Arch Capital Group - Earnings Call - Q1 2025

Executive Summary

• Operating EPS of $1.54 beat Wall Street consensus of $1.31 by ~$0.23 per share; diluted EPS was $1.48 as catastrophe losses from California wildfires weighed on GAAP results. Consensus values marked with an asterisk are from S&P Global and may differ slightly by data vendor; Values retrieved from S&P Global.*
• Total revenues were $4.67B, below consensus of $4.84B, as higher cat activity drove a 90.1% combined ratio versus 78.8% in Q1 2024; ex-cat and ex-prior-year development combined ratio was 81.0%. Consensus values marked with an asterisk are from S&P Global and may differ slightly by data vendor; Values retrieved from S&P Global.*
• Catastrophe losses were $547M (primarily California wildfires); favorable prior-year development was $167M; book value per share rose 3.8% QoQ to $55.15.
• Management highlighted a more competitive P&C market but sees disciplined opportunities (especially property cat reinsurance) and expects to return significant capital as growth moderates (Q1 buybacks $196M; +$100M in April).

What Went Well and What Went Wrong

• What Went Well

  • Underlying profitability remained strong: ex-cat, ex-prior-year development combined ratio 81.0% vs. 80.8% YoY; operating ROE was 11.5%.
  • Mortgage segment delivered $252M underwriting income; delinquency rate ended at ~1.96%, with strong cure activity supporting favorable development.
  • Capital management: repurchased ~$196M in Q1 and an additional ~$100M in April; book value per share increased to $55.15.
  • CEO tone: “For a company with a strong underwriting culture like Arch, this is a market where we can stand out”.

• What Went Wrong

  • Elevated cat losses: $547M current accident-year cat losses drove combined ratio to 90.1% and compressed underwriting income to $417M from $736M YoY.
  • Loss ratios increased: total loss ratio rose to 61.8% from 50.5% YoY; Insurance at 66.0% and Reinsurance at 66.9% amid wildfire impacts.
  • Reinsurance specialty top line headwinds: non-renewal of large structured transactions reduced NPW by ~$147M; primary cedents retaining more risk also weighed on growth.
  • Net investment income decreased vs. Q4 due to the December special dividend (reducing investable assets), incentive comp timing, and a lower risk posture in the portfolio.

Transcript

Operator (participant)

Okay, ladies and gentlemen, and welcome to the First Quarter 2025 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 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 2024 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 also will 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. François Morin. Sir, you may begin.

Nicolas Alain Papadopoulo (CEO)

Good morning and welcome to Arch's first quarter earnings call. I'm pleased to report solid results for the quarter with $587 million of after-tax operating income, $1.54 in operating earnings per share, and an annualized operating return on equity of 11.5%. These results were achieved despite $547 million of catastrophic losses affecting our property and casualty segment, primarily from the California wildfire. The P&C market has become increasingly competitive. However, we remain optimistic about our prospects as we continue to achieve broadly attractive rates across the sectors where we compete. At Arch, we believe that prioritizing expected profitability over market share by allocating capital to lines of business with attractive risk-adjusted returns gives us the best opportunity to outperform for the cycle. This is what we mean by cycle management, and we stand by the historical results of this approach.

While the market may be more competitive, ample growth opportunities remain. This is true despite emerging macroeconomic concerns, including the potential impact of tariffs that have increased uncertainty for many of our insured across the globe and raised inflationary risks for some of our businesses. During times such as these, risk selection is critical as a growing number of our previously attractive accounts no longer meet our return criteria. We believe the acumen of our underwriting teams, breadth of our platform, investment in data and analytics, and depth of our financial resources have Arch well-positioned to navigate the P&C cycle. Now we'll turn to our segment, starting with reinsurance. Reinsurance results were solid despite substantial catastrophic losses in the quarter.

A 91.8% combined ratio, inclusive of 18 percentage points of catastrophic losses, demonstrates the strong underlying profitability of our diversified reinsurance portfolio. Growth in net premiums written in the quarter was modest due to an increased level of competition, more risk retention by ceding companies, and reducing our participation for treaties where margin no longer meet our hurdles. In the first quarter, the reinsurance group deployed additional capacity into property catastrophe lines where opportunities remain attractive, particularly in loss-impacted accounts. Casualty premium writings declined primarily due to non-renewing a large structured transaction. Weaker margin in cyber and part of our international treaty business also led to reduced premium writings.

Treaty casualty lines experienced growth in the quarter as Arch Re capitalized on a handful of select opportunities. We are hopeful these lines will continue to achieve rate and that treaty casualty market terms and conditions will continue to improve. As we look towards mid-year renewals, particularly with coverage in Florida and the Gulf, we expect additional demand from existing and new clients. On the supply side, it is worth noting that for many reinsurers and the ILS funds, these zones represent peak exposure. As a result, significant additional capacity may be harder to come by even if the market is more competitive on the margin.

Moving to our Insurance segment, where the California wildfires led to a small underwriting loss for the quarter due in part to commercial risk from the recently acquired middle market commercial and entertainment businesses. The additional premium generated from those businesses contributed to the insurance group $1.9 billion of net premiums written in the quarter, a 25% increase from the first quarter of 2024. The integration of the middle market business is progressing well, and we remain excited about the increased capabilities this team brings to the Arch insurance platform. As we've said before, there isn't one underwriting cycle, but many.

