I just be surprising for us to grow our market share that significantly in the near term.
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. We've asked this question all the time. And the answer is that we ended up in a worst place. I think the status quo, the current status quo based on the remember, we're dealing with monoline business. That's all what they have.
So I think ultimately, they're going to defend their book and we'll end up in a worse place. So that has been the analysis that we carried.
Josh Shanker, Analyst, Bank of America: Well, thank you very much for all the answers and I'll let you go to lunch.
Francois Maurin, CFO, Arch Capital Group: Thanks, Josh.
Conference Operator: Our next question comes from Elyse Greenspan with Wells Fargo.
Elyse Greenspan, Analyst, Wells Fargo: Hi, thanks. I'll just shove a few more in before lunch. But my first question is on Hurricane Helane, right? I think you guys said it was 45% of cats. So I calculate that at just over $200,000,000 so that's like 1.5% to 1.7% market share given your 12% to 14%.
Is that about what you would expect, I guess, for these large type events? And does that share a good frame of reference when thinking about Milton?
Francois Maurin, CFO, Arch Capital Group: I mean, your math is about right, but the Helene's a bit unusual for us. I mean, it's a little bit on the elevated side in terms of market share based on some of the accounts we wrote. Again, Milton is different because it's Florida only. So it's we have a different mix of business there, different type of accounts we write. So I would not draw a correlation or an analogy from the Helane call it implied market share to what built in could look like.
Elyse Greenspan, Analyst, Wells Fargo: Okay. That's helpful. And then my second one I guess is a follow-up on reserves, right? We had another company this morning that kind of flagged they're kind of going to take an in-depth review and there might be some movement with their Q4 review. It sounds like from earlier questions that you guys really haven't seen like a change in loss trends or actual versus expected in the Q3 versus earlier in the year.
But is there anything I guess that you're concerned about or anything that's come up with the quarterly reviews that you guys are paying particular attention to, when we go into the end of your review?
Francois Maurin, CFO, Arch Capital Group: There's nothing unusual. I mean, it's something we look at all the time. The trends are relatively stable. I mean, we had views going way back that the loss trends that we were seeing in the market were a bit optimistic. So we've always taken a longer term view of trends.
And we review those annually at a minimum, sometimes some twice a year. But yes, really nothing that stands out that's I'd say unusual or that we're overly concerned with. I mean, that's the standard kind of themes that we've been talking about for quite some time.
Elyse Greenspan, Analyst, Wells Fargo: And then I might just shove one last one in there. You guys have an upcoming Investor Day in a couple of weeks. Is this are you going to expecting to use this to lay out bigger strategy, financial targets, something on capital, I guess? Can you just give us a little bit of a preview of what you expect to talk to us about in a few weeks?
Francois Maurin, CFO, Arch Capital Group: We're just missing you guys in person. So that's why we scheduled this. But no, I wouldn't expect anything really unusual from the upcoming Investor Day. You've known us for a while. The strategy remains the same.
Nicholas will obviously be focal point. So we'll make sure everybody gets to hear a bit more from how he wants to shape the company going forward. But I would not message or think that there's anything unusual or kind of a new revelation that you should expect to hear from us in a couple of weeks.
Elyse Greenspan, Analyst, Wells Fargo: Okay. Thank you.
Francois Maurin, CFO, Arch Capital Group: You're welcome.
Conference Operator: I would now like to turn the conference over to Mr. Nicolas Papadopoulos for closing remarks.
Nicholas Papadopoulos, CEO, Arch Capital Group: Yes. So if there's not any more questions, so this will conclude our results today. And thank you for your questions. And we'll see you next quarter.
Conference Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
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