The Operator of the Q2 2023 Arch Capital Earnings Conference Call welcomed all listeners and reminded them that certain statements made during the call may constitute forward-looking statements. They also reminded listeners that certain non-GAAP measures of financial performance may be discussed and that reconciliations to GAAP can be found in the company's current report on Form 8-K. Marc Grandisson and Francois Morin were then introduced as the hosts of the call and Marc Grandisson began the call by noting that the company had delivered another quarter of profitable growth.

In the second quarter, Arch Capital Group reported stellar operating results with an annualized operating return of 21.5% and a 4.8% increase in book value of common share. Each segment generated over $100 million of underwriting income in the quarter, and property and casualty net premium written increased by 32%. The insurance clock suggests that the current environment dictates an extended period of rate hardening, which is allowing Arch to maintain good results.

The hard market is being sustained by heightened uncertainty that has created an imbalance in supply and demand for insurance coverage. This is due to macro factors such as COVID, war in Ukraine and increased cat activity, as well as industry dynamics such as inadequate pricing and overly optimistic loss trend assumptions during the soft market. Reinsurance companies have been successful in seizing growth opportunities and increasing their exposure to property cat risk, while their PML remains within their threshold. Despite some lines seeing a decrease in pricing, P&C markets continue to experience rate changes above loss trends.

The company is taking advantage of weakening rates to generate attractive returns, and the mortgage business is doing well due to the lack of refinancing leading to a high persistency rate. The Federal Reserve's rate hikes have had a positive effect on the company's net investment income, which has increased by 22%. The company is able to continue to grow and create book value with strong cash flow and new money rates exceeding the book yield.

The incredible Wimbledon final between 20-year-old sensation Carlos Alcaraz and all-time great Novak Djokovic was an epic match-up that lasted nearly 5 hours, with a pivotal moment of a single game lasting 26 minutes and containing 13 deuces and 7 breakpoints. Marc highlighted that the company's underwriting and investment teams delivered excellent results in the second quarter, resulting in a performance that exceeded that from the first quarter.

The Reinsurance segment saw strong growth in the quarter, with net premium written increasing 47% from the same quarter last year and a combined ratio of 81.9%. The Insurance segment also performed well, with net premium written increasing 18% and a combined ratio of 89.8%. The Mortgage segment had an excellent quarter, with a combined ratio of 15% and net premiums earned in line with the past few quarters. There was also $84 million in favorable prior year reserve development in the quarter.

In the second quarter of 2023, U.S. MI had a strong performance with a delinquency rate of 1.61%, the lowest since the onset of the COVID pandemic. Underwriting income across all three segments was favorable, with current accident year catastrophe losses totaling $119 million. Net investment income was up 21% from the first quarter of 2023, and total return for the investment portfolio was 0.56%. Net cash flow from operating activities was over $1.1 billion, and new money rates for the fixed income portfolio were in the 4.5% to 5% range. Risk management practices remain in place.

The company's capital base is strong and the results of the past quarter set a high watermark. The reinsurance market is still experiencing an imbalance of supply and demand, with estimates of $50-70 billion. The market has found a way to buy coverage, but there could have been more from a reinsurance perspective.

Insurance companies have had to adjust to the pricing levels of the market, and the industry as a whole needs to find a balance between creating capacity for catastrophe exposure through third-party capital and reinsurance protection and improving terms and conditions on the insurance level. Francois Morin believes that the reinsurance segment will have volatility from quarter-to-quarter, but it is still a good quarter with room for improvement. Marc, the CEO of the company, has been successful and has a valuable currency, which he can use to take advantage of organic growth opportunities in the hard market.

Marc Grandisson explains that they are focused on growing their book organically and maintaining their EMI and other nonproperty exposure. He states that they have plenty of opportunities to do this and that any M&A would have to strategically fit beyond the money. He also mentions that their 1-in-250 PML intangible equity was 10.5% at 7/1, which was up from 8.1% at 4/1 and that getting closer to 25% requires an even higher ROE hurdle rate or pricing.

Marc mentioned that the terms and conditions of the market are improving, which is helping to manage cat-related risk better. The PML growth is expected to increase, although it is uncertain how much it will increase by. The pricing for cat is the highest it has been since 1990. Marc also mentioned that the company had been accumulating and growing PML in 2006, 2007, 2008, and 2009. Francois added that the market is balanced in terms of supply and demand.

Marc Grandisson does not have a specific view on this year's hurricane season, but his team has evaluated sea surface temperatures and believe it will be an average or slightly above average season. He believes that the current pricing in the market will be able to handle any deviations from the long-term expected frequency and severity of the hurricane season.

Marc Grandisson states that terms and conditions have improved and primary insurers are absorbing more of the first dollar loss, suggesting a transfer of risk from reinsurers to primary companies. He notes that this is evidenced by an increased amount of facultative team submissions in the first half of the year, not just from E&S property but from other sources as well.