In today's market, it's possible to deliver double-digit growth in some lines while experiencing similar declines in others. In the first quarter, we generated meaningful growth in casualty-led sectors, including construction, National Accounts, and international casualty. At the same time, we experienced premium reduction in other lines of business due to rate decreases and our desire to maintain margin in lines such as E&S property and professional lines, including cyber. We have seen competition increasing in the London market specialty lines, which has made profitable growth difficult. Looking ahead, we expect continued growth in casualty lines as well as the U.S. middle market, where opportunities remain for both rate and premium growth. We are well-positioned across the insurance group because of our market-leading capabilities and relevance with distribution partners that gives us first look at many opportunities.

The Mortgage segment continued to provide a steady earnings stream, contributing $252 million of underwriting income in the first quarter. Economic uncertainty, limited housing supply, and high relative mortgage rates continued to create headwinds for new mortgage origination, which resulted in modest new insurance return in our U.S and international mortgage businesses. For USMI, high mortgage interest rates and home price appreciation have kept persistency around 82%, and insurance in force relatively stable. The delinquency rate of our in force portfolio remains low, ending the quarter below 2%. Our near-term outlook for the mortgage industry is unlikely to change significantly. While recessionary trends resulting from tariffs and other economic policy could create headwinds, we still expect the Mortgage segment to continue generating attractive underwriting income given the high credit quality and embedded equity of our in force portfolio.

Turning to our investment group, where invested assets increased by 4% from year-end to $43.1 billion, providing a large, sustainable contributor to group earnings. Investment market volatility increased broadly, leading us to reposition our portfolio to a more market-neutral position. To manage the cycle, it's important to understand that you cannot control the market, but you can control how your underwriting teams respond to it. At Arch, we manage the different cycles across our many lines through the ability of our underwriters to access, analyze, and ultimately select risk. Over time, our underwriting teams have built strong relationships with our distribution partners, which gives us an access advantage as they look to place risk with fewer, more relevant carriers, including Arch.

Risk analysis combines experience, expertise, and deep analytical insight to understand and assess the underlying risk and match it with a technical price that reflects an adequate premium for that risk. Ultimately, risk selection is what separates the winners from the losers. If the return does not adequately account for the risk, you must be willing to let others take the business. The P&C market in transition is one where Arch can, and as previously demonstrated, its ability to find success. While premium growth may be more challenging than in recent years, plenty of profitable opportunities remain. For a company with a strong underwriting culture like Arch, this is a market where we can stand out and continue to maximize returns for our shareholders. François.

François Morin (CFO and Treasurer)

Thank you, Nicolas, and good morning to all. Last night, we reported our first quarter results with after-tax operating income of $1.54 per share, resulting in an annualized operating return on average common equity of 11.5% and growth in book value per share of 3.8% for the quarter. At a high level, our three business segments delivered excellent underlying results with an overall ex-cat/accident year combined ratio of 81%, and importantly, each of our segments showing an improvement for that metric over the same quarter one year ago. Our underwriting income included $167 million of favorable prior development on a pre-tax basis in the quarter, or four points on the overall combined ratio.

We recognized favorable development across all three of our segments and in many of our lines of business, but the effect was most notable in short-tail lines in our Reinsurance segment and in mortgage due to strong cure activity. The acquisition of the MidCorp and entertainment insurance businesses continues to roll through our financial metrics within the insurance segment. This quarter, the net premiums written coming from the acquired businesses was $373 million, contributing 24.2 points to the reported year-over-year premium growth for the segment and generally consistent with last quarter. Also, the inclusion of the acquired business in the segment's results lowered the current accident year ex-cat combined ratio by 1.1 points.

This can be further broken down to include the current quarter acquisition expense ratio that was lowered by 0.9 percentage points due to the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP, the other operating expense ratio that was lowered by 0.9 percentage points, and the accident year ex-cat loss ratio that ended up being 0.7 percentage points higher, reflecting the underlying results of the acquired business. The quarter-over-quarter comparison of net premiums written for the Reinsurance segment, showing growth of 2.2%, was also impacted by a few items. Of note, this quarter's net premiums written includes approximately $70 million of reinstatement premiums, mostly related to the California wildfires.

Offsetting this benefit was the non-renewal of large structured transactions in the specialty line of business, which reduced our top line by $147 million in the quarter. There were also some timing differences in the recognition of certain treaty renewals, which resulted in lower net premiums written in the quarter of approximately $103 million. Our mortgage segment delivered yet again another very strong quarter with underwriting income of $252 million. Even though the origination environment remains challenged, the underlying fundamentals of the business are excellent, as exhibited by most of our key metrics, including a very low delinquency rate for our USMI business, which currently stands at 1.96%. On the investment front, we earned a combined $431 million pre-tax from net investment income and income from funds accounting using the equity method, or $1.13 per share pre-tax.

