Arch Capital Group - Earnings Call - Q2 2025

Executive Summary

• Strong quarter with broad-based growth and clean underwriting: total revenues rose to $5.213B, GAAP diluted EPS was $3.23, and operating EPS was $2.58; BVPS increased 7.3% QoQ to $59.17, driven by investment gains and underwriting profits.
• Clear beats vs S&P Global consensus: operating EPS $2.58 vs $2.30* and revenue $5.213B vs $4.268B*; operating ROE at 18.2% underscored resilient profitability despite higher taxes from Bermuda’s new corporate tax, estimates*.
• Reinsurance delivered record pre-tax underwriting income ($451M) on lower cat load and favorable prior-year development; mortgage remained a steady diversifier with $238M underwriting income despite lower NIW; insurance grew NPW 31% aided by MidCorp/Entertainment acquisition, with integration on track.
• Stock drivers: magnitude of revenue/EPS beat, 7.3% QoQ BVPS lift, continued capital return (repurchases in July too), and commentary pointing to NII growth and selective Florida cat growth; watch higher effective tax rate and reinsurance attritional losses noted on the call.

What Went Well and What Went Wrong

• What Went Well

  • Reinsurance outperformance: underwriting income rose 23% YoY to $451M, with loss ratio improvement to 54.1% and lower cat points (5.5 vs 10.0 prior-year) plus stronger favorable PYD (3.9 points).
  • Book value and investments: BVPS grew 7.3% QoQ to $59.17; pre-tax NII rose to $405M and total investment return was 3.09% in Q2.
  • Management discipline and cycle management: “disciplined underwriting…paired with dynamic capital management” and data/analytics capabilities highlighted; CEO: “This…positions us to consistently generate superior returns across market cycles”.
  • Operational scaling: announced two new global capabilities centers in India (Trivandrum, Pune; Hyderabad coming), supporting analytics/technology/operations across businesses.

• What Went Wrong

  • Reinsurance attritional losses: CFO cited items like the Air India crash and refinery explosions as drivers of higher attritional in the quarter vs unusually benign prior-year comp.
  • Higher taxes: effective tax rate on pre-tax operating income rose to 15.2% (vs 9.5% prior-year) due to Bermuda’s new corporate income tax.
  • Insurance segment loss ratio rose (59.8% vs 57.3% YoY) with 2.9 pts of cat and mix/MidCorp effects; combined ratio 93.4% (up 0.8 pts YoY).

Transcript

Operator (participant)

Good day ladies and gentlemen and welcome to the second 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 call, Mr. Nicolas Papadopoulo and Mr. François Morin.

Nicolas Papadopoulo (CEO and Board of Director)

Good morning and welcome to Arch's second quarter earnings call. We are pleased to report another solid quarter with after-tax operating income of $979 million resulting in an operating earnings per share of $2.58. On a year to date basis, we have grown book value per share by 11.4%, a strong outcome that reflects our focus on execution and long term value creation for our shareholders. We achieved this result by staying true to our core principle of cycle management where we actively grow our writings in lines of business that offer attractive returns while selectively reducing exposure in areas where risk adjusted returns fall short of our targets. This disciplined underwriting approach paired with proactive capital management positions us to consistently generate superior returns across market cycles. P&C market conditions were largely consistent with the first quarter.

Some sectors are seeing increased price competition while others continue to achieve rate improvements in the current environment. Much of our growth is because of the strength of our relationship with distribution partners and insureds. This not only reflects Arch's increased scale, but also the increased relevance of our platform, one built on a broad and flexible set of capabilities. Underwriting expertise supported by our advanced data and analytics capabilities enables us to deliver valuable insight and innovative solutions that help our customers achieve their ambitions. Ultimately, the strengths of our relationships, our commitment to consistently deliver meaningful customer value, and our ability to respond quickly to changing market conditions are significant differentiators in today's environment. As we've discussed on previous calls, there isn't one underwriting cycle but many.

This principle was reinforced last month when Paul Gray, Arch's former chairman and one of its founders, spoke to a gathering of our top leaders. It was a unique opportunity for our newer team members to hear directly from someone whose vision continues to influence our culture and operations. In addition to sharing stories from Arch's early days, Paul reminded us of the enduring value of a diversified platform, a core part of Arch's original vision. He explained that the insurance market is comprised of 1,000 points of light, each representing a potential opportunity. While the intensity and location of some of those lights may have shifted in today's underwriting environment, many continue to shine. Our role, as always, is to find those with the greatest potential. Our message is the PNC industry still presents meaningful opportunities for disciplined underwriters to generate attractive risk-adjusted return on capital.

Now I will briefly walk through segment performance starting with our Property and Casualty Insurance Group. Underwriting income for the quarter was $129 million and net premium returns surpassed $2 billion, up 30.7% from the second quarter of 2024. This growth was largely driven by acquisition of the US middle market and entertainment businesses which contributed $451 million in net premium return. Organic growth outside the acquisition was modest. We remained focused on integrating the new unit with client retention and portfolio optimization, progressing in line with expectation. Growing our presence in the small and mid-sized market is central to our strategy. Elsewhere in North America, rate increases broadly offset loss trends. We saw selective growth in casualty lines, particularly in alternative market, ENS casualty and large account casualty where pricing continued to outpace loss trends. However, competitive pressure persists in ENS, property excess, DNO and cyber.

While pricing in excess DNO and cyber appears to be stabilizing, we are maintaining a cautious stance and prioritizing margin over volume in these lines. Internationally, our Lloyd’s and London market business are experiencing increased but rational competition. Our long-term investment in establishing a leadership position at Lloyd’s continued to yield strong results reflected in favorable signing and our ability to attract top-tier underwriting talent. The reinsurance segment delivered strong second quarter results generating $451 million in underwriting income on over $2 billion in net premium return. The underlying business is attractive with gross return premium increasing 8.7% compared to the second quarter of 2024. We grew our casualty reinsurance premium year over year supported by selective new business and rate improvements. We also expanded our property catastrophe ratings, particularly in Florida where we identified attractive risk-adjusted returns and responded to increased clients’ demand for additional limits.

