Arch Capital Group - Q2 2023
July 27, 2023
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Q2 2023 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 periodic reports that are filed by the company with the SEC from time to time.
Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-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 and on the SEC's website. I would now like to introduce your hosts for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sirs, you may begin.
Marc Grandisson (CEO)
Thank you, Josh. Good morning, and welcome to our Q2 earnings call. We're more than halfway through 2023, and through our commitment to underwriting acumen, prudent reserving, and cycle-focused capital allocation, we were able to deliver another quarter of profitable growth. In the Q2, our results were primarily driven by our willingness and ability to deploy capital into lines with superior risk-adjusted returns. Our operating results in the quarter were stellar, with an annualized operating return on average common equity of 21.5% that drove a 4.8% increase in Arch's book value of common share for the quarter. As you know, book value per share growth is our primary focus on our road to creating long-term value for our shareholders. Each segment generated over $100 million of underwriting income in a quarter.
These outstanding returns reflect our ability to effectively execute in each segment. We're really operating in our sweet spot. I also want to commend our employees for the continued exceptional growth they've delivered in the quarter, most notably a 32% increase in property and casualty net premium written compared to the same quarter a year ago. This hard P&C market is proving to be one of the longest we've experienced, and we are in an enviable position as we look to 2024 and beyond. We often refer to the insurance clock developed by Paul Ingrey to help illustrate the insurance cycle. You can find the clock on the Download tab for this webcast or on our corporate website. If you can't view the clock right now, just picture a traditional clock dial.
For some time, we've been hovering at 11 o'clock, which is when we expect most companies in the market to show good results as rate adequacy improves and loss trends stabilize. Last year, a popular topic on earnings calls was whether rate increases were slowing or whether rates were even decreasing. These are classic signs of the clock hitting 12, when returns are still very good, but conditions begin to soften. Yet here we are in mid-2023, and conditions in most markets remain at 11 o'clock. We've even checked the batteries in the clock, and they're just fine. The clock isn't broken. It's just that the current environment dictates an extended period of rate hardening. What's sustaining this hard market? Well, I believe it's a relatively simple combination. Heightened uncertainty is driving an imbalance of supply and demand for insurance coverage.
Since this hard market's inception in 2019, we've had COVID, the war in Ukraine, increased cat activity, and rising inflation, all of which create significant economic uncertainty. Underwriters have had to account for more unknowns. Beyond those macro factors, industry dynamics also play a role in sustaining the hard market. Generally, inadequate pricing and overly optimistic loss trend assumptions during the soft market years of 2016 to 2019 have led to inadequate returns for the industry. The impact of these factors should cause insurers to raise rates and purchase more reinsurance in a capacity-constrained market with limited new capital formation. Put it all together, and it may be a while before the clock strikes 12 and we begin to move beyond this hard market. I'll now share a few highlights from our segments. First, P&C.
In the second quarter, the reinsurance group was successful again at seizing growth opportunities. In particular, the media property and property cat renewals saw significant improvement in rates adequacy, and our underwriters were ready, willing, and able to provide valuable capacity to our clients. Our PML, or exposure to a single event in a 1 in 250-year return period, went up in the quarter, while our premium income grew substantially. On July 1st, our peak zone exposure rose to 10.5% of tangible equity. Overall exposure to property cat risk remain well within our threshold. Because of our diversified portfolio and broad set of opportunities, we retain the flexibility to pursue the most attractive returns across lines and geographies. Although there are lines where pricing has declined, large public D&O comes to mind, P&C markets continue to see rate changes above loss trends.
Even with those few lines with weakening rates, the compounded rate increases over the past several years continue to be earned and are generating attractive returns. Overall, we like the range of opportunities in front of us, and we continue to lean into the current market. Next is mortgage, which keeps generating meaningful underwriting income and risk-adjusted returns. Housing and credit conditions remain favorable, although high mortgage interest rates temper demand for mortgage originations and limit refinancing options. The lack of refinancing has led to a historically high persistency rate of 83%. High persistency stabilizes our insurance in force, which, as many of you know, drives mortgage insurance earnings. Our disciplined underwriting process and risk-based pricing model have helped us to build a healthy risk reward profile for the business we write.
The composition of the overall book, with high FICO scores and low loan-to-value and debt-to-income ratios, remains one of the best risk profiles in the industry. International growth, along with our GSE credit risk transfer business, enabled us to profitably manage risk better than monoline US-only companies, a key differentiator of our MI global platform. Mortgage insurance plays a valuable role in our diversified business model and continues to generate capital that is and can be deployed into the most attractive opportunities across the enterprise. Moving on to investments now. Since our Q2 call last year, the Federal Reserve has increased, as we all know, the rates 8 times for a total of 375 basis points. Given our short duration portfolio, these hikes have positively affected our net investment income, which is up approximately 22% over the Q1 of 2023.
New money rates exceed our book yield, which, along with our strong cash flow, sets the stage for further growth and book value creation. I've had tennis on the brain after watching the incredible Wimbledon final a couple of weeks ago. It was an epic matchup. 20-year-old sensation Carlos Alcaraz taking on all-time great Novak Djokovic. It was a back-and-forth match that lasted nearly 5 hours before Alcaraz emerged victorious. There was 1 pivotal moment that will be remembered for years. In the third set, a 1 game, something that usually takes about 3-5 minutes, instead lasted 26 minutes. The game included 13 deuces and 7 break points. It was an incredible display of tenacity and athleticism, not to mention the mental strength required to remain focused. It was insane.
