Prepared remarks
Good day, ladies and gentlemen, and welcome to the Q3 2024 Arch Capital Earnings Conference Call. 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 today'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 the 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 2023 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 will also make references 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. I would now like to introduce your host for today's conference, Mr. Nicolas Papadopoulo, and Mr. Francois Morin. Sirs, you may begin.
Good morning, and welcome to our third quarter earnings call. I'd like to begin by wishing the best to my friend and my business partner of 23 years, Marc Grandisson, who retired earlier this month, after the fantastic road under Marc's leadership. While we will miss him, I'm very excited about the opportunities before us. My message to our shareholders, employees, brokers, clients, and business partners is that it is business as usual at Arch. Our core objective remains unchanged: to be the best-in-class specialty lines insurer in the market. We will continue to execute on the key pillars of our strategy, which are to build a diversified mix of businesses, actively manage the underwriting cycle, remain prudent stewards of capital, be dynamic managers of a data-driven enterprise, and foster a culture that attracts best-in-class talent. Back to the quarter, where Arch generated strong top and bottom line results with an annualized operating return on equity of 14.8% and an 8.1% increase in book value per share.
Our third quarter results included $450 million of catastrophe losses across multiple levers, including Hurricane Evan. It's worth noting that this catastrophe loss is within our third quarter seasonally adjusted cap load. Overall, the P&C environment remains very favorable despite increasing competition in many lines of business, making underwriting and risk mitigation increasingly important. Underwriting strategies empower our businesses to respond quickly to their trading environment. This has been and remains a competitive advantage as we pursue opportunities with the best risk-adjusted return. Industry catastrophe losses have once again exceeded $100 billion for the third quarter. We should continue to support increasing demand for property insurance and reinsurance. Even with this increased catastrophe activity, we believe the property market remains attractive and one in which disciplined underwriters can produce attractive return on capital.
Rate increases continue to outpace trends, which is consistent with our hypothesis of a hardening casualty market. We have selectively increased our casualty writing in both insurance and reinsurance as the markets respond to claim inflation and uncertainty around loss trends with higher prices. Turning now to underwriting segments. Our insurance segment reported $1.8 billion of net premium and delivered $120 million of underwriting income in the third quarter. The acquisition of the MidCorp and entertainment business from Valiance in August helped drive a 20% growth over the same quarter a year ago. We are confident that the mid-core team will be an important part of our growth story as we further enhance our capabilities in the middle market. Excluding MidCorp, insurance growth was mid-single digits as we continue to find attractive growth opportunities in casualty programs and our London market specialty business.
Our reinsurance segment had another excellent growth quarter with net premium returned up more than 24% to over $1.9 billion, along with underwriting income of $149 million as our team continued to benefit from a more robust relationship with our brokers and cedents. Growth was driven by property excluding catastrophes, including facultative business, casualty, and other specialty lines. Our industry-leading mortgage segment again contributed significantly to our earnings with $269 million of underwriting income for the quarter. Underlying fundamentals remain excellent for the mortgage insurance industry, including strong credit conditions and continued favorable house price appreciation. Mortgage origination activity remains light, and the new insurance return of $13.5 billion was in line with our expectations as relatively high mortgage rates and continued house price appreciation have kept most buyers on the sidelines.
Finally, the contribution from our investment portfolio was substantial. In the quarter, Arch Investment Management generated $399 million of net investment income. Significant operating cash flows from our underwriting units should support the continued growth of our assets under management, setting us up for strong investment contributions in the years to come. Looking ahead, we like our position and the market opportunities. This is true as we enter a responsible growth phase of the P&C cycle where disciplined underwriting and thoughtful rate collection are essential to success. A few final comments in closing. Arch has proven to be an exceptional company defined by a culture of underwriting excellence, underpinned by our core strategies of cycle management and thoughtful capital allocation. That was true yesterday, it is true today and it will be true tomorrow. I'm very excited and proud to lead this company and work with our leadership team as we continue to strive to deliver the greatest value to our clients and shareholders over the long term. I'll now turn it over to Francois to provide some more color on our financial results in the quarter, and then we will return to take your questions.
Thank you, Nicolas, and good morning to all. As you know by now, we reported third quarter after-tax operating income of $1.99 per share for an annualized operating return on average common equity of 14.8%. Book value per share was $57 as of September 30, reflecting an 8.1% increase for the quarter and a 21.4% increase on a year-to-date basis. Once again, our three business segments delivered excellent underlying results highlighted by $538 million in underwriting income and an 86.6% combined ratio, which was slightly elevated from an active catastrophe quarter. Our combined ratio was 78.3% on an underlying ex-cat accident year basis. Overall, current accident year catastrophe losses were $450 million for the group in the quarter, split roughly 80% in reinsurance and 20% in insurance segments. Approximately 45% of our catastrophe losses this quarter are due to Hurricane Helene, with the rest coming from a series of events, including Canadian events, smaller named hurricanes, U.S. severe convective storms, flooding in Europe, and other events across the globe.