Specialty lines remained a strategic focus and our teams bound several new opportunities this quarter. That said, our property portfolio other than cat excess of loss contracted accidents retained more risk and margin on certain portion of the portfolio fell below our target. We are actively managing our exposure in these areas to maintain underwriting discipline and long term profitability. We were generally pleased with the state of the mid year catastrophe excess of loss renewals. Pricing was slightly down but terms and conditions were stable with primary insurer maintaining high retentions. Overall catastrophe excess of loss margin remained attractive. The broader insurance market continued to exhibit discipline. We are growing selectively focusing on areas where margins are attractive. We are committed to pursuing the brightest opportunities, those offering the strongest risk adjusted return. Our mortgage segment delivered $238 million of underwriting income in the second quarter.

Mortgage originations remained relatively low reflecting the impact of higher mortgage rates on affordability. Still, the strength of our global in force portfolio and high persistency allows the mortgage group to provide steady profitability and valuable earnings diversification even with lower volumes of new insurance written in recent years. Despite ongoing economic uncertainty and low origination activity, we remain confident in the quality and durability of our in force portfolio which is a core driver of our mortgage earnings. Investable assets grew 4.4% in the second quarter, benefiting from our strong premium growth and cash flow. Net investment income was up 7% from the first quarter to $405 million. With overall yields remaining elevated, Arch's ability to dynamically adapt to multiple underwriting cycles continues to set us apart. This is a function of both our founding principle and a culture that prioritizes and rewards underwriting profit over premium volume.

Even in a competitive environment, our global diversified platform offers many points of light for our underwriting teams to pursue. For a company with a strong underwriting culture like Arch, this remains a market where we can deliver differentiated performance and maximize long term shareholder return. I will now turn the call over to François who will provide more details on the financial results before we open the line for your questions.

Francois Morin (EVP, CFO, and Treasure)

Thank you, Nicholas, and good morning to all. Last night we reported our second quarter results with after-tax operating income of $2.58 per share, resulting in an annualized operating return on average common equity of 18.2%. These operating earnings, combined with a high level of realized gains, solid contributions from our equity method investments, and a noticeable appreciation in our fixed maturities investment portfolio, resulted in our book value per share growing by 7.3% in the quarter. Similar to last quarter, our three business segments delivered excellent underlying results with an overall ex cat accident year combined ratio of 80.9%, down 10 basis points from last quarter. Our underwriting income included $139 million of favorable prior year development on the pre-tax basis in the second quarter, or 3.2 points on the overall combined ratio.

We recognized favorable development across all three of our segments and in many of our lines of business. The most significant improvements were once again most seen in short tail lines in our reinsurance segment and in mortgage due to strong cure activity. Current year catastrophe losses at $154 million net of reinsurance and reinstatement premiums were slightly below last year's level for the same quarter and were primarily the result of severe convective storms in the U.S. This is the fourth and last quarter where we are separately reporting the contribution of the Mid Corp and entertainment unit to the insurance segment. Financial results for the quarter: Net premiums written for the acquired businesses were $451 million, contributing 28.9 points to the reported year-over-year premium growth for the segment and generally consistent with last quarter.

The strong premium volume this quarter reflects the seasonality of the business, with the second quarter generally having the most significant renewal activity. We are now on track to write slightly more than $1.5 billion of annualized premium for the first year of owning this business, which is slightly higher than the forecast at the time of the acquisition. The inclusion of the acquired business in the segment's results increased the current accident year ex cat combined ratio by 40 basis points. This can be further broken down to include the other operating expense ratio that was lowered by 40 basis points, the current year acquisition expense ratio that was lowered by 20 basis points due to the write off of deferred acquisition costs for the acquired business at closing under purchase GAAP.

As expected, this benefit has become less significant as policies written before the acquisition date have rolled off and the accident year ex cat loss ratio that was 100 basis points higher reflecting the underlying results of the acquired business. The reinsurance segment produced its best quarter ever in terms of pre tax underwriting income reflecting the underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity. Of note, the 5.8% growth in net premium written in the quarter was muted due to the timing of certain ceded premium accruals. The effect of this change in timing was to reduce our net premiums written in the property catastrophe line of business by approximately $94 million this quarter. We expect to record an equivalent offsetting benefit in net premiums written next quarter.

Overall, this item should not have a significant impact on net premiums earned. Once again, our mortgage segment delivered another very strong quarter with underwriting income of $238 million. We note that these results reflect the completion of tender offers for two Bellamy Re securities at a one time cost of $15 million. We expect that this expense will be recouped through lower levels of ceded premium over time, mostly through the end of 2027 and will ultimately result in a net economic benefit to us. The delinquency rate for our USMI business decreased slightly to a very low 1.93% as new notices of default were more than offset by strong cure activity. On the investment front, we earned a combined $567 million from net investment income and income from funds accounted using the equity method for $1.50 per share.

Pre tax net investment income in the next few quarters should grow in line with the size of our investment portfolio. As our portfolio book yield and new money yield have converged in the last few quarters. Income from operating affiliates was comparable to the amount in the same quarter last year with contributions from both COFAs and Summer's REIT. Cash flow from operations remains strong at approximately $1.1 billion for the quarter as of January 1. Our peak zone natural catastrophe PML on a single event 1 in 200 year, 1 in 250 year return level on a net basis increased slightly to $1.9 billion and now stands at 8.6% of tangible shareholders equity. Our PML remains well below our internal limits.

