Arch Capital Group (NASDAQ:ACGL) Q1 2026 Earnings Call

0:00 Good day, ladies and gentlemen, and welcome to the 1Q twenty twenty six Arch Capital Earnings Conference Call. At this time, all participants are in 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.

0:48 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 the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10 ks for the 2025 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.

1:37 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 eight ks 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 host for today's conference, Mr. Nicolas Papadopoulos and Mr. Francois Morin.

2:23 Sirs, you may begin. Good morning, and welcome to Arch's first quarter twenty twenty six earnings call. We delivered a strong quarter, reflecting both attractive underwriting margin and the disciplined execution of our underwriting and capital management strategies. After tax operating income for the quarter was $9.00 $1,000,000 or $2.50 per share, producing an annualized net income return on average common equity of 17.8%. Today's market is clearly more competitive than in recent years. That said, rates and terms and conditions in aggregate still support strong returns.

3:10 Capturing those returns requires the ability and willingness to actively manage the portfolio across and within lines of business. This is embedded in Arch's operating principles and among our differentiating traits to dynamically add to areas where returns are attractive while declining those risks that no longer provide an adequate margin of safety. Regardless of where we are in the cycle, Arch is committed to generating superior returns for our shareholders. I'll now provide updates across our reporting segments, beginning with Insurance, which generated $66,000,000 of underwriting income in the first quarter. This compares favorably to the first quarter in twenty twenty five that was impacted by the California wildfires.

3:59 Overall, market conditions remained favorable. However, top line growth in the segment was essentially flat in the quarter, reflecting our focus on profitability over volume as competitive pressures increase. Growth opportunities remain across most casualty focused businesses, including excess and surplus line casualty, construction, alternative markets, as well as a number of our London market businesses. Growth was offset by softening rates in a few areas, including large account and excess and surplus lines property, as well as in some short tail lines in London. We also chose not to renew certain program business acquired in the middle market commercial transaction that did not align with our risk appetite or meet our profitability requirements.

4:54 As we have discussed on prior calls, these non renewals are expected to reduce net premium return by approximately $250,000,000 throughout 2026. I also want to note a significant operational milestone achieved in our middle market commercial business. Earlier this month, our team successfully completed the data and system migration of the acquirer businesses from Allianz to Arch owned systems. The ability to complete this effort in just eighteen months speaks not only to the dedication of our teams, but also represents a strong use case for artificial intelligence in accelerating systems and platform transformations. With this significant step completed, the business can now pursue its objective of creating a scalable, best in class experience for clients and distribution partners.

5:47 Our Reinsurance segment delivered an excellent $441,000,000 of underwriting income in the quarter, a significant increase from the $167,000,000 in the first quarter of twenty twenty five, which was heavily impacted by the California wildfires. Rate reductions and increased retentions by our students contributed to a 6% decline in net premiums written versus the same quarter last year. Short term lines, including other property, property catastrophe and marine, were the primary driver of these declines. Strong industry results over the past few years have attracted significant new capacity from traditional markets and third party capital, resulting in a broadly competitive environment.

6:38 Its additional supply continues to put downward pressure on property catastrophe and short term rates while also moderating the push for needed rate increases in some casualty lines. However, underwriting performance remained excellent. Our focused and disciplined underwriting led to the Reinsurance Group's 76% combined ratio, marking the fourth straight quarter of sub-eighty percent combined ratios. Consistent with our cycle management philosophy, our Reinsurance team actively manages the portfolio mix by continuing to write new business that meets our risk adjusted return targets and by reducing our share of business that falls below our minimum return thresholds.

7:26 The mortgage segment delivered another strong quarter with $221,000,000 of underwriting income to go along with $266,000,000 of net premiums written. Mortgage originations picked up modestly in the first quarter, though affordability challenges tied to high mortgage rates and home prices continue to constrain demand. Credit quality across our mortgage insurance portfolio remains excellent, with delinquencies normalizing from seasonally higher levels in the fourth quarter of twenty twenty five. Competition remains disciplined, and we continue to pursue growth through innovation and new product introductions across our global footprint.

8:12 Overall, mortgage performance continues to exceed expectations and provides shareholders with a differentiated and diversifying source of earnings that support long term value creation. Turning to investments, which contributed four zero eight million dollars or $1.13 of net investment income per share in the quarter. The decline in net investment income from the fourth quarter of twenty twenty five was driven in part by lower cash yields, lower qualified refundable tax credit benefits and seasonal compensation payouts. Our nearly $48,000,000,000 in investment portfolio provides a material contribution to earnings and book value growth, effectively raising our quarterly earnings floor.

