The operator introduces the Q1 2024 Arch Capital Earnings Conference Call and reminds participants that the call is being recorded. Management warns that certain statements may constitute forward-looking statements and references non-GAAP measures of financial performance. Marc Grandisson and Francois Morin will lead the call.

The company had a successful first quarter with strong underwriting income and an increase in book value per share. They have been able to take advantage of favorable market conditions and establish themselves as a key trading partner. Despite a major industry loss, their disciplined underwriting, long-term view of risk, and diversified business helped them manage the event.

Arch's effective capital management has been a key factor in their success, allowing them to allocate resources to profitable opportunities and invest in their platform. They recently announced their intent to acquire Allianz's US middle market and entertainment businesses, which will significantly expand their presence in this area. The Property and Casualty market cycle is evolving, but Arch's skilled specialty underwriters are able to differentiate themselves and continue to see growth opportunities. Their Reinsurance segment had outstanding results in the first quarter, with strong underwriting income and premium growth. They expect to capitalize on the trend of increased flight to quality as the cycle ages, thanks to their strong in-force book and underwriting expertise.

Arch is a strong and reliable provider of insurance solutions and financial strength to clients, especially during times of market dislocation. The Insurance segment has seen growth opportunities in several lines, with healthy pricing and attractive returns. The Mortgage segment continues to generate solid underwriting income and risk-adjusted returns, with a high-quality portfolio and low delinquency rate. Despite high mortgage interest rates, the company is prepared to increase production when the market improves, but is content with their current situation. Competition within the mortgage insurance industry remains disciplined.

The Investments portfolio grew to $35.9 billion and generated $327 million of net investment income in the quarter. The NFL draft took place and teams with successful seasons have the luxury of selecting players who can fill specific roles and grow into difference makers. The acquisition of Allianz MidCorp is like adding a solid player to a winning team, making the company better today and tomorrow. The quarter started strong with after-tax operating income of $2.45 per share and an annualized operating return on average common equity of 20.7%.

The book value per share for the company increased by 5.2% in the first quarter, driven by strong performance in all three business segments. Underwriting income was $736 million, with significant growth in the Reinsurance segment. The combined ratio for the group was 78.8%, with $126 million in favorable prior year development. The collapse of the Francis Scott Key Bridge had a significant impact on the Insurance and Reinsurance segments, but overall catastrophe loss activity was lower than expected. The underlying combined ratio remained excellent, with the increase this quarter largely due to the Baltimore Bridge collapse.

The company's current quarter ex cat combined ratio improved by 1.4 points from the previous year, due to earned rate changes and lower expense ratios. However, investments in people, data, and technology slightly offset these benefits. The company's peak zone natural cat PML remained flat from January 1, but declined relative to capital. The investment portfolio earned a combined $426 million pretax, with a total return of 0.8%. The company's growing investment portfolio is of high quality and short duration and is expected to continue supporting further growth in investment income. Income from operating affiliates was strong at $55 million.

In the first quarter of 2024, the company's income was boosted by a one-time nonrecurring item related to deferred tax assets. The effective tax rate was slightly lower than expected due to timing of tax benefits. The company is making progress in acquiring US MidCorp and Entertainment insurance businesses and expects the transaction to be moderately accretive to earnings and return on equity starting in 2025. The company's capital base remains strong despite deploying capital for the transaction. During the Q&A, a question was asked about potential dislocations in the casualty reinsurance market.

The casualty market is currently going through a period of uncertainty and price increases due to prior year developments and ongoing inflation. This presents an opportunity for Arch to lean into the market and potentially grow their casualty book of business on both the insurance and reinsurance sides. However, the full extent of these opportunities may take a few more quarters to fully materialize.

The speaker discusses the current psychological belief within the human system and the human interaction in the casualty that people need and know that they need to get more rate to make up for past risks and misses. They also mention the recent Allianz deal and how it fits into their long list of potential acquisitions and additions to their platform. The speaker emphasizes the importance of diversification and being prepared for market cycles by having a variety of areas to deploy capital. They also mention having a wish list of potential acquisitions and being constantly on the lookout for opportunities, with mid market being one of the items on that list.