On the capital management front, we repurchased $161 million of our shares in the month of July in addition to the $360 million worth of common shares repurchased this year through the end of the second quarter. In closing, our strong balance sheet, affirmed by a recent credit ratings upgrade, and our diversified platform position us well to deliver superior results in the periods ahead. With these introductory comments, we are now prepared to take your questions. Jenny.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing STAR 1 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 1 to ask a question and we'll pause for just a moment to allow everyone an opportunity to sign up for questions. Our first question comes from Elyse Greenspan from Wells Fargo Securities. Your line is now open.

Elyse Greenspan (Managing Director and Senior Equity Research Analyst)

Hi. Thanks. Good morning. My first question is just on the insurance segment. You know, if we back out, MC growth was around 2% in the quarter. It feels like, based on commentary, the market was stable. Maybe that's about where you guys are running in the short term. I know obviously there's a lot of business lines that triangulate into that number, so we're just hoping to get kind of a forward view just on premium growth within the insurance segment, unlike, you know, the XMCE piece.

Nicolas Papadopoulo (CEO and Board of Director)

Yes, it is. Good morning. Yeah, I think so. The story here is that again we, as I described in my opening remark, we are pivoting where the opportunities are and kind of, you know, heading out where we think the business is less attractive. This quarter I think we like the casualty line, so I think we grew in the casualty lines and I think we grew in international business and we have a big book of professional lines. As those market conditions were more competitive and more difficult to trade, that had a negative headwind on the premium for the quarter. The good news there is that it looks like, you know, the rate decreases on both, you know, excess D&O and Cyber are leveling off. I think we, you know, as we look to the future, I think I do not have a crystal ball, but, you know, we think the favorable wind on the casualty should support additional growth. That is all I can say.

Elyse Greenspan (Managing Director and Senior Equity Research Analyst)

Thanks. My second question was just on capital, it sounds like, right, François, capital return share repurchase picked up in July. Just kind of looking for current thoughts just around excess capital levels and just willingness, I guess, to lean in to buyback as we go through the third quarter and get into the peak of one season.

Francois Morin (EVP, CFO, and Treasure)

Sure, yeah. I mean, as you've seen, terrific results in the second quarter. Our capital position remains very strong. I think, no question that we're still working hard trying to deploy that capital in the business. That's always our top priority. We still think there's opportunities to do that, but maybe not to the full extent of which, you know, the capital generation we've been able to achieve. No question that capital return is a focus area for us. Something we, you know, no different now than it's ever been. We look at it, you know, on a regular basis with management and the board for sure. You know, no question that capital return in the second half of the year, I mean, we think we'll be there not knowing again what opportunities might be in front of us.

We look at both share buybacks and potentially dividend if we need to. Those will be very much part of that then, you know. Historically we've kind of slowed down a little bit, you know, during the wind season. I don't think we necessarily, you know, we're a different company, I'd say right now. We're going to keep looking at the opportunity in front of us. Certainly at current price levels we find stock to be attractive and be more than happy to buy back as we move forward.

Elyse Greenspan (Managing Director and Senior Equity Research Analyst)

Just my last one, was there any adverse development in the quarter from the U.K. Russia aviation ruling? If it was even small, if you could just let us know the number.

Francois Morin (EVP, CFO, and Treasure)

I mean, no question that we had, you know, we had some adverse in the sense that yes, we increased our OR IVNR for both on the insurance and the reinsurance side. The reality is these, again, we're not big players in that space but you know, the claims that evolved and you know, that was basically absorbed within our IVNR through short tail lines. So what you're seeing and what we'll disclose more of in our 10Q is, you know, no adverse in total. We still have favorable in total. Yeah, we reflected some changes, some new developments in the Ukraine, Russia conflict.

Elyse Greenspan (Managing Director and Senior Equity Research Analyst)

Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Mike Zaremski from BMO. Your line is now open.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Good morning. Thanks. On the prepared remarks made comments about expanding the propcat writings, believe in Florida particularly just, you know, maybe just macro level. I feel like you all have been excellent underwriters and continue to be in propcat. Especially, you know, would you say that expected ROEs are, I do not know if you're willing to kind of put a corridor around them in the 20s, down from the 30s or just, I guess, you know, we get asked a lot about, you know, is can propcat reinsurance pricing continue to decline off excellent levels? The consensus is yes. Just curious, given the rate of decrease over the past year. How do ROEs kind of look in terms of risk reward?

Nicolas Papadopoulo (CEO and Board of Director)

Yeah, our belief is that ROEs are still very attractive. Just to qualify, I think the price decrease, my view is not always across the board. For instance, in Florida, what we've seen is most of the competition is really on the high layer and at this renewal, I think the FHCF moved up their attachment points. There was a need for capacity below the FHCF and about the size of the FHCF. I think, you know, we actually were able to write more below and by the side because we are able to write across the board. Below the FHCF, I think the price decrease was, you know, pretty flat. I think if you look at where we come from, probably a year ago, probably the price where we had gone to 100% rate increases, I think we've seen some rate decrease, but the business remains really attractive as we see it.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Okay, got it. That's helpful. Maybe pivoting to the strategy about growing your presence in the SME marketplace. I know you've been doing that strategically, inorganically. But just curious, maybe you'd be willing to elaborate. Is there kind of a specific pocket that's really high up on the wish list like U.S. retail, traditional main market, or is it kind of a broad appetite to just go, continue going kind of down market more broadly?

Nicolas Papadopoulo (CEO and Board of Director)

I think for us, I think we really start in the mid market. As you've seen with the acquisition we've made of the alliance portfolio, I think that's our sweet spot. We come from the larger account, so I think we had strategic aspiration to grow in the upper middle market. I think that's why the acquisition fits strategically well. I think the strategy thesis behind it, I think it's even more compelling today than it was when we did the deal.