9:02 In the first quarter, we repurchased $783,000,000 worth of Arch common stock, while still increasing book value per share by 1.7. Our first priority remains to deploy capital into our business. When organic opportunities do not meet our return threshold, we view repurchasing our shares as an attractive use of excess capital, reflecting our conviction in the intrinsic value of the franchise. The Board's recent $3,000,000 increase to our share repurchase authorization underscores its approach to capital allocation. To conclude, Arch delivered another strong quarter by staying true to our principles of disciplined cycle management and by leveraging the strengths of the Arch brand and our diversified platform.

9:55 In today's market, underwriting discipline, powered by insight from our investment in data and analytics, rewarding our underwriter for profit and volume and prudent capital management continues to differentiate Arch and drive long term value for our investors. Arch's twenty five year record of strong return and compounding book value at double digit rates is a direct result of hard work and discipline. That is Arch. That is our DNA. And that is why we believe we will continue to deliver best in class results across market cycle and into the future. I will now turn the call over to Francois, who will talk through the financials in more details. Francois?

10:43 Thank you, Nicholas, and good morning to all. Last night, we reported our first quarter results with after tax operating income of $2.50 per share and an annualized operating income return on average common equity of 15.4%. Book value per share grew by 1.7% in the quarter. Our three business segments once again delivered excellent underlying results with an overall ex cat accident year combined ratio of 82.3%, up 130 basis points from the same quarter last year and consistent with the more competitive environment we are facing. I will provide more color on trends in each of our segments shortly.

11:32 Our underwriting income included $200,000,000 of favorable prior year development on a pretax basis in the first quarter or five points on the overall combined ratio. We recognized favorable development across all three of our segments and in many of our lines of business, but mainly in short tail lines in our P and C segments and in mortgage due to strong cure activity. Of note this quarter, we commuted a large transaction which increased the level of favorable prior year development in our Reinsurance segment by approximately 25% in the quarter. Current year catastrophe losses were $174,000,000 net of reinsurance and reinstatement premiums and were mainly the result of winter storms in The U. S. And The Iran conflict.

12:24 All in, these losses were slightly lower than our seasonally adjusted expectations for natural catastrophes. The Insurance segment's gross premiums written grew 2%, while net premiums written declined 1.4% year over year. As Nicholas explained, the non renewal of certain program business acquired as part of the MCE transaction impacted our top line this quarter. In addition, net premiums written were also impacted by a shift in business mix toward lines with lower net to gross retention ratios. The ex cat accident year loss ratio improved by 70 basis points to 56.7 compared to the same quarter one year ago.

13:14 The acquisition expense ratio for the current accident year increased by 160 basis points as the benefit we observed in the first quarter of twenty twenty five from the write off of deferred acquisition costs from the MCE acquired business rolled off. We would expect the most recent acquisition expense ratio to be more representative of long term expectations. Our operating expense ratio was higher this quarter as we incurred additional expenses related to the transition of our middle market business to Arch Systems. You would expect our operating expense ratio to revert back to a level closer to historical levels during the second half of the year. The Reinsurance segment had an excellent $0.25.04 $41,000,000 in pretax underwriting income.

14:09 Overall, gross premiums written were down by 2.3%, while net premiums written were down by 6% from the same quarter one year ago. Net premiums written were up in specialty, partly due to timing differences and the recognition of certain treaty renewals that impacted our financials in the first quarter of twenty twenty five. Over one third of the decrease in net premiums written in property catastrophe was attributable to a lower level of reinstatement premiums compared to a year ago, which were impacted by the California wildfires. Overall, our ex catastrophe accident year combined ratio of 78.1% is comparable to last year's result for the same quarter.

14:57 Our mortgage segment produced another very strong quarter with underwriting income of $221,000,000 Net premiums earned were down by approximately $6,000,000 from last quarter, mostly driven by lower levels of cancellation premiums in our CRT business. Of note this quarter, new insurance written at USMI reflects a large non GSE transaction of $2,200,000,000 in NIW. Absent this transaction, which increased our NIW by 15%, we would expect our market share of the PMI market to remain relatively unchanged from the prior quarter. The delinquency rate for our U. S. MI business decreased by decreased to 2.06% consistent with our expectations and seasonal trends.

15:49 On the investment front, we earned a combined $568,000,000 from net investment income and income from funds accounted using the equity method or 1.57 per share pre tax, slightly down from the $1.60 per share we earned last quarter. Cash flow from operations remained positive at $1,200,000,000 for the quarter. Our portfolio remains a very high quality with a short duration and in line with our asset allocation targets. Income from operating affiliates was $36,000,000 for the quarter, up from $17,000,000 from the same quarter one year ago, which was impacted by the California wildfires.

