The conference call is for the Q3 2023 Arch Capital Earnings, and participants are reminded that certain statements may constitute forward-looking statements. Actual results may differ from these statements and investors should review periodic reports filed with the SEC. Non-GAAP measures of financial performance will be discussed and reconciliations can be found in the Company's current report on Form 8-K. Marc Grandisson and François Morin will be hosting the call and hope that everyone is safe and well.

The company had a strong quarter with good performances from all three operating segments, resulting in a 25% operating return and 4% increase in book value per share. They capitalized on favorable market conditions and low catastrophe losses to earn $721 million in underwriting income. The company is well positioned to navigate different insurance cycles by reallocating capital and their underwriters are aligned with shareholders. The current hard market started in 2019 and was paused by the pandemic, but is expected to continue to support profitable growth. The second act of this market introduced Hurricane Ian as a main character, affecting property reinsurers' pricing and risk appetite.

The capital has become more expensive and the industry is facing pressure to meet new expectations from investors. The property market has been a major driver of this market, but there is evidence that casualty rates are underpriced. The third act of the hard market is expected to continue until the industry's reserving issues are resolved and capital rates generate positive results. Arch is well positioned to take advantage of this environment, with their reinsurance group driving growth and a focus on small- and medium-sized specialty accounts in their insurance segment. The reinsurance group had a strong third quarter, with net premium written up 45% from the same quarter last year and a combined ratio of 80%. The insurance group also saw growth in both their North American and international units, with net premium written up 16% over the past 12 months.

The company's underwriting income is increasing due to higher earned premium and a strong combined ratio. Property and short-dated lines are experiencing rate increases of over 15%, while casualty pricing is also on the rise. However, professional liability rates have softened. The company remains positive about cyber pricing and is seeing growth opportunities in the international mortgage market. The investment side of the business is also experiencing positive results due to higher cash flows and a favorable yield environment.

The paragraph discusses the comparison of the current hard market to a baseball game, with unknown duration but a strong lineup. The company remains committed to being good stewards of their capital and following a data-driven approach. They have significant momentum in all three of their businesses and a reliable earnings engine. The team defense has also played a role in their success.

The company has been focused on minimizing errors and executing well on the field to make the most of their offensive production. In the third quarter, they had high-quality earnings and a strong return on equity. The reinsurance segment saw significant growth, particularly in the property other than catastrophe line. The property catastrophe business also had strong growth, even when adjusted for the impact of reinstatement premiums. The segment had a combined ratio of 80% and an underwriting profit of $310 million. The Insurance segment had a strong quarter, with 11% growth in net written premium, except for professional lines which remain competitive. Overall, net written premium would have been 20% higher if professional lines were excluded.

The market conditions for the insurance and reinsurance segment were favorable, resulting in higher returns than expected. The Mortgage segment had a 4.7% combined ratio and saw $98 million in favorable prior year reserve development. The delinquency rate at U.S. MI remained low and most of the net reserves were from post-COVID periods. The underwriting income showed $152 million in favorable prior year development, driven by short cat lines. There were $180 million in current accident year catastrophe losses, with half from U.S. severe convective storms. Pretax net investment income was $0.71 per share, up 11% from last quarter. The total return for the investment portfolio was a negative 40 bps on a U.S. basis.

The company experienced a decrease in net investment income due to an increase in interest rates. However, their cash flow from operating activities has been strong, allowing them to grow their invested asset base. Risk management remains stable and their capital base has grown. The speaker is now taking questions, and the first one is about the January 1 property cat renewals on the reinsurance side and where rates may end up next year.

The team expects some improvements in the reinsurance market for 1/1/24, but not as significant as 1/1/23. They believe there has been a re-underwriting and reallocating of capacity by clients, but it remains to be seen how this will affect the market. The company plans to focus on casualty in the future, but the timing and impact on their reinsurance book is still uncertain. They may see some changes in the liability market at 1/1/24, but it will likely take more time for clients to evaluate their plans and reserves.

The paragraph discusses the potential impact of the current market conditions on general liability insurance. It mentions that the longer-term development of the market may lead to a longer process of softening and hardening. The speaker also addresses concerns about reserves in the casualty market and notes that umbrella insurance is an area of particular concern. They assure that they are actively monitoring the situation and taking proactive measures.

The executives of Arch Capital Group, Marc Grandisson and François Morin, discuss the impact of COVID-19 on their business. They mention that larger accounts will feel more pressure than smaller accounts and that there may be a sense of urgency in this sector. They also mention that 85% of their reserves as U.S. mortgage insurance are from post-COVID years, but they were cautious in setting these reserves due to changes in home prices. They acknowledge that there may be further favorable development as delinquencies cure.