Francois Morin (EVP, CFO, and Treasure)

Yeah. I'd add to that that, you know, while, I mean, truly small business is not an immediate action item, I mean, down the road, who knows where things go. It's a different animal, I think, the technology, the system, the distribution. Let us focus on the middle market acquisition. There's a lot we need to do with it, a lot we want to do with it. We're, you know, things are going well, but it's still early days, so I think there's a lot we can, a lot of value we can generate from that asset and that'll be the focus for the short term.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Okay. Maybe I'll sneak one last one in. Maybe just, I'm going to stick, I guess high level, mortgage insurance continues just to be the gift that keeps giving. You know, we're seeing some data points on your data too, but maybe less so, but delinquency rates going a bit higher, but we're still seeing good, still some levels of hpa. You know, I guess just more broadly, has anything changed over the last couple quarters in terms of the mortgage outlook other than, you know, I think we clearly know the top line in the U.S. is going to continue to be negative, but any macro data points that are kind of changing Arch's kind of viewpoint on a medium term. Basis.

Francois Morin (EVP, CFO, and Treasure)

I wouldn't say anything's changed our viewpoint. Certainly the housing market data has itself evolved a little bit, which was, is maybe in line with how we thought about home prices moving forward. For example, we have shied away or we've been, I think, underweight in certain geographical areas that seem to be, you know, currently under pressure in terms of home prices maybe even coming down in.

Some of those places. That's been part of our, I'd say, approach is to manage our production or manage our new insurance written strategically with, you know, having a focus on where we thought home prices would be more sustainable and less risky, I'd say. That's maybe one data point again. I mean, what's happening, what seems to happen and, you know, what data seems to be in line with how we approach the business going in. You know, bottom line is yeah, we, our portfolio has been constructed to be a little bit kind of, you know, again staying away from the high risk areas. High risk, not only geographical areas but types of loans. So ILTV, high DTI. That's been kind of a little bit, you know, how we constructed the portfolio and so far that seems to be paying off, you know, well for us.

Michael Zaremski (Managing Director and Senior Equity Research Analyst)

Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Cave Mohaghegh Montazeri from Deutsche Bank. Your line is now open. Thank you.

Cave Montazeri (Research Analyst)

My first question is on the Florida market. Can you give us a bit more color? Is it mainly like the port reform from two years ago that are feeding through that's making the market a bit more attractive now? Can you, like, break down a bit more what's making Florida a lot more attractive now?

Nicolas Papadopoulo (CEO and Board of Director)

I think the tort reform has had an impact, I think on the side benefits. We've seen the local companies, you know, attrition loss ratio dropping from, you know, the 50s plus to now in the 20s. The nice thing for us, I think we mostly write excess of loss in Florida. The nice thing for us is that it afford them the money to buy the reinsurance they need to protect the capital. Investors are put in those companies and pay a price that if you buy a limited amount of capacity, you pay one price. As they are looking to buy closer to the 100 or 200 year return, you know, they have to spend more money. I think that is what has made, you know, end the storm. The number of storms that have hit Florida have made the market attractive on an excess amount basis.

Cave Montazeri (Research Analyst)

Thanks. My follow up, sticking with reinsurance, the 5.8% growth you said had a bit of negative impact from the timing point of view of some business that you said was $94 million negative impacts. So does that mean that your premium growth in reinsurance in the quarter would have been double digit this quarter, adjusting for that, and if so, what are the pockets of growth that you were able to just lean on for, lean into for, for reinsurance? I mean, Florida is one of them. Was there anything else that you want to flag?

Francois Morin (EVP, CFO, and Treasure)

Yeah, you're right. I mean again, this timing issue. So it's really something that typically would happen in Q3. It happened in Q2. In terms of stated premium, if you adjust for the $94 million. Correct. The net written premium growth for the segment would have been double digits, you know, slightly higher than the gross written premium growth of 8% or so. Right. So in mine and we bought a little bit less, you know, reinsurance in some pockets. So I mean that's part of the strategy along the way. So I think those two numbers in terms of in premium are aligned. And if you convert more specifically the growth to property cap, you see property cap premium growth, call it, you know, higher than the segment. Right. So 20% range and that, that was really the story, I'd say this quarter I think, you know, we saw some, some attractive opportunities in property cap and you know, the rest. As you know, there's offsetting and other property and other specialty. But you know, a good part of the story would have been in PropCap.

Nicolas Papadopoulo (CEO and Board of Director)

There was, in fact, more demand in the marketplace. I think we were able to secure what we thought was attractive pricing. It's not only, you know, getting market share, it's mostly, you know, being able to go along with the need or support the needs of our major clients as they buy more limits. That's really the big reason for the growth.

Cave Montazeri (Research Analyst)

That's very helpful. Thank you.

Francois Morin (EVP, CFO, and Treasure)

Welcome.

Operator (participant)

Thank you. Your next question is from Andrew Scott Kligerman from TD Cowen. Your line is now open.

Andrew Kligerman (Managing Director)

Hey, good morning. In reinsurance, you mentioned that you're growing in casualty. And I'm kind of curious, you know. On a lot of the calls that. We've heard so far, casualty rates in general, I'll pinpoint them at around 10%. But I'm hearing reinsurance pricing in the casualty area has come down a bit. So I'm wondering if you could give a little more color on what you're seeing on the primary level in various casualty lines and what's happening in reinsurance, particularly for Arch.