16:34 As a reminder, this quarter's result reflects our lower ownership stake in Summers Re since the start of the year. Our effective tax rate on pretax operating income was 14.8%, reflecting the mix of income by tax jurisdiction. It was slightly below the 16% to 18% previously guided range, mostly due to a 1.7% benefit from discrete items. As of January 1, our peak zone natural catastrophe probable maximum loss from a single event one and two fifty year return level on a net basis remained flat at $1,900,000,000 and now stands at 8.2% of tangible shareholders' equity. On the capital management front, we repurchased $783,000,000 of our shares in the quarter or 8,300,000 shares.

17:26 We have repurchased an additional $311,000,000 in shares so far this quarter through last night. Our balance sheet remains in excellent health with strong capitalization and low leverage. With these introductory comments, we are now prepared to take your questions. Thank Our first question comes from Elyse Greenspan from Wells Fargo.

18:21 Please go ahead. Hi, thanks. Good morning. My first question is on property cat on the reinsurance side. I was just hoping to get some of your expectations for the midyear renewals. And then if you expect declines in the book to continue, would you expect your cat load to come down after the mid years? Yes. Morning, Elyse. Yes. So we don't as we always said, we don't have a crystal ball. But for the 6.1%, I think we really expect the market to remain competitive and to adjust underwriting stand based on the actual rate decrease that we will see at that time. So we don't really have a forecast there.

19:22 On the overall trend of the catastrophe portfolio, I think we have huge headwinds because of the double digit rate decrease. And we really as I said it in prior call, we really monitor the property cat through a lens of 50 separate zones. So I think some if I go back two years ago, they were all green. So now we have a bunch of them that are still green. Think Florida is still green, but we have a bunch of them that are yellow and some of them that have turned red. So I think it depending of the where the business renew and perception of the attractiveness of that zone, our underwriting team will make the decision.

20:16 Okay. Thanks. And then on the casualty side, you guys were mentioning still some good opportunities I think on both the insurance and the reinsurance side. Can you just talk through within casualty, where you're currently seeing the best growth opportunities? Yes. I think the we're still optimistic on the casualty, and we think that the pain has not gone through yet. As you may have seen, I think we're still seeing some little development from the year 2016 and 2017, but the most recent years 2021, 2022, 2023, '24, we've seen additional adverse development.

21:09 And so that should, in our view, continue to sustain price increases above trend. So in terms of our risk appetite on the insurance and reinsurance, I think it hasn't changed. I think we like the specialty casualty, the excess and surplus line casualty, primary position on the large accounts. So that's where we play. We are not we stay away from the commercial auto and also the large account excess towers, which we think are still very challenging despite some of the rate increases that we've seen. Our next question comes from David Motemaden from Evercore ISI.

22:04 Please go ahead. Hey, thanks. Good morning. I was hoping maybe just to get an update on the insurance book where we stand just on rate versus trend in both The U. S. And internationally. Yes, good morning. So on starting with The U. S, I think on The U. S, I think we are broadly getting rate at trend. And I think so as I mentioned earlier, we are getting rate above trend on the casualty lines of business. And we are getting detractor on the trend is really the short tail property lines of business where we've seen rapid rate decrease. But when you sum it up for North America, I think we're seeing rate slightly below trend. If you go to international, I think we have more short tail lines on the international book of business. So we're seeing some rate pressure on the short tail lines. So overall, a low one digit rate decrease of over trend overall.

23:29 But we started there with pretty high margins. So we feel very good about the business there. Got it. Thanks. And then I believe you mentioned just in reinsurance some of the supply there and good returns and short tail lines trickling into casualty re. Just wondering, does that change sort of how you're thinking about the growth opportunity there as an offset FRANCOIS to the headwinds on the property side? So on the casualty, on the reinsurance side, I think we're mainly talking about quota shares. I think the as I mentioned earlier, I think we like the fundamental of the specialty casualty business.

24:18 The difficulty there, it's really the selling commissions. I think based on the past experience of the casualty market, ceiling commissions should have gone down, but we get excess supply. I think there's a lot of our competitors wanting to get on that business or increase share on that business. So that allows for the sitting commission to stay flat and on the best account to continue to go up. The sidecars, the latest flavor of the day with the casualty sidecar is just going to add to that dynamic. Our next question comes from Tracy Panjigi from Wolfe Research.