What really struck with me was that kind of like this hard market, the game simply refused to end. There were many times where a single winning shot could have ended the game, but it just kept going. About 15 minutes in, it became clear that we just needed to enjoy what we were watching and not focus on the end point. That's what we're doing with this hard market, returning what the market serves us with gusto. As always, our goal remains to generate strong risk-adjusted returns in order to create long-term value for our shareholders at lower volatility. The exceptional profitable growth over the last several years has fortified our market presence and helped us achieve one of the most profitable quarters in our company's history.
This is a type of well-rounded quarter we've always envisioned, the sweet spot, if you will, and we look forward to building on this momentum in upcoming quarters. I'll cede the court now to François, and then we'll return to answer your questions.
François Morin (CFO)
Thank you, Marc. Good morning to all. Thanks for joining us today on this gorgeous day in Bermuda. As Marc highlighted, our underwriting and investment teams delivered excellent results across their respective areas in the Q2, which resulted in a performance that exceeded that from our very strong Q1. For the quarter, we reported after-tax operating income of $1.92 per share for an annualized operating return on average common equity of 21.5%. Book value per share was $37.04 as of June 30, up 4.8% in the quarter and 13.5% on a year-to-date basis. Turning to the operating segments, net premium written by our reinsurance segment grew by 47% over the same quarter last year. This growth was observed in most lines of business.
Growth was particularly strong in the property catastrophe and property other than catastrophe lines, with net written premium being 205% and 53% higher, respectively, than the same quarter 1 year ago, a reflection of the fact that market conditions in these lines remain very attractive. As a result, the quarterly bottom line for the segment was excellent, with a combined ratio of 81.9%, producing an underwriting profit of $245 million. The accident year ex-cat combined ratio was 77.4%. The insurance segment also performed well, with Q2 net premium written growth of 18% over the same quarter 1 year ago, and an accident quarter combined ratio, excluding cats, of 89.8%.
Except for professional lines, which saw a slight decrease in net written premium in our public directors and officers business due to a more competitive market, all our underwriting units in insurance, both in the U.S. and internationally, saw good growth in the quarter as market conditions remained excellent. Our mortgage segment had another excellent quarter, with strong performance across all units, leading to a combined ratio of 15%. Net premiums earned were in line with the past few quarters, reflecting a high level of persistency in our insurance in force during the quarter at USMI, partially offset by lower levels of terminations in Australia and higher levels of ceded premium.
Benefiting our results was approximately $84 million in favorable prior year reserve development in the quarter, net of acquisition expenses, with over 75% of that amount coming from USMI and the rest spread across our other underwriting units. Cure activity at USMI was again very strong this quarter, and our delinquency rate stood at 1.61%, its lowest level since the onset of the COVID pandemic. At the end of the quarter, over 80% of our net reserves at USMI are from post-COVID accident periods. Overall, our underwriting income reflected $116 million of favorable prior year development on a pre-tax basis, or 3.9 points on the combined ratio, and was observed across all three segments, mainly in short tail lines.
Current accident year catastrophe losses across the group were $119 million, over half of which are related to U.S. severe convective storms that have occurred so far this year. Pre-tax net investment income was $0.64 per share, up 21% from the Q1 of 2023, as our pre-tax investment income yield was almost up 50 basis points since last quarter. Total return for our investment portfolio was 0.56% on a U.S. dollar basis for the quarter, with most of our strategies delivering positive returns. Our interest rate positioning with a slightly shorter duration helped minimize the impact of the increase in interest rates during the quarter. We remain comfortable with our commercial real estate and bank exposure, which is of high quality and short duration.
Net cash flow from operating activities was strong, in excess of $1.1 billion this quarter, continues to provide our investment team with additional resources to deploy into the higher interest rate environment. With new money rates in our fixed income portfolio still in the 4.5%-5% range, we should see further improvement in our net investment income in the coming quarters, arising primarily from positive cash flows and the rollover of maturing lower yielding assets. Turning to risk management, our natural cat PML on a net basis at the single event 1 in 250-year return level stood at $1.46 billion as of July 1, or 10.5% of tangible shareholders' equity, again, well below our internal limits.
In light of the improved market conditions in the property market, we were able to deploy more capacity, which resulted in significant premium growth for property lines in both our insurance and reinsurance segments. This growth was well diversified across multiple zones. Our view is that the current in-force portfolio, with a broader spread of risk across many zones, is well positioned to deliver attractive returns. Our capital base remains very strong, with $17.4 billion in capital and a debt plus preferred to capital ratio of 20.5%. Even though the results of the past quarter set a high watermark for us on many fronts, we believe the continued hard work and dedication from our teams, serving the needs of our clients every single day, along with our steadfast commitment as disciplined and dynamic capital allocators, sets us up very well for future success.
With these introductory comments, we are now prepared to take your questions.
Operator (participant)
Thank you. If you have a question at this time, please press the star one, one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press star one, one again. If you are using a speakerphone, please lift the handset. One moment for questions. Our first question comes from Elyse Greenspan with Wells Fargo. You may proceed.
Elyse Greenspan (Managing Director and Senior Equity Analyst)
Hi, thanks. Good morning. My first question, Marc, can you quantify the supply-demand imbalance that you're seeing within the reinsurance market? How much of that, do you think could transpire from a pickup in demand, potentially, at 1/1/2024?