The reduction in net investment income relative to last quarter is attributable to a few items, including the impact of paying a $1.9 billion special dividend in December, the timing of incentive compensation expenses, slightly lower interest rates in the quarter, and the repositioning of our portfolio to a lower risk posture in light of the current macroeconomic uncertainty. Income from operating affiliates was down this quarter, mostly due to a lower level of affiliate income at Somers Ltd., in part as a result of the California wildfires. Cash flow from operations remained strong. It was approximately $1.5 billion for the quarter. Our effective tax rate on pre-tax operating income was an expense of 11.7% for the quarter and reflects a one-time discrete benefit of 4.6% related to differences in the expensing of non-cash compensation.

Also, it is worth mentioning that we started to amortize this quarter the deferred tax asset we established at the end of 2023 related to the introduction of the Bermuda Corporate Income Tax. This benefit does not impact our operating or our net income effective tax rates in the period, but, as we mentioned previously, will flow through our financials as a reduction to pay taxes. As of January 1, our peak zone natural cat probable maximum loss for a single event, one in 250-year return level on a net basis, increased slightly and now stands at 9% of tangible shareholders' equity.

Our PML remains well below our internal limits. On the capital management front, we repurchased $196 million worth of our common shares in the first quarter and an additional $100 million in April, demonstrating our ongoing disciplined approach to managing our capital to enhance shareholder returns. In closing, our balance sheet remains extremely strong with common shareholders' equity of $20.7 billion and a debt plus preferred to capital ratio remains low at 14.7%. With these introductory comments, we are now prepared to take your question.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. The first question comes from Mike Zaremski at BMO. Please go ahead.

Mike Zaremski (Research Analyst)

Hey, good morning. Thanks. I guess thanks for all the insightful market commentary. On the reinsurance group deploying additional capacity into catastrophe lines, you said that loss-impacted accounts remain particularly attractive. Should we be—I guess we'll think through kind of how to change our loss ratio a bit if you kind of feel like you're going to continue leaning in. Any kind of update to your cat load guide? I believe it was 7-8 points when you updated us last. Should we expect the number to move up a bit?

François Morin (CFO and Treasurer)

I don't think so. I think the number should be relatively stable. I mean, full-year cat load, obviously, there's seasonality to it. As we look at market conditions, we certainly had thought that after the California wildfires, there might be a little bit of a, I think, a more—some stabilization in that market, which we think will happen, although as we touch on, I think Florida is its own different market, right? A little bit early for us to know exactly how Florida is going to ultimately perform or what opportunities we're going to see there. Big picture, I think what we saw at the start of the year seems to be holding up pretty well.

Nicolas Alain Papadopoulo (CEO)

All right. Great. I think the Florida outlook, as we see it, is for the reason I described in my comments, is pretty flattish. I think we like the business. I think if our teams—again, we do not know—but if our teams find opportunities to grow, and we expect more demand in the marketplace for several reasons. I think the FHCF is raising the retention by $1.5 billion, and I think we are seeing more cedents wanting to increase their limits, things that they have not been able to do in the last few years because of the lack of capacity. We think an opportunity to potentially do more if the rates hold up.

Mike Zaremski (Research Analyst)

Got it. Okay. Switching gears to market competition outside of reinsurance, I think the common theme has been in recent quarters that large account property is well priced, and we're seeing some more meaningful downward pressure. You mentioned in your prepared remarks the London specialty market as well. Maybe can you kind of unpack what you mean by the London specialty market and maybe kind of help frame which lines in particular are the clock isn't where you'd want to grow as much?

Nicolas Alain Papadopoulo (CEO)

Yes. I think in London, what's happening, I mean, it's twofold. First, I think we've seen after years of good results, more appetite for people to expand in lines like terror, marine, and energy. The typical Specie, the typical lines of business that are written historically out of Lloyd's. I think what we're seeing is London is kind of the excess and surplus market of the rest of the world. We're seeing as companies in their local market become more comfortable with their risk, their appetite expands. There is a little bit less business coming from Australia, from Asia, from jurisdictions that historically rely on Lloyd's as the appetite of their local companies gets diminished. That's what we're seeing. We're seeing the combination of the two.

I mean, the tailwinds for us and a few other markets is that the market is consolidating around leaders, and I think we lead in many other lines of business. It is difficult to predict how it is come out, but we feel positive about how we are positioned to continue to take advantage of the market there.

Mike Zaremski (Research Analyst)

Thanks for the color.

Nicolas Alain Papadopoulo (CEO)

Welcome.

Operator (participant)

Thank you. The next question comes from Cave Montazeri at Deutsche Bank. Please go ahead.

Cave Montazeri (Research Analyst)

Thank you. My first question is going to be on net premium growth in reinsurance. I think it's pretty clear that those are the days of 30% plus growth in NPW are behind us now as you become more selective. I'm assuming also 2.2% growth is probably a little bit too low to expect going forward. Can you maybe unpack some of the key drivers of the deceleration you saw in the quarter? Maybe give us a bit more details on the impact of the structured deals just to help us understand maybe how would you think about that going forward in terms of premium growth in reinsurance?

François Morin (CFO and Treasurer)

Yeah. I mean, I touched on it in my comments, right? There's a couple of items. If you adjust for what we mentioned, again, we're not trying to do the but-fors and adjust for everything, but if you adjust for those two things, you still get to a, call it, 6-7% growth rate, which may be more consistent with what we see in the near future. Beyond that, I'd say there's really a separation. We had good growth in property other than property cat and in property cat and in casualty. Where we saw some decreases is on the specialty line beyond the structured and the timing of accruals on written premium. There, I'd say it's a function of some of the lines or some of the smaller specialty lines that we participate in where there's been more competition.