The speaker explains that the recent growth in the insurance industry has been largely driven by the booming housing market, and that the industry is currently in a good place with disciplined practices. They also mention that the pace of insurance premium growth has slowed down in the last two years and may continue to do so due to headwinds in professional lines. The speaker also suggests that they may prefer deploying capital into reinsurance due to its current high returns.

The insurance group is expected to see growth in the line they want to see growth in, and the market conditions are favorable. The duration of the asset portfolio has been shortened, but they may consider lengthening it if interest rates become more attractive. They have room to match with liabilities and will look into it in the coming months. The company is overall positive looking into 2024.

The speaker discusses their positive outlook on the insurance and reinsurance market and their ability to deploy capital into it. They prioritize having enough capital to take advantage of opportunities, and their underwriting units are not constrained by capital. They encourage their units to deploy more capital if they see potential for growth in the market.

During the year, the company allocates capital after writing the business, with 85% allocated to the reinsurance group on the property cat side. There is plenty of capital available, but the market at 1/01 is uncertain. Public D&O and cyber lines are still expected to have healthy returns. This quarter saw high retentions in terms of premium ceded.

The speaker explains that they are retaining more lines of business due to the current hard market and the value of reinsurance. They also mention that their increased capital allows them to retain more net and that they are buying less on liability lines. They still maintain their loss on the cat side and purchase a significant quota share on that business.

The speaker discusses the balancing act between providing relief and information, and how having more capital has helped them take on more risk. They also address the issue of compensating their team for a successful quarter and mention that incentive compensation decisions will be made in February of next year. They will be keeping an eye on this to ensure it does not distort their first quarter results. The speaker also mentions that the Board has final say in how much money will be available for bonuses. The next question is about the attritional loss ratio in the reinsurance segment.

The speaker is asked about the favorable performance year-over-year and if there are any new factors driving it. The speaker responds that they believe reinsurance should be analyzed on a trailing 12-month basis and that their growth in property has helped improve their combined ratio. The speaker is then asked about the recent commentary on casualty reinsurance and what may be causing it. They respond that there are multiple factors at play, including reserve development and social inflation, that are negatively impacting the industry.

The speaker discusses a slowdown in activity and an increase in litigation funding, which is contributing to social inflation. They also mention a need to update information and account for higher inflation in pricing. The industry is reacting to these challenges and addressing them. The speaker then moves on to discuss the investment portfolio.

The company experienced net realized losses this quarter, primarily due to selling fixed income securities to reinvest in higher yields. There were also some losses from fair value option securities, including equities. The potential tax changes that may occur in the future are still unclear and it is too early to determine when they will take effect.

The company has no impact for 2024 and will be evaluating their target tax rate. They will provide more information on the next call, but it is too early to give details. The buying pattern for GL is mostly on a quota share, so there may not be significant changes in the casualty market. The liability side is not as prone to large events as the property market.

In the paragraph, Marc Grandisson and Meyer Shields discuss the reserve problems from older accident years and how it affects the industry's ability to earn in the future. They also mention how the reserving process informs the pricing process and how historically, the industry has been wanting on the rate level side. Bob Huang asks about the improvement in the insurance segment's loss ratio and whether it should have been better given the strong E&S pricing environment. François Morin responds by saying they don't want to be overly optimistic and there is still a lot of risk out there.

The speaker discusses the uncertainty surrounding pricing the business and mentions that they have a conservative approach to initial loss picks. They are hopeful for good news in the future but are currently satisfied with their loss picks. The second question is about the reinsurance core combined ratio, which has been strong due to a shift in business mix towards property. The analyst asks if it is fair to assume that the run rate combined ratio will be closer to the last two quarters and better than previous quarters. The speaker responds that they think about it in terms of the trailing 12 months and that the OpEx is sustainable given the growth, but the loss ratio should not be overemphasized based on the latest quarter. The next question is from Brian Meredith from UBS.

During an earnings call, Brian Meredith asks Marc Grandisson about the decline in market share and new insurance written in the mortgage insurance segment. Grandisson explains that the company is focusing on other areas with better returns and that the market is very disciplined. Meredith also asks about potential improvements in the casualty reinsurance segment and how it may impact acquisition expenses. Grandisson mentions that there may be improvements in ceding commissions, but it is dependent on market conditions.

The speaker discusses the growth opportunities in the reinsurance sector, particularly in the mortgage insurance market. They mention that their acquisition in this area is currently in the mid-low 20s, but it may increase due to a higher ceding commission. They also mention the potential for growth in Australia and internationally, specifically in Europe with mortgage-backed credit risk transfer.

The speaker discusses the increase in capital release transactions due to the implementation of Basel III. They have partnered with a European company to focus on this growing area and provide more capital relief. The risk profile and credit quality of these transactions are favorable, but the speaker does not want to reveal too much to avoid competition. They close by thanking the listeners and wishing them a happy Halloween.

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