Marc Grandisson (CEO)
I think, yeah, good question. Good morning again, Elyse. I think, you know, the numbers we've seen sort of around $50 billion-$70 billion is not a crazy number. I think that where we still have this imbalance occurring, I think the market has found a way to, you know, do the reinsurance transaction and, and buy coverage. Indeed, there could have been more to be had from the reinsurance perspective, but as we believe, and you heard on the call, that insurance companies also had to have a sticker shock of sort and had to evaluate what they can buy and how much they could afford based on what the pricing level was.
I think that this imbalance right there on the reinsurance, there's also, I believe, we also believe there's imbalance in the terms and conditions in the overall broad industry.
... that needs to be a bit more of a function. You know, on one hand, you could create capacity for cat exposure through third party capital or reinsurance protection, but at the same time, you could also do it through, you know, improving terms and condition at the insurance level. I think that's also something that will help bridge the gap, and we believe that's gonna be one of the key elements as well, for the next 18-24 months.
Elyse Greenspan (Managing Director and Senior Equity Analyst)
The 77.4%, Francois, the accident year, underlying combined ratio within reinsurance, is that a good run rate level, you know, is, or maybe it could get better as we think about, you know, some rate earning into the cat book, or is there anything one-off in that number in the quarter?
François Morin (CFO)
Well, I wouldn't say there's anything one-off. It's certainly a very good quarter. I think our view, as we said in the past, when we've had some quarters where there's a little bit more activity, is we think it's better to look at it on a 12-month kind of forward-looking view. You know, is this quarter gonna repeat in the future? Maybe, we just don't know. I mean, I'll say it's certainly good. There's room for further improvement, again, recognizing that there's gonna be volatility in the reinsurance segment from quarter to quarter, I'd say it's. You know, I'll let you make your pick from there.
Elyse Greenspan (Managing Director and Senior Equity Analyst)
Thanks. Marc, one more for you. I mean, your stock has done really well, so, you know, you have, you know, a problem that, you know, a good problem that any CEO would want, in that you have an extremely valuable currency. We sit here with a hard market, and you guys obviously have a lot of organic growth opportunities. What would you need to see from an M&A perspective to consider, you know, using your stock as currency to enter into any type of transaction?
Marc Grandisson (CEO)
Well, many things are needed. Obviously, you need stakes through the time go as well, it's gonna appreciate in this world. I think at a, at a high level, Elyse Greenspan, we're not focused on M&A at this point in time. We're really focusing on growing the book organically. You know, we're also maintaining, you know, pretty well in EMI as well as other non-property exposures. We are seeing a lot of opportunities broadly, and this is where, what our shareholders are paying us to do, and this is what we're doing. This represents really a once in a little while opportunity to really deploy and really, you know, get access to the market in a bigger way, provide more capacity to our clients.
We don't wanna miss that. I mean, an M&A would have to strategically fit for us beyond the money. I think right now, our efforts and time is better focused on organic growth, though, at this point in time. This is where I think we have plenty of opportunities on our own.
Elyse Greenspan (Managing Director and Senior Equity Analyst)
Thanks, Marc.
Marc Grandisson (CEO)
Thanks.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Tracy Benguigui with Barclays. You may proceed.
Tracy Benguigui (Director and Senior Equity Research Analyst)
Thank you. You mentioned that your 1-in-250 PML tangible equity was 10.5% at 7/1, which was up from 8.1% at 4/1. I recognize your upper tolerance is 25%, it almost feels to me like you have a supplement below the 25%. Is it fair to assume that getting closer to 25% requires an even higher ROE hurdle rate or pricing? Like, could we just be theoretical, what would you need to see in order to get more comfortable taking on more volatility in your book, where you can get closer over time to that 25%?
Marc Grandisson (CEO)
Well, I think first, the one thing about the PML which is so interesting to us, is it's we're in the early innings of where it's going to go, we have to be careful the way we talk about this, even internally ourselves. These are the early innings of a market getting much better, like as I mentioned, in terms and conditions, we believe also improving and really helping to manage cat and the cat-related risk better as an industry. We'll see how that develops over time, Tracy. I think that we're also a different animal than we were way back when. We have, we've grown up our capital faster than the growth in exposure needed, the 25 before is probably a lesser number. I think you're quite right.
We also have to balance your whole portfolio, you know, risk profile. I think that all there's plenty of room to go from 10.5 to wherever we're gonna end up. We don't know where that's going to be, assuming conditions stay as they are or even improve further, it certainly will, you know, will mean more PML, more PML growth. I think that it would have to be substantially better. We actually have a very, very solid construct within our overall capital allocation, that will dictate what kind of market share we would have in the market. All I would say is, there's always a place to go to the numbers you talk about, but, you know, we'll see if we get there.
I will also remind everyone that it's not a bad place to start. The rate on line index of one of the major brokers, as you all know, it shows us that the ROL and the pricing for the cat is the highest it's ever been since 1990, even before Andrew. There's a lot of room, and we're excited to see where that takes us. One final thing I will say, Tracy, if you look back at the 2005, 2006, 2007, 2008, if you go back on this, if you have enough of a memory or a good document retention policy or a bad one in your company, you'll see that our PML grew, you know, in 2006, 2007, 2008, 2009. We kept on, you know, accumulating and growing the PML, so it's just a start.