Cyber is a prime example of that. It is a combination of rates coming down a little and also of some of our ceding companies retaining more of the risk. That is how I would say midterm, you are right, the 30% growth is probably behind us, for the near term at least. Hopefully, these couple of things help you kind of reconcile a little bit from the 2.2% to what you may perceive to be a more kind of realistic expected growth for the rest of the year.

Nicolas Alain Papadopoulo (CEO)

Yeah. I think in the specialty book, you have a mix of lines of business. I mean, it goes from credit to cyber to agriculture and a few others. Our team are really scouting the world to find opportunities. We had a great opportunity in Brazil last year on the agriculture side, and this year the cedent is retaining more of the business. I think you have to be opportunistic in those lines of business to make money. Yes, if we have a big book, the ups and downs offset each other. In the last few years, it grew together because it was what the hard market does. I think we should be prepared to see more ups and downs quarter by quarter going forward in that particular book. That is what we want them to do.

Cave Montazeri (Research Analyst)

I think that's very good, very helpful color. My second question is on casualty. Last year, a big theme was just the strengthening in the casualty reserves at the industry level. We haven't seen much of that so far in 2025. I think some people are thinking maybe we might be past the point of maximum fear with regards to social inflation. Just wondering what your thoughts are. Do you agree with that? What do you think? We're just in the eye of the storm, and there's more pain to come in the second half of 2025.

Nicolas Alain Papadopoulo (CEO)

My prediction is that I don't know when the pain will come, but it will come. There's more pain. That would be my how people manage the pain, and I can't tell, but we think the casualty social inflation story has not fully played out. I think that's our view. We're still definitely right above trend on our casualty line and where we feel comfortable with the exposure, the jurisdiction, the type of the terms and conditions that we get. I think we're willing to lean in, but I don't think we are still at the case where it's a market that you can take a share of it and guarantee that you're going to make an adequate return. I think there's more to come. That would be our general underwriting view.

Cave Montazeri (Research Analyst)

Very clear. Thank you.

Nicolas Alain Papadopoulo (CEO)

Welcome.

Operator (participant)

Thank you. The next question comes from Elyse Greenspan at Wells Fargo. Please go ahead.

Elyse Greenspan (Managing Director and Equity Research)

Hi, thanks. Good morning. My first one, I think, is a quick one. François, the 7% adjusted growth in reinsurance that you were talking about in the quarter, is that excluding reinstatements and the structure deals? I just want to make sure I understand what you're backing out.

François Morin (CFO and Treasurer)

No, I'm just putting back in the two items I mentioned. That's all. I'm not backing out the reinstatements. I'm just adding back the non-renew deals and the timing of the accruals on some business.

Elyse Greenspan (Managing Director and Equity Research)

Okay. Got it. My second question is on the commentary around the mid-years. It sounds like you're expecting perhaps some opportunity on the demand side. What about pricing? I guess are you guys expecting that price is probably down, but that there could be some growth opportunities just with demand? Can you help me think through those two pieces?

Nicolas Alain Papadopoulo (CEO)

Clearly, there's the data point at 4.1 where single-digit down most places, maybe a bit more than that in Japan due to, I think, one of the players buying less, which the markets crumbled around that. I think the dynamic in Florida, as I said in my remark, is a little different because it's a peak zone for most markets. The dynamic is people like the top players, but there are not that many top players, and people didn't like the bottom of the program. There's not as much. What we've seen in the past, and we're seeing still today, is bottom of the programs, which have been impacted by the loss last year, the hurricane last year, Milton. We'd expect those probably to see some price increase.

Would that be compensated by price decrease at the top of the market, at the top of the program? I do not know. That is why I think our view is if things play out the way they should, which they never do, we would expect something more flattish for Florida. At that point, we feel that based on our positioning, we should be able at least to keep our share of the programs that are buying more, and therefore, we may have opportunity to deploy more capital.

Elyse Greenspan (Managing Director and Equity Research)

Okay. And then one last one. In insurance, if I kind of X out MidCorp, you get, I think, around a 56-7 underlying loss ratio. I think that was slightly below the Q4. Is that about runway-ish, I guess, on core Arch, right? And then we think about bringing in MidCorp on top or anything else we need to think about just with pricing and loss trend and dynamics on the margin as we go through the year?

François Morin (CFO and Treasurer)

Yeah. I mean, call it for the legacy Arch book. I mean, at a high level, we'd say that our margins are holding up in terms of rate above trend kind of being kind of keeping us steady. The one thing, though, that you have to factor in somehow is the mix is changing, right? As we pivot a little bit more into casualty, you might see that underlying loss ratio go up a little bit as we see more competition on the property. We mentioned it like a lot of our growth was in the casualty-led kind of lines of business or profit units for us. That might be the only thing. Big picture, we still think the loss ratio that we had this quarter seems to have no reason why it can't hold up at that level.

Elyse Greenspan (Managing Director and Equity Research)

Thank you.

François Morin (CFO and Treasurer)

You're welcome.