Nicolas Papadopoulo (CEO and Board of Director)

Yeah. The story of the casualty business, I think it's mostly quarter share. I think, you know, the story on the primary side and the reinsurance side, as far as the underlying business, is very similar. There, I think we've seen rates, you know, as you said, exceeding trends. I think it makes it, you know, and we are selectively growing both on the insurance and trying to grow on the insurance. I think where you see the difference in market behavior is I think there is a lot of supply on the reinsurance side and it's difficult for many of the market to expand their writings because a lot of the competition is also looking to expand. That translates in terms of conditions and ceiling commissions not changing. Because if you looked at the experience of those portfolios and based on the prior year development, you would route for some of those treaties to have lower ceiling commissions.

Andrew Kligerman (Managing Director)

I see. Thank you for that. Just shifting over to Mid Corp, could you give an update on, you know, where you are in the process of incorporating data and analytics? Is the performance, the underwriting performance, where you've, you know, is it where you expected it and when do you think Mid Corp could kind of pivot to growth?

Nicolas Papadopoulo (CEO and Board of Director)

Yes. I would say that it's a process. It's a long process. The integration is actually pretty much on track. I think we've almost entirely rolled over the book over to Arch, and that's almost done. I think I want to remind you that we're still a year away from the full separation with alliance, so that's hanging there. We feel good about the rollover of the book. We feel good about the team and the underlying business that we've acquired. Again, as I said earlier, the strategic thesis I think is even more compelling in our views.

Francois Morin (EVP, CFO, and Treasure)

I add to that a middle market book. Part of the overall acquisition I think has, you know, the pricing environment is good, is attractive. That is, I would say, exciting for us. I think that is an opportunity for us as we move forward in a, you know, gives us another opportunity set to get into and kind of pursue aggressively. I would say we are excited about that. I mean the platform is there, the distribution is there and that team, the team and then, you know, the rate environment we think will support it. That is the deposit sign.

Andrew Kligerman (Managing Director)

Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Josh Shanker from BofA Securities. Your line is now open.

Josh Shanker (Managing Director and Insurance Equity Research Analyst)

Yeah, thank you. Looking at your commentary about Florida and the general attractions of the property cat market, you can't help but look at the underwriting, see how they've declined. There were some one-off transactions in 2Q 2024. Can you square how much of the business a year ago was just a few unique things that really boosted the numbers and what a normalized year-over-year growth rate might be for the property cat line and the property other line reinsurance?

Nicolas Papadopoulo (CEO and Board of Director)

Yes, I think your question is other property. I just want to make sure. Look at both.

Josh Shanker (Managing Director and Insurance Equity Research Analyst)

I mean the premium volumes are down fairly dramatically from where they were a year ago. You are leaning in, you like the lines. There is a disconnect there. I am trying to bridge that from the cat side.

Nicolas Papadopoulo (CEO and Board of Director)

I think I'll let François explain because I think we talked about it earlier, so we can go there on the other property. I think the comment I would like to make is that it's really, you guys have to understand, it's really a mixed bag of line of business. So, you know, a bit of homeowner, a bit of commercial, you know, it's geographically diverse. You have U.S., Canada, International, you have facultative treaties.

So I think the reduction in other properties this quarter is really driven by, as I said, some students, you know, decided not to buy, some revision, you know, in certain of the subsegment of the book based on the companies not meeting their, you know, their targets because, you know, for instance, E&S, we've seen some drastic reduction and also, you know, a couple of decisions that our team made and one of them is a big deal not to, not to renew a contract. So I think, you know, overall I think the business remains very attractive, but it has to be, has to be managed.

I think this, and I would contrast the experience of the other property with a similar experience we have in specialty where there, you know, it's also a mixed bag of lines of business and there I think, you know, headwinds have been cyber, but this quarter on the international side we were able to land a few large transactions and so we are up significantly there. I think you, you have to, reinsurance as we deploy, we do large deals. I think you have to be able to accept the volatility quarter over quarter, some of it going up. You love it when it goes up, but sometimes it goes the other way. I think that's what happened in other properties quarters.

Francois Morin (EVP, CFO, and Treasure)

Yeah. And just to finish up again on property cap, I mean Josh, once you adjust for this timing issue on the retro prop cap again, call it 20% year over year in that, in the quarter. That's, I think that's a reflection. You know, big picture again, we like both prop cap and property other than property cap, still very attractive business. To Nicolas's point specifically, you know, there's a, you know, the reality there's some transactions that always kind of come back or, you know, change in their form or their substance and, you know, the seasons by less et cetera. That's, that's been, that's truly what happened this quarter. You know, unfortunately can't help you on how the third and fourth quarters are going to look like, but we think there's, you know, it's still a very attractive market.

Josh Shanker (Managing Director and Insurance Equity Research Analyst)

Just in terms of the impact on acquisition cost ratios, did that cause a one time unusual item that we should feature and think about going forward for normalization?

Francois Morin (EVP, CFO, and Treasure)

Not in a big way, you know. Acquisition for reinsurance, you know where you see the variability sometimes is more on the profit commission. I mean the underlying performance of the book will end up having maybe a more, a bigger impact. The fact that these, you know a non-renewal and or growth, I think generally speaking should not have, in and of itself, a significant impact.

Josh Shanker (Managing Director and Insurance Equity Research Analyst)

Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from David Motemaden from Evercore ISI. Your line is open. Thanks.

David Motemaden (Managing Director and Senior Equity Research Analyst)

Good morning. On sticking with the reinsurance segment, the press release had called out some attritional losses, higher attritional losses within the underlying loss ratio there. I'm wondering if you could just elaborate on the nature of those. What lines or was it just, you know, kind of things swing one way or the other, you know, any given quarter, just sort of normal volatility.