François Morin (CFO)
Yeah, there's one thing I'll add on that. Just going back to Marc's earlier point about supply and demand and balance. I mean, Florida is obviously a big market. It was a big renewal at 6/1. The reality is, even if we wanted to deploy more capital, I think, or more capacity, I mean, the buyers or the ceding companies just don't have the resources or the money to buy the coverage that we think they should be buying.
There's a little bit of wait and see whether, you know, it'll take, you know, be a full year before they reprice their product, and then it gives them more money potentially to spend on reinsurance protection, which we, again, assuming the pricing stays at the current levels, we would deploy more capital. Certainly, the demand is a big factor in our ability to grow PML.
Tracy Benguigui (Director and Senior Equity Research Analyst)
Got it. I would say that if you do change your threshold, and I get it's very fluid, and the demand equation's also different, that you would provide an update to the market on that. Real quick, do you have a house view on how this year's hurricane season will shape up? There was talk about average hurricane season, and now people are talking about above average. How do you see that playing out this year?
Marc Grandisson (CEO)
Well, we have a view. With Santara, we have a meteorologist who would, you know, evaluates the sea surface temperature. I'm sure everybody's seen those numbers. You know, we expect average to maybe slightly above average, the last time he gave us a presentation. As you know, Tracy, it moves week to week, so we'll see when we get there. We're a little bit almost starting the season, so we'll see how that develops. We tend to take a longer term view, Tracy, of the frequency and the severity of the hurricane season. We believe that the pricing, as it is right now, accounts for a lot of deviation from the long-term expected.
Even if you had a little bit above average, I think that the market will be in a really, really good place. Not only us as Arch, I think the market is, on the reinsurance side, has priced the business, with that, long-term expected, which had, as we all know, a little bit of that increased frequency and severity of late. That is reflected in the modeling that all the companies are using.
Tracy Benguigui (Director and Senior Equity Research Analyst)
Very helpful. Thank you.
Marc Grandisson (CEO)
Good.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Jimmy Bhullar with J.P. Morgan. You may proceed.
Jimmy Bhullar (Managing Director and Senior Equity Analyst)
Hey, good morning. First, just a question on your comments on supply-demand. Besides the absolute price, obviously, terms and conditions have improved as well. Where we can see the data, it seems like most of the primary insurers are absorbing more of the first dollar loss, but obviously, we don't see the data from all of them. How broad-based is this? Do you think there's sort of been a little bit of a transfer of risk, cat risk from the reinsurers to the primary companies, given changes in terms and conditions?
Marc Grandisson (CEO)
I think the last part is a true statement. I think the Q2 numbers you saw for some other, some of our clients, actually, and competitors, demonstrate that there's a little bit more retained, and this is the kind of question. I mean, if you can't buy the coverage, you have to retain it yourself. The terms and conditions change. This is what's fascinating with this market, is it's not only a property cat terms and condition change, it's a very broad-based property, you know, terms and conditions and price and improvement that is sought by a lot of companies. I think the market globally has the psychology is squarely, like I said, last quarter, squarely in the camp of having to mend and optimize and reshape and re-underwrite the portfolio.
One of the key thing that we see that evidences that, is that a facultative team in our E&S property have an increased amount of submission this first half of the year. What's interesting, the E&S property on the insurance obviously has some cat exposure, a fair amount of it, but it's not only that. Our facultative book of business is actually not cat-heavy portfolio, which is an indication, as facultative is typically in any market, is a good indication for where the market psychology is. Beyond the cat, when they provide a fire protection, the pricing and the conditions are improving there as well. It's very much a broad base and in the early stages.
I will say, remind everyone, and we have to remind ourselves of this, is that this is the second or third year that our property rates and terms and conditions have improved. It's not the first shot at it. It's an ongoing process, and I think that it's just got, you know, repositioned in top of mind after Ian, and certainly the Q2 this year, we believe will help maintain a bit of that going forward.
Jimmy Bhullar (Managing Director and Senior Equity Analyst)
Okay. Then on the MI business, you've had obviously very sizable reserve releases over the past couple of years. How much of the forbearance-related reserves that you'd put up, are those mostly released, or is there more room to go there?
Marc Grandisson (CEO)
I mean, they're mostly gone. I think we've released a fair amount of the reserves that we put up in the early in 2020, effectively, during, you know, the early days of the pandemic. As I mentioned, like, a lot of the, you know, cures that we're seeing now are from 2021 and 2022, that's good news. You know, as you know, I mean, the reserve base has shrunk quite substantially from the peak of 2020, early 2020. You know, we were still very prudent. We still look at the data every single month as the new delinquencies come in and how quickly we cure and all of that, you know, we're still very comfortable with our reserve position there.
Jimmy Bhullar (Managing Director and Senior Equity Analyst)
If I could just ask one more. In the past, when the market's been really good, we've seen some companies go out and raise equity, try to take advantage of that, and a couple of your peers have done that as well, obviously not to a very large extent. What do you think about your sort of desire to do that if the demand really picks up?
... and your business continues to grow?
Marc Grandisson (CEO)
Well, it'll be a function of the market. I mean, it's, you know, we've been able to grow quite substantially in the last few years without raising any additional capital. As I've told many people, over, you know, the last few months, we have the luxury of having a mortgage unit that provides a source of capital that we have been able to redeploy in the P&C space. Assuming similar conditions where P&C stays very hard, and mortgage still does very well but isn't growing substantially, we still think there'll be, you know, we'll be able to generate capital internally. Again, hard to have the crystal ball on what 2024 will look like.