25:04 Please go ahead. Thank you. Good morning. One of the largest primary insurers had said on their earnings call some pretty pessimistic views of property pricing, particularly shared and layered in North America and in London. And the culprit is cheaper forms of capital coming in from NGAs, reinsurers and alternative capital. So from your vantage point, is this a real structural shift in the market? And how does that influence your underwriting appetite? For us, it's more business as usual. So the advantage that we have is that we are not retail large account players. We don't play in that space. So that has been that has gone up. That has coming rapidly going down. So we don't play in that space.

25:53 Play in the excess and surplus line property business. And so that space is getting competitive, and we are taking a very careful approach to that line of business right now. And there was also a recent settlement development early in the second quarter around Francis Scott Bridge collapse. How are you currently sizing the industry loss? And has that pushed your loss estimate upward? So that in that particular case, I think we were holding much more conservative estimates than the loss estimate than the market. So no real change for us. Our next question comes from Mike Duremski from BMO.

26:48 Please go ahead. Hey, thanks. Good morning. In the Insurance segment, the underlying loss ratio continues to show some healthy improvement. Is that if you can kind of talk about some of the drivers, I believe, right, some of the nonrenewals on some programs is, I think, helping that. But if you can kind of talk around the dynamics we should consider? Yes. Good morning, Mike. This quarter in particular was we benefited from a relatively benign amount of activity in attritional losses in London in particular.

27:37 So our international segment or book did very well this quarter. So that explains most of the favorable or reduction in the kind of ex cat loss ratio compared to a year ago. Again, as a reminder, we encourage you all to look at trailing twelve month kind of rolling numbers to kind of get a view on performance of the book. And the impact of the MCD and our renewals is yet to be seen, right? I think it's we're as the business earns out, it's it will show up in the numbers. But at this time, we don't think it will be material. I think it's still a relatively small part of the book. You think of an $8,000,000,000 insurance segment book of business, the impact of non renewing some of these programs will be somewhat immaterial or limited. So hopefully that explains that really the quarter was all about kind of really good performance out of London.

28:38 Got it. And Francois, my follow-up, I think you mentioned on the catastrophe side that this quarter's losses were, I think you said a bit lower than normal and you also added a bit on the Iran conflict. Maybe you can kind of just elaborate on the Iran conflict, how you guys are thinking about that? Is it all IBNR? Are there real losses? You. Yes. I mean there's nothing paid, but it's certainly there are some real losses, specialty book out of London like terror, political violence. I mean those are the some of the lines that are exposed, will be exposed. It's ongoing.

29:24 So we took a first stab at it this quarter based on what had happened and call it in the month of March. But we will expect we do expect more losses to come through in the second quarter. And we'll keep reporting on it. But it's yes, it's ongoing. And the point in my comments was really to communicate that we have been able to absorb those losses in the first quarter as part of our overall cat load even though technically the cat load is only on the natural catastrophe side. So it's a man made, we call that man made cat, but we still report it as part of our cat losses to street and that's kind of included in the overall number.

30:17 Our next question comes from Andrew Kilgerman from TD Cowen. Please go ahead. Hi, and good morning. So I know you've gotten a lot of questions about property. And I'm kind of just to kind of gauge a sense of where we are in the cycle, which you are very good at. I'm wondering if you could share and again, this is blunt. Where are you seeing risk adjusted returns in property cat catastrophe reinsurance? I know there are, you know, different layers and risk online, etcetera. But, like, if you had to gauge a risk adjusted return range, what are we seeing today? And maybe maybe the same question with the E and S property that you've been writing.

31:08 And so the way you have to understand is that, as I explained, we Property Cat, we manage very dynamically based on the actual underlying profitability we see in 50 zones. So we said earlier that two or three years ago, we were in the 30s. I think the business we have on the book today is still in our mind very attractive because, again, we're not writing some of the business that we think has fallen below the threshold for us to write the business. So we think the business it's a different mix than it was probably three years ago. The mix has shifted, but the business that we have today remains attractive on our book. So and we are still in the high teens, I think.

32:03 I see. I see. But it sounds And on the like E and S Yes. Go ahead. Following up on that, Nicholas. It sounds like that there is business out there that Arch Capital won't write that is well below your upper teens return threshold. Is that fair? That's fair. Okay. Our next question comes from K. B. Montessori from Deutsche Bank. Please go ahead. Thank you. First question is on share repurchases. It was nice to see a little uptick.

32:49 I think this quarter it was 87% of your operating income versus roughly 70% of each of the past two quarters. Now my question is, if the current pricing trends continue, don't really need any capital to grow and you're starting from a pretty healthy capital position. So without any obvious M and A targets, is there any reason why you couldn't pay out 100% of income, potentially even more given that you're releasing capital when you're shrinking. I guess, I don't want to sound greedy, but like I'm wondering what held you back from doing more this quarter? I mean, there's nothing stopping us.