Francois Morin (EVP, CFO, and Treasure)

Yeah, I mean there's no question that when we compare year over year, last year was maybe one of our best quarters ever. There's, you know, literally not much that went on in the, call it, large attritional space. This quarter we had, I mean, a little bit of a hit with the Air India crash. We had a couple of refineries that exploded. I mean those make the news and, you know, we don't, we're not here to, and I gotta get into all the details of each one of them but, you know, that explains a little bit the volatility. I mean that's a business, the business word. Right. I think the takeaway is that there's nothing alarming, it's part of the normal volatility in the book. You know, again we go back to our preferred way of looking at it on a trailing, trailing twelve month basis to, I mean, at least temper some of these kind of shocks or kind of events that may or may not happen in a given quarter. That's really the story. A couple of large claims that just happened to take place this quarter and we didn't have those a year ago.

David Motemaden (Managing Director and Senior Equity Research Analyst)

Got it. No thanks. Thanks for that. Makes sense. Also, just sticking with the reinsurance business. I think you called out specialty lines there, remaining a strategic focus and that there were some new opportunities that were bound in this quarter. Wondering if your outlook has changed at all in terms of the growth outlook there, how the pipeline is looking and if you see this sort of growth being sustained.

Nicolas Papadopoulo (CEO and Board of Director)

On specialty I think the headwinds have been really cyber. We had a decent sized book of cyber so that has been on the, you know, pricing pressure. I think that probably, you know, as we not allocated as much capital to the line than we did probably a year ago. I think, you know, again it's a mixed bag of lines of business and a lot of those lines of business, you know, we would like to grow. The question is, you know, are our teams, you know, doing the work they need to do to generate those opportunities. We landed a couple this quarter. I think we want to do more, I mean, but in a competitive market it's sometimes hard to find new opportunities, new business at heart. I think I'm positive on the outlook. Whether we find those opportunities or not, I can't tell.

David Motemaden (Managing Director and Senior Equity Research Analyst)

Great, thank you.

Nicolas Papadopoulo (CEO and Board of Director)

Welcome.

Operator (participant)

Thank you. Your next question is from Alex Cott from Barclays. Your line is now open.

Alex Scott (Equity Research Analyst)

Hi, I wanted to ask about the insurance segment and I guess just wanted to see if you could provide an update on sort of how far you are through some of the Mid Corp remediation and just maybe high level comments on how we should think about some of the benefits from that which would help margins and the potential offsets from, you know, just thinking through like pricing versus loss, cost, trend, spread and whether there's deterioration.

Nicolas Papadopoulo (CEO and Board of Director)

You know, I think we're going, as I explained earlier, we're going through the integration. I think we feel good about, you know, where we are today. I think the only area I think that I would highlight in terms of performance is probably on the program side. I think we've taken some action on the writing action on the program side that should lead to some performance improvements right over the next 12-18 months. That, that's, you know, that's the only thing that I think you'll be able to see. But we're doing a lot of work. You know that work will be, you know, it will take time but the action on the program, you know, the next 12-18 months you'll be able to see some of the backs.

Francois Morin (EVP, CFO, and Treasure)

Of that, you know, the loss ratio and the expense ratio, I'd say the operating expense benefit that we're getting in terms of scale I think are sustainable. Right. There's no question that adding, call it $1.5 billion of premium to the insurance segment with not necessarily a corresponding amount of operating expense in terms of IT and management, et cetera. That's the benefit that we think is here to stay.

Alex Scott (Equity Research Analyst)

Yeah, that all makes sense. Follow up, I have, so on insurance, are you seeing any changes in just the dynamics with admitted versus ENS and in terms of volume? I mean, if I kind of go back to the, I guess part of the rationale to buy Mid Corp, you guys sort of bought this entity and at some point having more of a presence than admitted may be very helpful. If volume and appetite kind of returns to admitted in a way you could use that growth opportunity. I mean, are we closer to that? Are you seeing any of that kind of opportunity to take some of what was going into the ENS market?

Nicolas Papadopoulo (CEO and Board of Director)

I think the Mid Corp business I think is very different from the ENS business we write today. ENS business we write today I think is very distressed. I think the Mid Corp business is mostly property led, low severity. That business does not lend itself to be in the ENS market. I think the attractiveness of the Mid Corp business is difficult to access, it is limited access. I think we had to buy a platform to become a player in the space. I think we have been trying to be a bigger player in that space for probably the last five or six years. Scale matters and ability to have decent size property limits in the hundreds of millions to solve the problem of the agency network I think is key. Those are two different businesses. The attractiveness of the Mid Corp business is really that it is less subject to cycle and it is more, you have a higher value proposition. The thing you do for the reason is more with the agent and the individual because you provide multi line, you know, and there is one agent. My view is it is a different, it is a different business.

Francois Morin (EVP, CFO, and Treasure)

I mean a little bit related to that, Alex. I think there's, you know, there's still, we still see business flowing into the ENS market. I mean, slightly different again than what would be, what would be middle market to us at least. But yeah, ENS markets are growing, maybe not as fast as they were the last few years. There's some maybe moderation in how much of the business is shifting over because again, as you know, like admitted markets, you need to get rates approved, et cetera. That takes time and some of that work has taken place. You know, admitted carriers are maybe in a slightly better position in some areas to retain that business. You know, ENS market is still, you know, big picture doing well.

Nicolas Papadopoulo (CEO and Board of Director)

Yeah, I think one comment on the ENS side, I think we see, you know, as long as we have this issue with social inflation, then I think we see more of the casualty business flowing into the ENS market because you can write it at your own price with your, you know, a flexible set of exclusions that is not always available in the equity market. I think that that trend will continue.

Alex Scott (Equity Research Analyst)

Thanks.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Andrew E. Andersen from Jefferies. Your line is now open.

Andrew Andersen (Equity Research VP)

Hey, good morning. You had mentioned some casualty pricing above loss trend and I think in the past your view of loss trend was maybe two to two and a half points above CPI and for excess layers perhaps even higher. Can you just provide us with your latest view on loss trends?