We're, you know, as I mentioned, you know, we got plenty capacity, we are low leverage, so that we got a lot of tools in the toolbox, and we'll react to the market as it presents itself.
Jimmy Bhullar (Managing Director and Senior Equity Analyst)
Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Michael Zaremski with BMO. You may proceed.
Michael Zaremski (Managing Director and Senior Equity Research Analyst)
Hey, great. good afternoon. maybe just wanted to learn more about market conditions in the primary insurance segment. I definitely heard your comments about, you know, rate change, but loss trend and, you know, pieces of where overall we are in the, in the underwriting lifestyle clock. Just curious, we're seeing, you know, kind of different data points from companies on pricing power levels. Some are showing flattish pricing power, some are showing deceleration. You know, you know, I know you guys operate in lots of different pockets, but would you say overall pricing in the primary insurance, you know, segment, is accelerating or maybe it's worth bifurcating between casualty versus property as well?
Marc Grandisson (CEO)
Yeah, you'd have to bifurcate the markets. It's a good question. I think the overall statement I will say is that, from our perspective, we look at our portfolio, as you just mentioned, right, all the specialty lines, and most of them, you know, still getting rate increases and actually had a bit more pickup in rate increase over the last, over the last quarter or two, which was a good, a good thing to see and the right thing to see, obviously. I think the workers' comp is a good example for rates not going up still, and there's a reason for it. It's been historically well performing and performing better than all the initial picks from all the folks out there.
I can see why, there is some, you know, validity or at least reason behind that. This is what I would tell you, the word I would use for the insurance industry right now in the US specifically is rationality. It's a very rational market. There's a reason for things to happen. The reason for things to happen are economically based. They're not, you know, growth or market share or making a splash or marketing driven. Companies are really doing the best they can to underwrite to the best and being appropriate, right, in getting price increase, you know, a certain degree, to lines that need it more than others. I think the market is fairly rational as we speak.
Michael Zaremski (Managing Director and Senior Equity Research Analyst)
Okay. Just switching gears a bit to the reinsurance side of the marketplace. You know, would you say there's been a lot of terms and conditions changes and cedant changes too, especially in Florida. You know, would you say that if, you know, if there is a major event, should we be looking at historical market shares and that the reinsurers and Arch have had and then hair cutting it? Would that be, like, the right exercise to do, given we're kind of, you know, in hurricane season?
Marc Grandisson (CEO)
I think we've grown our portfolio, right? I mean, you can see that the exposure growth. I think the proxy for market share is probably better to use the delta and the P&L, even though that's only one zone. As François mentioned in his remarks, we have an increased participation in a much more wider set of property cat exposure than we used to have before. The market share that we, you know, we said anywhere from, you know, historically from 0.5-0.8, it's going up a little bit, and I think I would use a P&L as a proxy. That's the best thing I can tell you right now. It's really done by zone.
Michael Zaremski (Managing Director and Senior Equity Research Analyst)
Okay, that, that makes sense. I'll stop there. Thank you.
Marc Grandisson (CEO)
Okay.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Josh Shanker with Bank of America. You may proceed.
Josh Shanker (Senior Equity Research Analyst)
I've read the Paul Ingrey reinsurance clock, but it doesn't really relate to something that Paul actually knew about, which I don't, which is how to make money in the late 1970s in the insurance industry. Given where you see loss trends are, and given that pricing is going up over an extended period of time, is there an element that we just don't know really what the loss cost trend is, and we need an extra padding in there compared with our historical appraisals? Is it possible to put a supplemental ambiguous loss trend on top of what you think the loss trend is currently and still get new business attractively?
Marc Grandisson (CEO)
Very good question. I think, let's maybe break it in parts. I think that, yes, we do. As you know, as a reserving practice, we're very keen on the reserving being prudent. We do reserve to a higher level of trend than is embedded in the pricing or what we've even observed in the data to make sure that we're, you know, accounting for this. I think as a result of that uncertainty and the need to get a bit more cushion and the uncertainty that it generates, I mean, you heard us on the other call, I think it does generate that need to get higher price for that reason.
There's a need, there's a recognition in the industry that we need to be a little bit on the, on this side of the, the decimal to create some kind of margin of safety. I do believe that companies are pricing for a higher inflation ratio going forward and also padding a little bit. I think that's what helps and sustain the, the hard market as we speak.
Josh Shanker (Senior Equity Research Analyst)
Is Arch padding more now than it has as a company standard practice in the past?
Marc Grandisson (CEO)
Not really. I think like we talked about this, Josh, when I'm on call, the last two, three years, and I think we've been consistent. You know, it is a little bit of art, right? It's not only science, it's not as granular as you might think it is. You know, you do the reserving process, you do the reserving process, look at what your, you know, expectation are versus what the actual is emerging, you adjust your loss ratio. There's two things going on right now. There's a tendency to sort of, you know, pick a higher loss ratio than otherwise would be indicated, because we have to still see through that underwriting year develop. It's been very consistent.