33:37 We don't set targets and how much we're going to buy back. So we go at it, we look at what's in front of us, we look at both in terms of the stock price and also liquidity in the stock, which is still very liquid. So that means so far it hasn't been a problem. But in terms of like could we buy back 100% of our income for the year, we could. I mean we but that's not how we think about it. It's more I'd say an outcome if things work out in a certain way in terms of kind of again the stock price and the volume etcetera. So you saw the reauthorization by the Board. I think hopefully that gives you a little bit of some direction in terms of how we think about the opportunity there and how much capital we think we can buy back or looking to buy back. But whether it happens this quarter or next quarter or next year, I think that's nothing set in stone. So we'll react to what's in front of us. But to answer your question, there's really no structural limitations in beyond, again, the regulations around buying back stock that we have to deal with.

34:49 That's great to hear. Thank you. My second question, just want to pivot to cyber insurance. And maybe if you can help us separate the cyclical versus structural pieces for us. So I guess first question, where are we in the underwriting clock today for cyber? And then structurally, like given the recent developments in AI and the potential for cyber attacks to become more frequent and more destructive, does that change your view of tail risk, aggregation risk or even the long term insurability of the product? Yes. I think in terms of the Ingo Eclog, I would think cyber is probably around 3PM. I think so.

35:35 It's still okay, it's getting to that point. So in terms of the recent AI, Tropic, Miphos, we see it as a real current threat, but we don't really see it as changing the cyber product. I think the we see the cyber product as more of a the cyber market as more of an arm race between attacker and defender. And And certainly, MITOS is accelerating that trend. But the MITOS can help the attacker, but the defender can also reinforce in defense using the same model. So we think it's really an acceleration of the speed at which maybe cyber attacks can be conducted. And it's and to your point, it's also an acceleration of the scale. So I would think because the scale would be larger, I would think we see it more as an increased systemic risk. So we are taking a very careful approach to that in our RDS scenarios.

36:51 Our next question comes from Josh Shanker from Bank of America. Please go ahead. Yes. I know you don't give guidance certainly on margins, but it's an interesting time. Obviously, declines in prices are well noted. Broadly speaking, at Arch and other companies, loss ratios are generally in the same sort of range they were a year ago, but growth is about zero. I guess maybe it's another clock question, but as you sort of give an outlook to internally for the next year, do you expect Arches and the industry's loss ratios to begin to deteriorate from here?

37:40 Or do you think the current levels are supportable? FRANCOIS So I don't know about the industry, to be honest. It's hard to predict because as far as we are concerned, we are confident in our ability to manage the cycle. That's what we do. So I think we I think that's our first line of defense. If things fall below our threshold, reduce. And we are confident in our ability to continue to find attractive opportunities to be able to expand. And I think we have certainly the property market is coming down, so everybody can see that. But we still think we have a good opportunity on the casualty side.

38:33 So overall, I think we again, as I said, based on our own mix of business, we think that we see rates just below trend. So that would support a thesis that margins are sustainable, at least for near future. And then in terms of SME, the commercial business, the mid core acquisition was in part to be less cyclical. Are you seeing fruits of that play out in 2026 that you're able to capture some incremental share in less cyclical SME business? So again, we just as I mentioned in my remarks, we just finished the cutover. So the main focus on the for us has been to roll over the portfolio and to get the to create an entirely workbench with which we can underwrite the business on Arch Paper. So that those have been the primary goals. So now that this is done, it opens abilities to try to enhance the value proposition of that business and build scale. So I think we I would doubt I think it's more of

40:03 a 2027 game than it is in 2026 because after you do the cutover, you have to stabilize, then we have to start to we're focusing on building new tools to really help underwriters with better selection, triage and so on that will make them more productive. Our next question comes from Rob Cox with Goldman Sachs. Please go ahead. Hey, good morning. Just a question on, premium leverage. So on the one hand, the business is shifting away from property and property cat, which should allow for an increase to premium leverage.

40:56 But in the past, we've noticed it's been hard to right size leverage in a softening market like this due to lack of growth opportunities. So I guess the question is, do you foresee premium leverage would continue to fall like this as we get further into the soft market? And how does that impact your view on the future ROEs? Well, certainly, we're managing the equity side of the leverage. So if we can't grow, we can't deploy the capital in the business as we've been doing like the last few quarters, we'll be returning more of the capital to the shareholders. So that's certainly a tool we have that we have been using, we'll keep using and make sure that our ROEs remain attractive. So I'd say for sure, like if the mix goes more long tail than short tail, it helps on the leverage.