Operator (participant)

Thank you. The next question comes from Andrew Kligerman at TD Securities. Please go ahead.

Andrew Kligerman (Managing Director)

Hey, good morning. First question is around the reserving. It looked like you had some nice favorable development, particularly in reinsurance. Could you call out anything around commercial auto and other liability net plus or minus in both insurance and reinsurance? How did that perform? How do you feel about the reserving in those lines going forward?

François Morin (CFO and Treasurer)

Great question. Reserves are something, again, we mentioned before. We look at it every quarter. The actual versus expected that we monitor very carefully is looking good. For us, it's a little bit early to call it a victory. We are monitoring everything. Plus and minuses, yes, there's always going to be the finer if you slice that down to very fine levels. There are some pockets where we took a little bit of adverse, which were offset by others where we had some good favorable coming through. Big picture, I'd say we're flattish. I mean, everything on the casualty kind of long-tail side, auto, and some of the more difficult lines, as you mentioned, umbrella, etc., we're comfortable with what the reserve, what the indications are.

Andrew Kligerman (Managing Director)

Okay. That is good to hear. Maybe shifting, this is sort of a two-part question. Being clearly the acclaimed cycle manager that you are, could you share a little color on, and I know, Nicolas, you mentioned many different cycles, but maybe very broadly, two cycles, casualty and property. Maybe we will even skip professional, or you could throw that in if you want. How do you see those cycles playing out as we sit here today? How much longer will we see property pricing come down? How much longer can casualty pricing hold up? I know it is a really tough question, but I would be really interested in your response on that. The second part is just, what are you seeing with MGAs today? Are they still proliferating? Are they still very competitive? I will stop there.

That was a lot of questions. Sorry for that.

Nicolas Alain Papadopoulo (CEO)

The two are intertwined.

François Morin (CFO and Treasurer)

Yeah. It might take a while to answer, but those are excellent questions. Yes.

Nicolas Alain Papadopoulo (CEO)

I'll start on the property side, and I'll start on the, I mean, on the reinsurance side. I think my view is that the market is more disciplined. I think we've seen rate decrease, but from peak of the market. I think the market remained attractive. We haven't seen any really actors behaving in a totally irrational way. The new guys are coming, but they're small. I think really we've been very optimistic about the property cat and the way the industry behaves in general on that aspect. If you move to the cat, the property in general, and especially the E&S property and the North American E&S properties, I think you have a, there you have a tail of two markets.

I think you have the middle market, more I would say admitted retail where the convective storm and some of the recent catalyst months, I would say, would include the wildfire to a certain extent. Keep putting pressure on the companies, and they have to keep on getting rates to make sure that they cover their cat load, which has gone up in the last few years. You have the more the E&S, cat, coastal, and maybe earthquake-driven risk, where that's where the MGAs play a bigger role. I think the market has responded to my surprise very quickly, giving up double-digit rate increases. We went through Ian, and everybody was surprised. Big limit was really something that people didn't like and took a ton of losses.

I think the market became in 2023 much more disciplined and cut limits, which really pushed when the capacity withdraw, that's where you see rates going up. We got a huge upswing, re-underwriting, terms and conditions. I think a year and a half later, we've seen MGAs, which their capacity had been curtailed, coming back with much bigger limits. If you think of a typical risk, let's say a $200 million risk where you needed probably 20 markets or more to complete. Let's say Arch was doing the first 10 or was doing the 10X10. Then an MGA comes in, and they do 40. It creates a complete run for the hill in terms of if you, let's say Arch was 10X10, and the MGA had $10 million capacity, and now they ask $40 million. What do we do?

We run for the hill, and we're trying to reposition our $10 million elsewhere in the program. That creates the huge pressure on the rates that we've seen. I think capacity of MGAs have gone up this year. I think they play a big role, my view, in how quickly the market turned to be much more competitive. That's what I see.

Andrew Kligerman (Managing Director)

Same thing on casualty?

Nicolas Alain Papadopoulo (CEO)

On casualty, there's less MGAs. I think on casualty, I think what you've seen is, and to go back to property, I think when you see markets like us increasing capacity, maybe we increase capacity for 10 to 15. We don't go from 10 to 40. If you go on the casualty side of the house now, whether it's E&S or you've seen the same thing. You've seen response to typical losses is reduction of limit. You want prices to be applied to multiple risk of business to create the diversification, and the law of large number works better. I think that's what we've seen.

The reduction of the capacity and the usual limits from 50s to 25s and to 15s have created this opportunity, especially on the excess side for rates to go up. I think we haven't seen a ton of people. In fact, we're seeing people still reducing limits. This tells me that the runway to a more competitive marketplace is going to be longer.

Andrew Kligerman (Managing Director)

Got it. Thank you.

Operator (participant)

Thank you. The next question comes from David Motemaden at Evercore ISI. Please go ahead.

David Motemaden (Analyst)

Hey, good morning. I had a question on the $147 million of structured deals that were non-renewed. Just so I'm thinking about it correctly, were there any other chunkier quarters in 2024 that we should think about where there were chunky structured deals that might not renew as we go through the rest of 2025?