If you look at our IBNR ratios and the way we book the business on our insurance portfolio, it's been consistent for the last three years. We tend to want to make sure that we see data emerge that allows us to release some of that before we do. We have not changed a whole lot, and it's quite a bit away above the expected or the actual emergence of the losses. Inflation develops in the future, so it's an appropriate thing to do, I think, at the early stages. François?
François Morin (CFO)
Yeah, I'd add, like, COVID certainly, you know, threw a wrench in the whole process, right? I'd say it's, you know, the way we think about the business today, the way the environment is today is different than it was five years ago, is different than it was 10 years ago. Great question, Josh, but it's, you know, no two periods are alike. Right now, back to Marc's point, I'd say the, you know, the reaction or how do we think about courts closing and courts reopening and coverages and everything that came with COVID, I think, I mean, we're still kind of working through that.
That's why I think it would just suggest we like to be prudent and maybe even more so in this environment.
Josh Shanker (Senior Equity Research Analyst)
On Tracey's PML question, you kind of ribbed into François and Don on this a little bit, but the corporate charter says you're willing to put 25% of the company's equity capital at risk for a 1 in 250-year event. You're nowhere near that, and I don't really expect there's any market where Arch, at this point, given how big this is, would really put 25% of its equity capital at risk for a 1 in 250-year event. What's the reasonable ceiling on how much cat risk you'd be willing to take in the best cat market ever?
François Morin (CFO)
I'd say, I mean, we think we're in a good market. We know we're in a good market, but we don't know what tomorrow holds. I mean, rates could go up again by a factor of, you know, quite substantially next year. Again, I don't want to speculate, but there could be some markets kind of pulling back. You know, I think I agree that in what we know today, it's unlikely that we would hit 25%, but we just don't know what the future holds. I think we're, you know, we're cognizant that there could be better opportunities at some point down the road.
Josh Shanker (Senior Equity Research Analyst)
Okay. Thank you for all the answers.
François Morin (CFO)
Thank you.
Marc Grandisson (CEO)
You're welcome.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Ryan Tunis with Autonomous Research. You may proceed.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
Hey, thanks. Good morning. I guess my first question is, is in MI. It's kind of a follow-up on Jimmy's, but, so on page 21 of the supplement, it looks like you guys give reserves, loss reserves, like, by vintage year. And the dollar amount of reserves in 2021, 2022 looks pretty similar to what it was at the end of last year. Against that, you've, you continued to release quite a few, over $100 mil. I guess I was just trying to square that a bit. Like, where exactly have these releases been coming from?
François Morin (CFO)
Just to clarify, I'd say, Ryan, that the reserves, we don't disclose the reserves by year. We show the risk in force. We give you the total dollar amount of reserves as of, you know, you know, $403 million at the end of the quarter, and the same at the end of the year. There, there are some shifts between, you know, between what was at year end versus now. I will say that most of the reserves that we've, you know, you know, the reserves releases in the first six months of the year, have been coming primarily from the 2021-2022 years. I mean, and a little bit of 2020 as well.
Marc Grandisson (CEO)
Ryan, what you're seeing is also recognition by the MI group, that there were more uncertainties and, you know, potential recession fears. There's a lot of things going on. The assumptions when you do reserving in the long term at that time, you know, you'll tend to increase because of the, you know, increased level of risk. I think that also could explain why, while after two, three quarters, well, we don't need them all, it's because things are also, as we know, changing for the better as we speak on the MI group. That could explain a little bit why it's a bit higher this quarter.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
Got it. Maybe just some perspective on kind of where the ultimate loss ratios on those years are now trending at?
François Morin (CFO)
Well, they are, I mean, they turned out to be really, really good. I mean, the reality is, you know, with even with COVID and kind of what transpired, you know, after that and the forbearance, et cetera, you know, I'd say again, we've talked historically about a long-term average loss ratio in the 20%-25% range. We're certainly gonna be below that. Still a little bit, we're not there yet, but, I mean, there still has to be, you know, we need more clarity on, you know, how the remaining delinquencies are gonna settle or whether they're gonna cure or not. Where we're at today, I'd say we're gonna be below the long-term average.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
Got it. Just a follow-up. Go ahead, sorry.
Marc Grandisson (CEO)
Right. Just to let you know, in terms of loss emergence in MI, it takes a little while, right? It takes 2 or 3 years for losses to start emerging. It takes a little while to get to know what the ultimate is going to be. I just wanna make sure, you know, it's not like a one and done. It's, you know, you generate an underwriting year, takes 2 or 3 years for, you know, for losses to start to emerge, right? Situations, family situations, economic situations, and the borrowers evolve over time. Just wanna make sure you know that it's not.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
Yeah.
Marc Grandisson (CEO)
Just because nothing has happened yet.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
Yeah, I'm still trying to figure this business out, so appreciate it. Follow up, I guess, for Marc, just on P&C. I'm not sure there's ever been a cycle where like, when rates started to decelerate, they re-accelerated?
Marc Grandisson (CEO)
Yeah.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
Why hasn't that happened before, in your experience?
Marc Grandisson (CEO)
Well, no, it's happened before, Ryan. It's happened before. It's happened before. From 1999 to 2001, we had 2002, 2003, 2004, actually, we had a hardening market on the liability side in the U.S. We had new lines of business, such as terror and aviation, going through the wringer. We had that going. I remember a period of time when Arch was on the way cat for the first 2, 3 years of its existence, and we were sort of the eye going against the grain. Most people were shying away from casualty and doing more property. Then we ran into KRW in 2005, and then we had a hard market as well in property. I think it helped maintain even the business on the liability lines a bit longer.