41:47 And again, the equity part of it is something we're watching carefully. Thanks. That's helpful. And then just a follow-up on terms and conditions. Just curious if any negotiations on terms and conditions started to change in the quarter? And like which terms you think could start to get further negotiated as we move deeper into the soft market? So which lines of business? Are you talking about property cat or new Yes, particularly property cat reinsurance. So we've talked to our team, and we are seeing a bit more, but it remains a very small portion of some of the aggregates, a bit more aggregates, a bit more chop and drops, which but it's at the margin so far. So but as the market gets more competitive, we would expect more of those structure that are much more difficult to price to come back to the market.

42:53 Thank you. Our next question comes from Brian Tunis with Cantor. Please go ahead. Hey, thanks. Good afternoon. So, the company is obviously a much larger company today than it was seven years ago, both from a premium side, but also from an OpEx side. And I imagine a lot of that increase in OpEx is in support of hard market growth. But my question is no longer being in a hard market, to what extent are you looking at managing the OpEx side of things as a potential source of boosting margins? I think the answer is yes. We that's something that's in our mind.

43:46 I think the loss ratio part is probably more important as the market gets softer. But yes, I think I would say, especially in the Insurance group, I mean, the expense side is important, and actually are paying attention to it. Okay. And then just a follow-up for Francois. Underlying loss ratio in the mortgage insurance segment looked a little elevated. Nothing really stood out to me, maybe a little bit higher reserve per default. Not sure if that's seasonal, but how should we interpret that loss ratio result this quarter in MI? Yes. Definitely some of it is a result of the change or the growth in the average mortgage that goes into NOD.

44:40 So if you think of the loans that are currently going in NOD this quarter are more from more recent vintage years and post COVID effectively right and that's when mortgage loans were up in size. So as you look at the frequency assumptions have not changed. They've been flat for us the last couple of years I want to say. But the math behind the reserve levels is such that we apply the frequency with a severity per loan and the severity has remains stable, but it's the average size of the loan that's hitting the loss ratio. So I think it's a little bit kind of like an evolving kind of thing within the loss ratios. I think it's for mortgage, it's gone up a little bit, but still very much within what we would expect it to be.

45:43 Our next question comes from Alex Scott with Barclays. Please go ahead. Hey, thanks for taking it. I guess I wanted to follow-up on the excess capital and less about just asking how much you buy back. But thinking more broadly, I mean, you don't have the business that you can really lean into growth in right now like you have been sort of most environments in the past. It's been one of your three businesses has been attractive to really leg into. So does it create any need to sort of look at potentially diversifying transaction? And then is legging into an artificial intelligence investment and doing it that way to try to achieve growth something that you think is achievable?

46:33 Just trying to understand how you're thinking about the different ways you get in this? Yes. I mean, I'll take the first part. Mean, certainly, the business are all doing well. I mean, yes, I mean, you're right. I think the growth opportunities in all three of our segments are somewhat limited. We're working hard trying to find new opportunities internationally and etcetera, like in mortgage and insurance for sure. But at this point, it's harder to see how the market will support massive or outsized growth in each of our segments. So yes, I mean the share buybacks, again, like as we generate we keep generating meaningful earnings, I think that we don't want to accumulate excess capital beyond what we think is prudent.

47:19 So we're certainly looking to return it or do something with it. M and A is we look at a lot of things, but we want for us to do something given our scale, we truly think it has to be something that is additive. We're not interested in doing deals just for the sake of doing deals. It has to make us better. It has to make us more competitive, increase our presence or our scale in a market, etcetera. So we're very selective there. But we're trying to think outside the box too. I mean, if there's things that we don't do currently that could make us better, we'll explore those. In terms of AI, I mean, I don't I mean, it's certainly something that is coming at us really quickly, really fast.

48:05 We're trying to think of ways where we can kind of, again, automate things and we're doing some of that. But I think there's it's still very early innings, very early days of that. So I think we'll that will evolve and we'll see where it goes. Yes. And we've been investing in AI for the last ten years, both in mortgage and P and C. So we've deployed a bunch of AI and machine learning models. And but it's changing really fast. And I think industry and our struggle is really to really show results, while at the same time working on our data strategy and our integration of our system to really support AI at scale. And third, really figure out what AI would look like three years from now because it's changing so quickly. If you look at the Anthropic models, they open huge, huge opportunities to do certain things. But what's next? So I think we you really have to take and it's a lot of investment.