Nicolas Papadopoulo (CEO and Board of Director)

Yes, it would be unchanged. I think I would say mid single digit on the primary, double digit on the excess. I think that's what we used and I would say unchanged compared to a year ago.

Andrew Andersen (Equity Research VP)

Thanks. And then just on the mortgage segment, I think some mortgage associations are talking about originations picking up in 2026. You know, are you kind of thinking. About that as we turn to next. Year or are you still envisioning more of a softer market there?

Francois Morin (EVP, CFO, and Treasure)

Great question. I think, you know, as you know, I mean economic forecasts are going to get updated. You know, we still see, you know, at least for the, you know, the next little while, mortgage rates kind of staying where they're at. That's certainly, you know, that's not ideal in the sense of, you know, creating, you know, housing, more housing demand. You know, we'll see. I mean into 2026, maybe things will change a little bit. Maybe interest rates come down at that point and mortgage rates follow. Yeah, I mean that's something we look at very carefully. For the, I mean too early to really have a clear view of. That at this time.

Andrew Andersen (Equity Research VP)

Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Brian from UBS. Your line is now open.

Brian Meredith (Managing Director)

Hey, just two quick ones here. The first one, just following back up on the MC program business. Can you scale it? How much business is that? Did you just start non renewing? I was surprised you said it's another 12 to 18 months before we're going to see the benefits there given I thought you started to get notifications when you close the deal.

Nicolas Papadopoulo (CEO and Board of Director)

Yeah, so I think of the total it's probably a third. I would say a third was program and that's not why we bought, to be clear. We bought, we bought the portfolio for the other two firms so that we've been able to scrutinize. And as you know, Ryan, it takes time. It takes time, you have to put to the end. I think we've mostly taken underwriting actions and looked at the list of firms we could and we knew when the time comes and talking to the MGs to give them enough notice, I think that's where we are. I think expect most of the effects to start in 2026

Francois Morin (EVP, CFO, and Treasure)

And Brian. On that, just be clear on an earned basis. Right. On a written basis, some of these, you know, some of these actions were taken, you know, late last year, early this year. On a written basis, you will start to see some reductions or some, you know, some changes in 2H2025. The full 12 to 18 month on an earned basis is really why that's as these, you know, the earnings kind of take a bit longer to come through.

Brian Meredith (Managing Director)

All right, that makes sense. Thanks. The second one, François, I'm just curious, could you give maybe an update on where we stand with Bermuda tax credits? Not the DTA stuff, but the credits that I know the Bermuda Monetary Authority has been talking about, you know, providing.

Francois Morin (EVP, CFO, and Treasure)

Unfortunately, no official news. I mean, it's certainly being discussed and worked on. We are, you know, hopeful. I mean, we were optimistic really that, you know, we'll come to a good place with the Bermuda government. You know, we love Bermuda. I think the Bermuda government, I know the Bermuda government likes Arch and others being on the island. We are a big part of the community here. It will be effectively, it's a negotiation with not only the Bermuda kind of involved parties, but there's the OECD that kind of has a little bit of some oversight there. We are expecting more development in, call it, the third quarter, kind of late third quarter, and with hopefully some, some kind of actionable items in the fourth quarter for us. We will give you an update next quarter. Right now, I mean, there's nothing official that we know of that we can really share with everybody here.

Brian Meredith (Managing Director)

That's helpful. Thanks. Just quickly too, François, on that one, if indeed these do happen to come through, are they a credit to your taxes or do they sit somewhere else in the P and L?

Francois Morin (EVP, CFO, and Treasure)

What's been talked about in big picture is a jobs credit effectively from the Bermuda government and that would, you know, most likely come through as a reduction to our operating expenses. The tax rate per se would not be impacted, but it would impact, I mean, most, well, all places where we have, you know, operating expenses in Bermuda. For us, it would be in each of our segments because we have Bermuda-based expenses in each of the three segments. It would also impact a little bit our investment income because we, your expenses flow through that. We've got our investment professionals here based in Bermuda. Also would impact our corporate expenses because Nicolas and I and others are based here in Bermuda. That's where it would hit a couple of different spots on the income statement, but would come through again as an offset to operating expenses.

Brian Meredith (Managing Director)

Very helpful. Thanks.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Meyer Shields from KBW. Your line is now open.

Meyer Shields (Managing Director)

Thanks so much and good morning. Two quick modeling questions. First, if we add back the 20 basis points of, I guess, acquisition accounting impact for the insurance segments acquisition expense ratio, is that a good run rate going forward or are the changes in the program business going to change that as well?

Francois Morin (EVP, CFO, and Treasure)

I mean I would start there. I mean, again, the benefits or the impact, call it to the loss ratio as we, as our underwriting actions on the program's business kind of materialized. We'd like to think that, you know, we can get more than that. Exactly when that takes place or when that, you know, again shows up in our underlying performance, it's a little bit, you know, it's not that clear. Right. So we'd like to think that we can do better than that. If not later this year, it'll be in 2026.

Meyer Shields (Managing Director)

Okay, great, that's helpful. And then second, just because midcorp, I think in the past you've talked about having a significant property exposure and a couple of carriers this earnings season have talked about particularly benign weather and low non cat losses. I was wondering if you saw anything like that in the midcorp book.

Nicolas Papadopoulo (CEO and Board of Director)

I think that this quarter was a pretty low cat quarter. I think, you know, when we started we got a little bit unlucky I think with some of the hurricanes and then the fire. I think for the first time this quarter, I think we got a look at quarter. I agree with sentiment here.

Meyer Shields (Managing Director)

Okay, fantastic. Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Jamminder Singh Bhullar from JPMorgan Chase & Co. Your lines are open.