Francois Morin discusses the market psychology and the consumer loan approval process, noting that it is in its second or third year. He explains that the MI business has released a fair amount of the reserves that were put up in 2020, and that the reserve base has shrunk substantially. Morin also comments on the possibility of raising equity if the demand for their business continues to grow.

Francois Morin explains that the company has been able to grow without raising additional capital due to the mortgage unit providing a source of capital and that they have the capacity and low leverage to react to the market as it presents itself. Marc Grandisson then states that from their perspective, most of their specialty lines are seeing rate increases that are getting more pickup in the last quarter or two.

Marc Grandisson suggests that the best proxy for market share is the delta and the PML, which are zones that have increased participation in a wider set of property cat exposure than before. He states that the market share has historically been between 0.5 and 0.8, and is increasing slightly. He recommends using the PML as a proxy to determine market share.

Joshua Shanker and Marc Grandisson discuss the reinsurance clock and the need to reserve money for losses in the insurance industry. Grandisson explains that companies are pricing for a higher inflation ratio and creating a margin of safety. Grandisson also states that Arch has been consistent in its practice of reserving money for losses, though it is more of an art than a science.

Arch is taking a more prudent approach to underwriting and reserving due to the COVID-19 pandemic, and they are not willing to put 25% of their equity capital at risk for a 1-in-250-year event. They have been consistently booking their insurance portfolio and their IBNR ratios have been consistent for the last 3 years.

Francois Morin and Marc Grandisson of Cat Risk discuss how much risk they would be willing to take in the current market. They acknowledge that rates could go up substantially in the future, but they recognize that there could be better opportunities down the road. They also explain that the releases of reserves in the first 6 months of the year have come primarily from the 2021-2022 years, with a little bit from 2020 as well, due to the recognition of uncertainties and potential recession figures.

Francois Morin states that the ultimate loss ratios for long-term reserving will be below the long-term average of 20-25%. Marc Grandisson adds that it takes 2-3 years for losses to start emerging in the MI business, and the economic and borrower situations evolve over time. Ryan Tunis is still trying to understand the business and asks a follow-up question about P&C.

Marc Grandisson explains that the cycle of decelerating and reaccelerating rates has happened before in the U.S. from 1999 to 2001. He also mentions that there was a period of time when Arch was underweight in casualty lines, but they were able to maintain business on the liability line. He then goes on to explain that the rate decreases in 2006, 2007, and 2008 were not as high as they could have been because of competition for capital, which helped buffer the rate decrease. Ryan Tunis then asks about the supply-demand balance and Marc Grandisson states that it hasn't changed since Katrina.

Marc Grandisson and Francois Morin from Argo Group answered questions about their PML (peak zone) which is currently located in Florida. They also discussed how their 1-in-50 and 1-in-100 PML has increased similarly in terms of percentage since the beginning of the year. Brian Meredith from UBS asked additional questions about the PML.

Marc Grandisson explains that the growth in the second quarter was due to regular growth, rather than large transactions. He also states that credit quality remains high, and that the availability of credit is tight, leading to good quality origination. He concludes that the company does not lose sleep over market share.

Francois Morin explains that the lower level of reserve releases in reinsurance in the quarter is not due to higher loss trends, but rather a process that is undertaken every quarter. The underwriters and actuaries look at the respective treaties and decide whether there is enough evidence to release reserves. Despite the lower level, the reserves are still considered healthy.

Marc Grandisson of Arch Insurance Group discussed the opportunity for the company to enter the U.S. personal lines market, which is dominated by major players and currently experiencing chaos. He stated that Arch is more of a B2B and commercial provider of insurance and specialty provider, however they do provide significant capacity for homeowners on a quarter share basis or excess of loss and property. They have significantly cut their ad book in the past 12 months due to better opportunities, and their client base mix is between large global and smaller regional companies.

Marc Grandisson explains that their portfolio tends to invest in super regional businesses that have a lesser footprint in terms of stake. He also states that they prefer to grow with these clients over time, but they are willing to opportunistically invest in larger companies. Yaron Kinar then asks about how changes in terms and conditions, such as more limited cover per peril, could impact aggregate excess or occurrence reinsurance covers. Grandisson explains that if the terms and positions are changed and coverage is cut at the underlying portfolio level, it will have a leverage impact on the excess or occurrence reinsurance covers, cutting down the loss expectations heavily into these layers.

Pembroke, Bermuda's Mr. Marc Grandisson wishes everyone a good month of August and suggests that the impact of the insurance portfolio on potential losses in 2023 may not be seen until underlying conditions in the marketplace change. He also suggests that the phenomenon discussed on the call will have a better perspective on the losses in the future. He concludes the call by wishing everyone a good month of August.

This summary was generated with AI and may contain some inaccuracies.