If you look back, the years, 2006, 2007, 2008, were still very, very good, and the price decrees were not as probably as high as they could have been otherwise. I think the one factor with these kinds of hardening market on the property side is just competing, it's competition for capital, and I think it also helps, you know, buffer or, you know, tame down the rate decrease that would have otherwise have happened. That's an important or, you know, or rate stabilizing more than just going down first. We've had this before.
After Katrina, correct me if I'm wrong, there was, like, one year of really good rate, and there was quite a bit of supply that came in, and that was kind of it. I'm just kind of trying to contrast from a reinsurance standpoint, how the supply-demand balance looks today, sort of a year after Ian, versus how it did a year after Katrina.
François Morin (CFO)
It hasn't changed a whole lot. We hear from our third-party capital team and the market. I mean, you hear from other markets. I think that there's a general more leveling off of capacity that's been deployed than we would have expected from the existing incumbent, which helps explain a lot of the price increase that we've seen in our ability to flex into this. We're not seeing or hearing, you know, supply increasing for a while. I think that there's still a very much the money that was there before, that presumably was requiring lower returns, has not returned back to the table. Even if they were to come back to the table, what we hear is their return expectations, like ours, have increased dramatically. We'll see where that, where that ends up.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
I guess just lastly, what are you-
Marc Grandisson (CEO)
Yeah.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
What are you paying the closest attention to thinking, like, looking forward into 1/1, kind of what might drive pricing when we get to the end of the year?
Marc Grandisson (CEO)
Well, activity, cat activity, of course, and demand increasing. Demand, people, like we said before, needing to buy more or having to bite the bullet and do the right thing at the same time as they're improving their insurance portfolio. That's the big tell for us.
Ryan Tunis (Managing Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Brian Meredith with UBS. You may proceed.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Hey, thanks. A couple questions here for you. First, just on your PML, what is your peak zone right now? Is it still Northeast?
Marc Grandisson (CEO)
It's Flagler County, Florida.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Where is it? Pardon me. Florida?
Marc Grandisson (CEO)
Florida.
François Morin (CFO)
You know, by Flagler County, Dade, Miami-Dade area.
Marc Grandisson (CEO)
Broward.
François Morin (CFO)
Broward, got it.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Okay. Then on the PML question, I'm just curious, you gave us 1 in 250, but how has your kind of 1 in 50 and 1 in 100s kind of increased, you know, over, you know, since, call it, the beginning of the year? Is it they increased more or less, about the same amount? Just trying to get a sense of where you're playing in programs.
Marc Grandisson (CEO)
Yeah, from a peak zone perspective, it's gone up similarly in terms of %. It's a very similar increase.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Gotcha, that's helpful. Marc, just curious, I know there was a lot of, you know, one-off type transactions, top-up programs that happened in the Q2. Can you give maybe some perspective on, you know, how much of that contributed to your growth here in the Q2, and, you know, how much is kind of continuing here going forward? Just so we can get a sense of, you know, how, how is this growth sustainable here for the remainder of the year, maybe, you know, into 2024.
Marc Grandisson (CEO)
Yeah, we've had a couple of programs, for instance, on the issue that we won. We've had a couple of big trends, but I don't think this quarter is necessarily a large transaction quarter, Brian, the way you make it sound. I think it was more, you know, more regular growth. A couple of transactions here and there, but nothing to the extent that when we talk on the call, as François mentioned in his remarks, that it has to, you know, highlight a specific report. I don't think there's nothing really to highlight in this quarter, actually.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Good. Thanks. I guess the last one, just quickly here. You know, one of your competitors talked about, you know, reducing market share in the MI business because of some concerns about potentially recession here going forward. Maybe give us your kind of perspective on what you're seeing right now in your MI and, you know, kind of outlook and potential for, you know, some higher loss ratios there if we do go into recession as we look into 2024?
Marc Grandisson (CEO)
Yeah, I think pricing has improved over the last 2 years, and credit quality stays really, really beautiful. It's one among the best, you know, if we go back to 2013, 2012, in terms of quality of origination. As you know, credit is not readily available. The availability of credit is still pretty tight out there. From a credit quality perspective, Brian, it's as good, you know, it's a really, really solid marketplace. I think the market share question, which we never, you know, we don't lose sleep over this, as you know, Brian. I think a couple of things.
In the market share that we're trying to do, in terms of shaping the portfolio in the MI, is trying to get the higher quality, like I mentioned in my remarks, lower FICO, a higher FICO or lower LTV, and also geographically go to the places where there's less perceived inflation or an overvaluation. Also, there's some different programs that have different returns, meaning they're less than we would have hoped for them to be, and they just don't meet our threshold. Especially, Brian, if you overlay the opportunity set that we have on the property side, it just makes for our fellow folks in MI willing to take the earnings that they generate and give it to us on a P&C side to generate, you know, even better returns. Pretty good return business, Brian.
It's just also for us, a matter of comparative, you know, ROEs as well as, you know, absolute.
Brian Meredith (Managing Director and Senior Equity Research Analyst)
Great. Thank you.
Marc Grandisson (CEO)
Sure.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Meyer Shields with Keefe, Bruyette & Woods. You may proceed.