François Morin (CFO and Treasurer)

I mean, there's always some chunky books or deals that we write throughout the year. I mean, what we don't know is whether they'll reappear or they may renew at the same thing, at the same level, same kind of structure for another year. Hard to know what the impact may or may not be for the rest of the year. Again, we're just trying to give you a bit of additional information on how the premium is, why it's going up or down. Sometimes it works in our favor in the sense that, yes, we write new deals that are significant and improve or increase the growth or the reported growth, but in this case, it was different. These are, I'd say, though, they're on the larger side.

I mean, it's unusual that we don't have that many deals that have that much premium associated with them.

David Motemaden (Analyst)

Yep. Got it. Okay. Thanks. Thanks for that color. On the insurance underlying loss ratio, I think last quarter you spoke about it running at around the 58 level going forward. It obviously came in nicely below that this quarter. I'm wondering, was there anything that drove that? It sounded like you split it out between the legacy Arch and MCE. Was there more improvement on the MCE side? Is that something we can expect to continue? Maybe some color around that would be helpful.

François Morin (CFO and Treasurer)

Yeah. Hard to say. I think I'd say the quarterly numbers matter, but we don't overly put too much weight on them. I'd say we want to make sure we have a longer-term view of what the underlying profitability of the book is. I would not factor in or expect any significant movements up or down, let's say, for either the MCE or the legacy business. Yeah, as you know, I mean, last year, we had the Baltimore Bridge, which impacted the loss ratio upward. We didn't have that this quarter. There's always going to be the random element of a couple of large claims here and there that have an impact ultimately on the quarterly loss ratio.

Big picture, we call it a fairly stable environment, and we always expect a little bit of volatility from quarter to quarter depending on what happens.

David Motemaden (Analyst)

Understood. Thank you.

François Morin (CFO and Treasurer)

Yep.

Operator (participant)

Thank you. The next question comes from Alex Scott at Barclays. Please go ahead.

Alex Scott (Equity Research Analyst)

Hey, good morning. I thought I'd see if you could provide a little more commentary on what you're seeing in the property cat reinsurance market. I guess specifically, what's your view of the impact of ILS? Is the pricing pressure more at the top end of the tower? Any commentary on sort of the way it's affecting these towers and where you play in them? Thanks.

Nicolas Alain Papadopoulo (CEO)

Yeah. What we've seen and what seems to continue to happen is what you described. More pressure at the top. We've seen the cat bond market being repriced to lower margin. I think that put pressure also to the layer below the cat bond market. Obviously, there hasn't been any losses on those layers where at the bottom of the program between the California wildfire on the nationwide account and some of the storms that we've seen, we have had losses. I think the more, I would say, the place where price decrease seems to be focusing is really at the top of the program. I think Florida is going to be more complicated because, again, there's not that much supply in the marketplace.

I would expect it to maybe not be as strong as maybe in the northeast region where you haven't had a loss in any of the top layers or middle to top layers for a long time. People see that. I think, but yes, I think what you describe is we expect it to, if something's going to happen, my view is that's what's going to happen. It's probably more pressure at the top of the program and maybe less moderate pressure at the bottom.

Alex Scott (Equity Research Analyst)

Got it. That's helpful. Next one on capital management. I mean, you guys have very strong capitalization and growth slowing a little bit, just given the environment. How do you think about priorities there and how quickly might ramp up capital return if you don't get the opportunity to grow in the midyear?

François Morin (CFO and Treasurer)

Yeah. I mean, it's something we look at constantly. It's part of the same framework. We've always had no question that if the growth moderates, which it's starting to, and we still have solid earnings coming through, we'll probably be in a position where we accumulate a bit more excess capital, and we'll probably be looking to return most of it back to our shareholders. There could be some small M&A. There could be some other things that come our way. At a high level, you could certainly I think it's reasonable for us to think that we'd be returning a significant amount of capital as we move forward. We had our special dividend late last year. We obviously like share buybacks a lot. Given the if the pricing and the metrics work for us, we're happy to do that.

Alex Scott (Equity Research Analyst)

Thank you.

François Morin (CFO and Treasurer)

Yep.

Operator (participant)

Thank you. The next question comes from Wes Carmichael at Autonomous Research. Please go ahead.

Wes Carmichael (Senior Analyst)

Hey, good morning. In reinsurance, I think you mentioned a couple of times of primary companies retaining more risk. Just hoping you could provide a little more color on what you're seeing from primaries and maybe where that's most pronounced.

Nicolas Alain Papadopoulo (CEO)

I think it's most pronounced in the other property where we see some of the other line of business, like maybe energy and where results have been good. Same commissions are good, but companies feel more comfortable with their results. That's a normal trend that you see as you go through the hard market and you go through the ingrained clock is that people tend to retain more of the risk. They bought the reinsurance because they either wanted the volatility and they were a portion of the business. They were unsure of the performance. As they have re-underwritten their book, it's not unusual for people to feel more comfortable. I know Arch Insurance, that's what we do. When we are more comfortable with the risk, we definitely buy more insurance.

We move the reinsurance as we would buy to an excess of loss where we retain more of the premium. I think we have not seen a ton of quota share going through excess of loss, but we have definitely seen companies as they feel more comfortable with the risk or feel better about their financial situation, retaining more of the risk. Certainly, if you relate it to the structure, on the structure side, structure deals are usually capital relief deals. I think those deals last as long as the company needs the surplus relief. If you go in a situation where they do not need the surplus relief anymore, then the deal goes away.