Jimmy Bhullar (Equity Research Analyst)

Hi. The question just differentiating between pricing. Movements versus price adequacy, if you look. Across your business, where is it that you're seeing attractive growth opportunities across reinsurance and insurance versus maybe highlight some of. The lines where you might have been. Active in the past but you just feel like the risk reward is not that compelling.

Nicolas Papadopoulo (CEO and Board of Director)

I think most of the casualty line, as I said earlier, we see price being greater than the loss trends. I don't think the entire, I said this in prior call, I don't think the entire casualty market is attractive to us. There are selected pockets of that market, especially in the excess and surplus side of the market. The more specialty that both on the insurance and reinsurance we have a strong appetite to grow. I think on the insurance our team is very specialized. I think we have high confidence that they'll be able to find the right opportunity. I think on the reinsurance it is really backing the right underwriting teams, people that have expertise in writing the liability portion of those risks that are difficult to price.

I think we also have some ability to grow our retail casualty where we are primary because I think our value proposition, I mean it's a competitive marketplace, but I think our value proposition resonates well with the big retailers and the mid market retailers. I think we like that. As I said in my prepared remark, we have, you know, built in London, I think, a decent franchise and leading capabilities that should, you know, help us continue to grow despite a more competitive marketplace. I think midcap certainly is an area where we think we're still getting double digit rate increases and as we continue to integrate the platform I think we have, based on the value proposition that we have, an ability to grow. In terms of the areas that are more challenged, I mentioned them earlier. Cyber, that's not new. ENS property I think still a very attractive rate levels but the competition is fierce. It's areas that we are watching carefully

Jimmy Bhullar (Equity Research Analyst)

and then on MI, like obviously if rates decline there would be a pickup in growth but do you think a decline. In rates overall would be a positive. For the business or negative? Given that there's a high likelihood that if rates decline a decent amount then persistency suffers and the in force book which is producing very high margins might begin to run off a lot faster. What's sort of an ideal. Scenario for the MI business from a profitability standpoint and how do you view declines in interest rates affecting that?

Francois Morin (EVP, CFO, and Treasure)

Yeah, I think, I mean we do all this work, I mean a function of how much rate, what it would take in terms of rate declines for in force book to have more propensity to refinance. If rates drop, you know, basis points, it's not a big deal for us. I think we see more benefit in terms of homes being more affordable. I think the new production would overtake that kind of, you know, negative in terms of refinancing. If there's a big refinancing boom then, you know, yeah, we pick up that share. It's obviously, we like the in force book a lot. I think it's high quality, it's got a lot of home equity built into those mortgages. You know, we wouldn't mind giving up a little bit of that in exchange for, you know, new business. You know, absent a, I'd say absent a significant drop in interest, I think the in force book will stay with us for quite some time.

Nicolas Papadopoulo (CEO and Board of Director)

Yeah, we have some room in that respect.

Jimmy Bhullar (Equity Research Analyst)

Okay. Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Les Carmichael from Autonomous Research. Your line is open.

Wes Carmichael (Senior Research Analyst)

Good morning. I know we're over time so I'll just keep it to one, but I had a question on reinsurance. From some of our conversations with some industry participants, it sounds like there was a bit of a return of aggregate treaties. I was just curious how you think about your exposure to aggregates and if your appetite at all has changed to write that business.

Nicolas Papadopoulo (CEO and Board of Director)

You know, I don't think so. In anything that's material. By the way, for the record, we always write aggregate treaties, but we, it's a very small portion of what we do and I think yeah, flavor of the day a few years back with aggregate drop down, all the good stuff that you see in software market, we haven't seen a huge comeback and our team haven't, you know, supported, you know, the few that have come to the market. Got it.

Wes Carmichael (Senior Research Analyst)

Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. Your next question is from Elyse Greenspan from Wells Fargo Securities. Your line is now open.

Elyse Greenspan (Managing Director and Senior Equity Research Analyst)

Hi. Thanks. I just had a follow-up, I guess coming back to some of the Mid Corp discussion. I guess, you know, we were talking about, right, just the programs piece of it, which I know is going to have an impact on the margin, but I know when you guys announced the deal, right, the goal was to get this business right in line with legacy Arch, right. Obviously, the 100 basis point drag on the underlying loss ratio in the quarter. Can you just—and it sounds like, right, the program piece will impact next year. Can you take us through, like, should we start to see some improvement relative to Mid Corp, you know, and serving as like a tailwind to that insurance segment underlying loss ratio next year, and then it picks up more steam in 2027. I just want to understand the cadence of kind of the improvement in the Mid Corp margin and the trajectory to get in line with legacy Arch.

Nicolas Papadopoulo (CEO and Board of Director)

Yes. Our long term, you know, thesis for making the acquisition and I think the targeted profitability I think is unchanged. I mean the timing, it's hard to, you know, it's hard to predict. We're doing a ton of work around it preparing, you know, again but I don't have a crystal ball as far as what the market will do, you know, around us. I think the thing we feel good is that the assumptions that we use, I think we'll be able to realize all the time.

Elyse Greenspan (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Francois Morin (EVP, CFO, and Treasure)

You're welcome.

Operator (participant)

Thank you. I am not showing any further questions. I would now like to turn the conference call over to Mr. Nicolas Papadopoulo for closing remarks.

Nicolas Papadopoulo (CEO and Board of Director)

Yeah. I want to thank you all for participating in the call and wish everyone a great summer. Definitely, we need to take some time off. I want to reiterate one more time, you know, we think the market we trade in is very attractive. The challenge, our challenge and a lot of the challenge around this market, is really generating new business. I think that's really it. Again, thank you and enjoy the summer.

Operator (participant)

Thank you, ladies and gentlemen, for participating in today's conference. This concludes the program. You may all disconnect your lines.