49:12 At the same time, you're trying to create productivity and the insight for your underwriters to be able to compete. So I think it's Yes. All helpful. Thanks. And as a follow-up, I wanted to see if you could talk a little bit about exposure to private credit. I know, I think, in the past, you've talked about the alternatives portfolio allocation of private credit. I have a rough idea of that, but wanted to see if you could tell us about anything that would be sort of considered private credit within the fixed maturity part of the book? Yes. We have some but limited, right? So we have it both in our, again, public markets and private markets. The general thinking that the strategy with our investment guys has been to go more on the high quality loans. So kind of low loan to value and kind of very good collateral supporting the investments.

50:12 So yes, it's something we're watching like everybody else, but at this point there's no red flags, nothing that really is rising to a level where we have to take action. Got it. Thank you. You're welcome. Our next question comes from Matthew Hellmerman with Citi. I just wanted to follow-up on your call related to using AI in the technology rollover of midcorp. And just curious how that experience has been different than past. I recognize that you're not a significant acquirer, so universe of past might be smaller, but just thought that was a provocative comment.

51:06 Yes. So I think the I mean, the way it really help us and speed up the process is to write some of the codes. I think we really didn't do enough there, but when we did, it was really helpful. And the big help was on the testing. A lot of the testing was done by AI, and that really accelerated the time to market. So those are the two aspects that we when we talk to the teams, really highlight as the impact on AI on this shift on this cutover. Because again right now, just quickly, mean, again, it was a build out of a brand new effectively platform infrastructure, right? So it's unusual in that sense that we bought the business, but without the systems, we had to create this infrastructure, this platform, brand new that we ourselves at Arch did not have. So it's that's where I think to Nicholas' point, AI kind of capabilities really came through and help speed up the process.

52:18 That's helpful. I just want to make sure I understand the using use of the word testing correctly. Is that should I think about that as auditing outputs of Yes. Running scenario to make sure that every time you create we created a new platform to a good point, Francois, for context. And so every time you create a new software, you have a lot of testing that to make sure that the software is doing what it's supposed to do. And a lot of it today can be done through AI. As opposed to individuals going in and asking the underwriter to test, the guys that collect the cash to test that what the hunters get to the right places and so on.

53:12 Our next question comes from Meyer Shields with KBW. Please go ahead. Great. Thanks so much. Francois, starting question for you. I expected operating expense in reinsurance to go down because you should have more Bermuda tax credits. And I guess I didn't see that. I was hoping you could talk us through the moving parts. Down relative to last year or last quarter? Last year, for sure up from last quarter. Yes, they're certainly up from last quarter. From last year, I mean, yes, there's some no question that there's some QRTCs this quarter in reinsurance.

53:59 I mean, what explains the increase is more investments in staffing and building out further the insurance, the reinsurance group. So I think there's well, I know that there's been kind of hiring around like technology and improving systems. So that's certainly a big part of it. And then a little bit of noise around some of our structured deals that we wrote a year ago. I mean they were actually beneficial to the expense ratio, the OpEx ratio a year ago. So if you adjust for that that explains a little bit of the difference as well. But nothing I'd say nothing I'd say structural that we was a surprise to us.

54:49 Okay. That's very helpful. And then shifting gears, there are some reports of very significant rate increases for product lines exposed to the Iran conflict. And I was wondering whether Arch is trying to write more of that business or being more cautious because of the risk? So we do that as I would be with our London office where we write some political violence and war on land. So we've been cautious, but we the rates have spikes up. So we've actually wrote a little bit more business, but in a very cautious way. Our next question comes from Roland Meyer from RBC Capital Markets.

55:41 Please go ahead. Hi, good morning. I just wanted to ask on your PML disclosure because I found it curious. Do you think that the catastrophe models are fully capturing the improved loss environment in Florida from AOB benefit reform? The PML that we report? Yes. I'm just curious on when you model the cat losses out in the state, if it's fully capturing how the sort of personal lines side of the business has seen significant returns in the loss environment? Yes, it's reflected. I think we historically, we have as we do our modeling, we have loads for certain features of the specific to the Florida market that with the reforms I think have changed. So we changed how we model those things on fraud and additional expenses around kind of claim handling etcetera. So that's all captured right now. So yes, our thinking has changed and what we report to you is how we see the business, how we expect the environment to respond given what we know about the latest reforms.

56:54 All right. That's perfect. Thank you so much. Yes. Our next question comes from Brian Meredith with UBS. Please go ahead. Yes. Thanks for fitting me in. Back on the PMLs, I noticed your PMLs did not decline. That kind of stayed the same at fourone versus your oneone disclosure, but you're declining property cut and everything. Can you help us reconcile kind of what's going on with the P and Ls relative to what you're doing with property reinsurance? Yes. I think Brian, it's the 4.1% number. So not a ton. Again, think of it as the peak zone. It's so I would expect changes at 7.1 next quarter. There's not a ton of activity for us necessarily at the fourone renewal that impacts our peak zone. So that would be the answer being Florida Tri State Tri County in particular.