The speaker responds to a question about the high reported loss from the Baltimore bridge incident in the Insurance and Reinsurance sector. They mention their long-standing involvement in marine liability and their recent acquisition in the London market. They state that the loss is in line with their expectations and cannot comment on how others are reserving for the event.

The company has taken a conservative approach to losses and is still determining who will pay for them. They have booked the losses as IBNR and will see how things develop. There were no material developments in long-tail casualty lines of business and reserves are holding up well. The MI market continues to improve and favorable prior year developments are expected to continue.

The borrower is in good conditions and there are programs in place to help them stay in their homes. There is a lot of incentive for borrowers to stay in their homes and there are tools and resources available to help them make payments and refinance. The Allianz acquisition has been criticized, but Arch has a plan in place to integrate them and improve their operations.

The speaker discusses plans to improve the Arch business, particularly in regards to cultural differences and data analytics. They mention their experience in the middle market and their excitement about investing in the future. In regards to the Insurance segment, they mention a lower loss ratio due to the nature of their business.

The speaker believes that there will be some ups and downs in the business, but nothing out of the ordinary. They mention a slight increase in the underlying loss ratio, but still consider it a good result. The company expects to maintain its cat load of 6-8% for the year. The speaker clarifies that this is for all insurance premiums, not just for the reinsurance segment.

The net to gross ratio for the company has remained consistent over the last few years, despite a slight decrease in the first quarter of this year. The growth in professional lines is attributed to the cyber sector, where the company has been expanding its team and seeing opportunities for growth in Europe. The company believes that cyber insurance is still a favorable market and also helps with other lines of business.

Marc Grandisson, speaking on behalf of the company, mentioned that it is still challenging to obtain coverage in the current market. Rates for directors and officers insurance decreased by 8% in the quarter, but there are still opportunities in this segment. The company is seeing increased competition in reinsurance, particularly in short-tail lines of business. They are responding by evaluating the overall profitability of the business and potentially decreasing their participation or focusing on clients who can navigate the market successfully. Ultimately, it is an underwriters' market at this time.

The speaker discusses the strong results in Reinsurance, attributing it to a great market and the quality of the book in force. They suggest looking at results on a trailing 12-month basis for a more reliable view. Another question is raised about the other income from Somers and Coface, with the speaker clarifying that Coface's results from Q1 will show up in their Q2 numbers. Somers is reported in real-time.

The speaker discusses the correlation between Somers and the Reinsurance book, stating that Somers should closely mirror the performance of the Reinsurance book. They also mention that if Coface reports strong Q1 results, the benefits will flow through to the second quarter. The speaker also addresses the company's excess capital and their ability to deploy it, stating that they have already put capital to work through Reinsurance growth and the Allianz transaction, and will continue to be patient until they find other opportunities to deploy it. The speaker concludes by stating that the company is currently in a good place in terms of capital and has a lot of flexibility.

François Morin, CEO of Allianz, discusses the financial impact of the recent deal with Brian Meredith, an analyst. The deal is worth $2 billion in cash, with $1.5 billion in incremental cash for Allianz. Morin also mentions higher contingent commissions on ceded business and explains that this is mainly due to performance-based commissions on property business. Meredith then asks about reserve development at Allianz's clients and how they protect against adverse development on their cut of casualty quota share business. Morin defers the question to Marc Grandisson, who does not provide a direct answer.

The speaker, Marc Grandisson, discusses the current state of the insurance and reinsurance markets, particularly in Florida. He mentions that there has been some positive impact from recent reforms, but inflation and potential storm activity in the Southeast are also factors to consider. Overall, there is still some uncertainty in the market and companies are trying to navigate these challenges.

The company has existing relationships that will help them participate in the Florida market, which is expected to be well-priced and profitable. The company also believes that the market will remain healthy for the next few years despite recent corrections. The company's approach to cycle management will not be impacted by their diversification into M&A.

When considering M&A deals, Arch Capital Group has a preference for using its own cash rather than issuing stocks due to the potential for dilution. However, the company also has the option to raise debt if needed. The proportion of earnings derived from fee income has increased over the years.

The speaker discusses the difficulty in determining the exact margin of fees earned due to the co-mingling of expenses, but acknowledges that fee income has grown and is an important part of the company's strategy. They also mention that Somers is included in this fee income. The speaker thanks the audience for listening and looks forward to the next conference in July.

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