Meyer Shields (Managing Director and Senior Equity Research Analyst)
Thanks. Quick question to start. The level of reserve releases in reinsurance is lower than it's been in recent quarters. I was hoping you could give us some color. Is that because you're assuming higher loss trends, or are there other factors that may have played into the quarter's results?
François Morin (CFO)
I'd say it's, I mean, we look at the data, right? I think some quarters there's, you know, evidence that we can release a bit more. This quarter, maybe, you know, not as much. You know, it's a process that we go through every quarter. I think our underwriters and our actuaries kind of sit down and take a look at, you know, the respective treaties and come up with a point of view on whether there's, you know, enough evidence to release reserves. I wouldn't read too much into it right now. I think it's a, you know, just, you know, another quarter still. You know, we think healthy reserves, healthy reserve releases, but not as much as you said, as in prior quarters.
Meyer Shields (Managing Director and Senior Equity Research Analyst)
Okay. No, that's, that's fair. Second question, I'm really not sure how to ask this, but there's a lot of chaos right now in US personal lines. Arch has always been really opportunistic. I was wondering if there's a way that in, in a line of business that's so dominated by major players, but you do have this level of instability, is there an opportunity for Arch?
Marc Grandisson (CEO)
I think it's a hard one, Meyer. I think that our shareholders, I mean, we could always see what we could do there, but from my perspective, I think we're more of a B2B and more of a commercial provider of insurance and specialty provider of insurance. You know, certainly on the reinsurance side, we're helpful. Our companies, a lot of companies are homeowners, homeowners are writers, and we do provide significant capacity for them, be it on a per share basis or excess of loss and also beyond property.
I think our game plan on homeowners is more to support the clients that we have, because I think on the long-term basis, it has a set of characteristics, as we all know, and focus that is not necessarily core to what we do every day, you know, rate filing and everything else in between. It's a bit of a different animal for us.
Meyer Shields (Managing Director and Senior Equity Research Analyst)
Okay, understood. Thanks so much.
Marc Grandisson (CEO)
Great.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Yaron Kinar with Jefferies. You may proceed.
Yaron Kinar (Equity Research Analyst)
Thank you. Good morning. With most of my questions already asked and answered, I figured I'd maybe focus on a couple more esoteric items.
Marc Grandisson (CEO)
Thanks.
Yaron Kinar (Equity Research Analyst)
First, on agg covers. Can you maybe talk about how much you're still writing in 23 versus 22?
Marc Grandisson (CEO)
We've cut our agg book significantly, over the last 12 months. You would say even in 2022, we started cut already as we saw this. Again, it's a matter of opportunity, right? I think we do some, we've cut the book heavily because of the better, frankly, better opportunities on the excess of loss occurrence. Much better, yeah.
Yaron Kinar (Equity Research Analyst)
Is the client base there, has that changed at all? Can you maybe talk about the mix between large globals, smaller regionals?
Marc Grandisson (CEO)
We said, well, we've had a. The way we grew, of course, in Florida was, as you know, is, is a, is a different kind of animal because of all the pops of the small companies out there. In general. I would say that our portfolio will opportunistically grow into the larger, global companies. We tend to think that they're relatively not as, there's less transparency or visibility into what they write. Our tendency is to be more of a super regional, you know, businesses and more ones that have a lesser footprint in terms of state. We think we can better allocate capital. This is sort of a high level philosophy that we've had for years, that hasn't really changed, Yaron.
I think that we prefer to grow with these, with these clients over time. I think that all this opportunistically, being on a core share basis of excess of loss, if it's a large corporate, we definitely were able to provide more capacity because they needed it, as we speak, and the price, we believe, reflected the, I think, the higher level of risk that they had. I think I would say same as before, with a little bit opportunistically on the larger companies.
Yaron Kinar (Equity Research Analyst)
Got it. If I put this together then, and we look at the very large cat activity that has really been incurred much more by the primaries here. With the changes in terms of conditions and maybe tighter, or more limited, cover for per peril, ultimately, how does that impact agg covers kind of later in the year? If, let's say, the primaries had a lot of cat losses on perils, secondary perils that are now no longer covered by reinsurers, at least not per event, ultimately, does that also flow into the agg covers that will not be breached on a reinsurance level because of that?
Marc Grandisson (CEO)
I think an agg excess of loss is very similar to an occurrence. If you do change terms and conditions and cut the coverage at the underlying portfolio level, it will have a leverage impact into your agg excess or occurrence, meaning it will definitely cut down the loss expectations heavily through these layers. What I will tell you, Yaron, is we're not there yet, right? This is the early innings, like I mentioned to you before on the call, is that we're gonna have. The phenomenon you just talked about, we'll have a much better perspective and view on this and the impact it's gonna have on the losses next year and into 2025.
I think right now we still have a portfolio that hasn't gone through quite 100%, right, of all these things that, that, that you and I expect to happen, I think, in the marketplace. The agg excess of losses, for that reason, probably still a bad bet in 2023, right? We probably need to see this underlying change in terms and conditions on the insurance portfolio before we can see this being a potential viable product.
Yaron Kinar (Equity Research Analyst)
Makes sense. Well, great, I appreciate the answers.
Marc Grandisson (CEO)
Sure.
Operator (participant)
Thank you. I'm not showing any further questions at this time. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.
Marc Grandisson (CEO)
From Bermuda, I want to wish everybody a good month of August, and we'll see you in the fall. Thanks for your support.
Operator (participant)
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.