57:52 We'll see what sixone and sevenone does for us, but that's where I would expect maybe a more meaningful change. Got you. But I mean, if I look at I'm sorry, if I even look at what happened between September 9 and one point one, it still was up despite the reduction in business you had at oneone renewals, right? So is it like is it simply we're just looking at changes in rate or you're dropping exposure as well? Well, at 1.1, I mean, we held on to most of business. We actually grew a little. So yes, gave up some rate, but we still found that that business met our was still attractive in terms of returns. So dollars of P and L didn't really change a whole lot. There's always you lose one account, you replace it with another. So it might on the margin change the P and Ls a little bit. But you're right, I mean the rates went down. So we gave up some returns weren't as good as they had been a year before.

58:49 But as again looking ahead six thousand one seventy one, don't know how it's all going to shake out, but that's when you may want to mean there could be some more significant changes in the P and L depending FRANCOIS on kind of what we review or not. As we said earlier, we put Florida was green. So I think for us, we getting the return, we're not going to let go the renewals and we're going to try at the margin to write more. So I think that was not a zone where we decided to come back. Great. Thanks. Appreciate it. You're welcome. Our next question comes from Pablo Sison with JPMorgan.

59:37 Please go ahead. Hey, thanks for squeezing me in. This will be a quick one. Nicolas, just wanted to follow-up on your comments regarding casualty sidecars. Do think this is a blip or is there a risk of casualty re facing the same structural headwinds that property cat experienced with alternative capital exacerbating the soft market cycles there? Thanks. I couldn't hear you well. Which line of business? Just the casualty sidecars. And do you think that ultimately, it will have the same effect that alternative capital had on property cat? I mean, it's hard to tell. The thing we know is that it's not helping. I think the thing that may the thing may mitigate that is the security risk.

1:00:22 I think the people that have used those sidecars, they usually use it because they want to write the business, but they don't like it. I haven't seen people that are in the market like Arch using those tools yet. So I think it's for the buyer and for the broker, I mean, they have a decision to make because those claims are going to get paid five, six years, seven years from now. And will the vehicle and the cedent, which are usually not the best way to cedent, be there to pay the claims? I think that may be mitigation factor compared to property cat, where the loss is imminent, and we know the capital loads are high.

1:01:08 So I think that's Thank you. That would be the difference. Our next question comes from Yaron Kinar with Mizuho. Please go ahead. Thank you. Good morning. Just Just want to circle back to the man made Iran related losses. Can you break them out for us for insurance and reinsurance and then maybe what the associate premiums are as well earned premiums? Well, we don't break out. I mean, we report everything as part of cats. But again, the it's part of the it's priced, right? So when we write some of these payrolls or these lines of business, again, political violence, terror, etcetera, which in this case are generating cat losses to us, again, just in terms of how we report them to you.

1:02:07 There's it's part of the pricing, but it's not really captured in the, call it, our cat load per se that we report to you. Yes. I think to give you an idea, I think when we talk to our teams, we think the political violence, wound on loss, all is about $3,000,000,000 and we think it's about the premium that you collect for those lines of business. So that gives you I mean, it's not a precise information, but that's the sense that we have, dollars 2,000,000,000 maybe. Dollars 2,000,000,000. And that's across both reinsurance and insurance? No. So the loss for the market today, think, is estimated at $3,000,000,000 We estimate it's an estimate the premium for those lines of business that have been impacted to be around 2,000,000,000 Because I guess what I'm trying to get at here is when I look at the kind of the underlying loss ratio here, it now doesn't capture some losses, but we still have the premiums associated with that book and the attritional.

1:03:14 So I like as we think forward, I want to make sure that we're using the right kind of base for the underlying loss ratio. Yes, good point. Maybe I mean, we can do that offline with you if you if that's okay. I mean, I think we can kind of walk you through what the yes. That would be perfect. And then my other question was in the insurance book, I saw that the other liability claims made line grew quite nicely in the quarter. Can you talk about what drove that? Yes. It's really the transaction liability. I think we write transaction liability both in North America and in our London office. And it's really driven by higher pricing in that line of business as well as the M and A activity that has picked up in the last couple of quarters.

1:04:16 I'm not showing any further questions. Would you like to proceed with any further remarks? Yes. I want to thank you all to participate to our call. And I feel good about the business as it is. I think we are challenged with the market condition for sure. But I think as we said, we think we are equipped and our teams are equipped and ready to compete in that market environment and generate decent return for our shareholders. So thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.