Wes Carmichael (Senior Analyst)

Thanks. That's helpful. I think in mortgage, Prepared Remarks touched on headwinds of origination. Can you maybe just talk about what behavior you're seeing in that business? Are you seeing any potential leading indicators of recessionary activity at this point?

François Morin (CFO and Treasurer)

Too early. I mean, really too early. I mean, we can speculate. We do the work. We certainly have a view that, yeah, I mean, if recession, we have a severe recession and that impacts unemployment and home prices go down a little bit, that may have an impact on the performance of the book. We keep going back to the strong fundamentals, the high credit quality of the borrowers, home prices, there is a lot of equity that has been built up by the homeowners in their homes. It is a vastly different situation than what we had back in 2008. We are not to say that we do not worry about it because we do, but we are a lot more comfortable with our position.

For a stress scenario to generate or create significant hardship on Arch, it would have to be very, very severe. At this point, we're in a, we think, in a very good place.

David Motemaden (Analyst)

Great. Thanks so much.

François Morin (CFO and Treasurer)

Yep.

Operator (participant)

Thank you. The next question comes from Josh Shanker at Bank of America. Please go ahead.

Josh Shanker (Senior Research Analyst)

Oh, thank you for taking my question. Good morning, everybody.

François Morin (CFO and Treasurer)

Morning.

Josh Shanker (Senior Research Analyst)

Back in the fourth quarter, you paid a big special dividend. You bought back a little stock. You bought back more stock this quarter. I tend to find it difficult to parse paying special dividends and buying back stock at the same time. Either the return on the stock is attractive or you need to give money back to shareholders promptly because it's not so attractive. A couple of things there. One, can you talk a little about your philosophy, which is about three-year ahead book value? I've done a little bit of the math. If the three-year ahead book value rule of thumb applies, the market is very much underestimating your earnings power for the next couple of years.

Can you talk about the philosophy of buybacks versus dividends and what that means for this year and what you think about the attractiveness of the stock at this point?

François Morin (CFO and Treasurer)

We like the stock, that's for sure. I mean, the biggest obstacle, Josh, is truly the level of the speed at which you can execute share buybacks. We have limits on daily trading volume, etc. The main reason, if you put aside, even if the price was right and you say, "Well, it's really attractive to buy at a certain level," the advantage of a dividend is you can execute a much bigger return of capital, I mean, instantly versus over a long period of time. For us to buy back $1.9 billion of stock at this rate at which we can actually do it because of the restrictions we have would take a long time, at which point we'd accumulate more excess capital and you never catch up.

That is, I think, important to realize that there's only so much we can do with share buybacks. When you get into what's the three-year payback, yeah, three-year is a good metric for us that we follow. Do we have a different view of what the book value might be out in three years out than you do? Maybe. We take a hard look at what we know about our business. We're still within that roughly that three-year payback period. We still think there's a lot of good runway for us to keep growing book value at a good clip for the next little while. That gives us a lot of comfort that buying back stock at this price is a good way to return capital to shareholders.

Josh Shanker (Senior Research Analyst)

If you started now, do you think you could execute $2 billion in buyback before year-end and preclude the need for a special dividend?

François Morin (CFO and Treasurer)

It would be hard. It would be hard. I mean, there are ways you can kind of create some programs, but we like to retain the flexibility. We like to have optionality. Locking yourselves in, and that is true in everything we do. To lock yourselves into making it public that we are buying back a certain amount at a certain price is something we try not to do. We like to be opportunistic. It is something that we, again, it is constantly something we look at and try to optimize as best we can.

Josh Shanker (Senior Research Analyst)

Thanks for being transparent about the behind-the-curtain, how the sauces are made.

François Morin (CFO and Treasurer)

Happy to do it.

Nicolas Alain Papadopoulo (CEO)

Thanks. Talk later.

Operator (participant)

Thank you. The next question comes from Andrew Andersen at Jefferies. Please go ahead.

Andrew Andersen (Equity Research Senior VP)

Hey, good morning. Just on the income from operating affiliates, I think it was $17 million in the quarter. It was down a bit year over year. I think that Somers and Coface, can you maybe just talk about the moving pieces there and perhaps how you're thinking about full year?

François Morin (CFO and Treasurer)

Yeah. Coface has been very, very good. So it's been a great story for us. We're extremely happy with it. There could be some pressure with trade credit going forward, but that's, again, something we're keeping an eye on. We don't have visibility or a ton of clarity on it. So really, the drop in operating income from operating affiliates was mostly, almost exclusively due to the Somers. And let's remember that Somers is effectively a sidecar to Arch Re. You have wildfires this quarter. They impact us, and they impacted Somers as well. There's a little bit of a kind of a one-off on the Bermuda tax that was reflected in the Somers' financials Q1 of 2024 that maybe makes the drop more significant than you would think otherwise.

As you look for the run rate, I'd say this quarter is a bit lower than what we normally think for the operating affiliates in general. I think we're still looking, when you think about our returns, we think plus or minus where we're earning well into a 10% range on these investments, if not more. Let's just say we have over $1 billion in assets there. Hopefully, you can do the math from there.

Andrew Andersen (Equity Research Senior VP)

Thanks. That's helpful. I mean, just insurance expense ratio, there was improvement in OpEx, but is full year 2024 still a good way to think about the rest of the year for the OpEx, or is there still some headcount costs coming on?

François Morin (CFO and Treasurer)

I mean, it's a good place. We are, no question. I mean, as we think about our growth and how we need to manage our expense base, we are being very thoughtful and diligent about, do we need to replace people that resigned? Do we have retirement, etc.? I think we're going to get some benefits from the MC acquisition. Scale brings a little bit of leverage, a bit of a kind of we can scale better. No question that we're trying to hire still on the MC side. We want to staff up with data scientists, and we need a bit more, a few more actuaries, etc. Big picture, I think we are watching our expenses, and that's something that will be a focus as we move forward.

Andrew Andersen (Equity Research Senior VP)

Thank you.

François Morin (CFO and Treasurer)

You're welcome.

Operator (participant)

Thank you. The next question comes from Meyer Shields at KBW. Please go ahead.

Meyer Shields (Managing Director)

Great. Thanks. I sort of have the same question in two contexts. I think Nicolas started or comments talking about the preference of brokers to work with fewer bigger insurers. I am wondering if you could talk about the volume versus profitability implications of that to companies like Arch.

Nicolas Alain Papadopoulo (CEO)

Yeah. I do not think the two are necessarily linked. I think, in my view, the best place to talk about this is probably the London market. In the London market, the brokers, because the business comes to London, the main three brokers control a lot of access to the business we write. I think it is more of supporting them where they need you to be supported and playing the role that you have to play where you can align with their own strategy. I think if you think of the way they are organizing the market, we are having their own facilities, then they need leaders. Without leaders, nothing works. They have some follow facilities, and ultimately, they have the open market that remains. I think you need to find a place. You cannot service just one.

I think if you service just one, you'll be the, so you have to be able to figure out your distribution strategy is a key component of future success. That's what I'm saying. I think we spend a ton of time thinking out how do we align better and where do we bring value to our distributors. It varies. For the bigger distributors, it may be one thing. For a smaller distributor, a mid-market distributor, where they rely better on the expertise of Arch, it may be something different. I think you have to really, if you have to be successful going forward, you really have to question the value you bring in the transaction. You can't just underwrite business. The two components is that you have to do the underwriting to cycle thoughtfully.

You have also to figure out what's your place in the food chain and what value you bring. That's really the so we've done a lot of work, and we're still thinking of this in a way that's less about Arch, but it's less about ultimately the customers. Without customers, we don't exist. We need to provide value to the ultimate customers. That dynamic, in my view, is playing out in London, is playing out in North America. You can't just be sitting at your box in Lloyd's and waiting for the business to come to you and underwrite because you're not even sure that the business you're going to see is the one you want to write. That's the issue.

I think if there are five people in front of you that are picking up the good business, now you're picking up from a part that by definition is not so good. I think you have to work hard. Size matters and relationship matters in being able you can see the business you're really targeting. That's where distribution strategy matters.

Meyer Shields (Managing Director)

Okay. Perfect. That's very helpful. Second, on reinsurance, when you have cedents retaining more business, how do you deal with the risk of adverse selection when the cedent kind of decides a more educated cedent because of the experience decides what they're going to keep and what they're going to reinsure?

Nicolas Alain Papadopoulo (CEO)

A lot of the business is about adverse selection. The question is, do I have insight into the business to understand why people are buying and does it make sense? Can they have a need? We spend a lot of time creating insight to figure out there are needs that we are willing to insure or reinsure, and there are things that we are unwilling to do because, as I said before, I think we're looking for risk where we have upside that outweighs the downside. That is one way to look at it. When you have only downside, you usually do not want to do those risks. I think that there is always that risk. Adverse selection, it is a very dynamic market. Adverse selection is everywhere.

I think you have to factor that into your risk selection, in my view. I think it's yes, you can't if you underwrite risk, a lot of what you get told as an underwriter is more like a fairy tale I used to say. If you like fairy tales, you're not going to end up in a very successful underwriting shop. I think you have to that's part of the job. The job is to have the insight to be able to ask the right questions and get to the answer and build a relationship with the clients where they come to you for legitimate concern that they have and where you can really provide value by either insuring or reinsuring them.

Meyer Shields (Managing Director)

Okay. Understood. Thank you so much.

Nicolas Alain Papadopoulo (CEO)

You can't have both sides of the house. I mean, on the insurance side, yeah, those people that we try to tell our guys to do the right thing. If the risk is good, try to retain it, to have conviction about. If for a while, you're not sure, you buy reinsurance on a quota-share basis. Ultimately, over time, you build conviction that your underwriting guidelines work, your pricing is okay. At that point, you don't need the reinsurance. You retain it net. There's nothing wrong about that. My view is that we should, that's the role the reinsurers play.

Operator (participant)

Thank you. I'm not showing any further questions. Would you like to proceed with any further remarks?

Nicolas Alain Papadopoulo (CEO)

No, I think thank you. I think another, I think, good quarter for Arch in a bit of a more difficult or more competitive market. I think we remain bullish about, as I said in my remarks, to stand out. I think we'll see you guys in the next quarter.

Operator (participant)

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