As of October 1, our peak zone natural catastrophe probable maximum loss for a single event with a 1-in-200-year return level on a net basis increased slightly and now stands at 8.1% of tangible shareholders' equity, as we incorporated exposures from the MidCorp acquisition on August 1. Our probable maximum loss remains well below our internal limits. Our underwriting income included $119 million of favorable prior year development on a pretax basis in the quarter, or three points on the combined ratio across our three segments. We recognize favorable development across many lines of business, but primarily in short-tail lines in our Property and Casualty segments and in mortgage, due to strong cure activity. As you know, we closed on our purchase of the U.S. MidCorp and entertainment insurance businesses from Allianz on August 1, and I would like to expand on a few items that impacted our financials this quarter.
First, the net written premium coming from the acquired businesses was $209 million for the 2-month period, contributing to the reported year-over-year premium growth for our Insurance segment. Second, in accordance with U.S. GAAP, the fair value of the acquired balance sheet does not include an asset for deferred acquisition costs. Therefore, since there is no amortization of deferred acquisition costs associated with the in-force business at the time of the acquisition, the current quarter's acquisition expense ratio is lower than in the third quarter of 2023. This item resulted in a benefit this quarter of approximately 1.9 points in the Insurance segment's acquisition expense ratio. Although we would expect this benefit to become less significant over the next three to four quarters as a larger proportion of our earned premium relates to premiums written after the closing date. Operating expenses in the new business were also somewhat lower than ultimately expected as we ramp up operations, contributing to a 60-basis point benefit in the quarter.
Third, as is required with business combinations, we recorded goodwill and intangibles in connection with the transaction, primarily from the value of the business acquired, distribution relationships, and the present value adjustment related to the reserves for losses and loss adjustment expenses. This quarter, we incurred an expense for the amortization of intangibles of $88 million, $63 million of which was for the MidCorp and entertainment acquisition. We expect our overall amortization expense across the group to be approximately $100 million in the fourth quarter of this year and $195 million in 2025, spread evenly throughout the four quarters. While still early, the mid-core business is performing as expected or maybe slightly better, and we are satisfied with the progress we are making in our integration activities. Turning to our reinsurance group. The team delivered a very solid 92.3% combined ratio in an active catastrophe quarter.
Of note, the reported net written premium growth of 24.5% in the quarter was augmented by reinstatement premiums. Adjusting for this item, the growth rate would have been approximately 22.4%. The mortgage segment reported an excellent 14.8% combined ratio as cure activity on delinquent mortgages is strong and the underlying credit quality of the book remains very high. The reported delinquency rate that USMI inched up slightly this quarter and was impacted primarily by seasonal factors. On the investment front, we earned a combined $570 million pretax from net investment income and income from funds accounted for using the equity method or $1.49 per share. Our investment income reflects approximately $20 million earned during the 2-month period from the assets we've received in connection with the MidCorp acquisition. Total return for the portfolio came in at 3.97% for the quarter, as there was significant price appreciation on our fixed-income portfolio due to lower interest rates.
The appreciation of our available-for-sale investment portfolio resulted in a book value increase of $1.56 per share net of tax. Cash flow from operations remained strong and exceeds $5 billion on a year-to-date basis. Our effective tax rate on a pretax operating income was an expense of 8% for the third quarter, and our annualized effective tax rate remains in the 9% to 11% range for the full year 2024. In closing, our balance sheet is strong with common shareholders' equity of $21.4 billion and a debt plus preferred to capital ratio of 14.2%. This level of financial resources gives us flexibility to deploy capital as needed and continue delivering outstanding results for the benefit of our shareholders. With these introductory comments, we are now prepared to take your questions.
Questions and answers
Our first question comes from Elyse Greenspan with Wells Fargo. Please go ahead.
Thanks. Good morning. I guess my first question is on the Allianz deal. You gave us some good color on the expenses. But anyway, could you give us a sense of just the impact on the underlying loss ratio within the insurance segment in the quarter?
Yes, sure. I mean, just to give you a bit more details on that, the normalized meaning ex-cat accident year loss ratio for the segment was 57.6%. And the stand-alone for the MidCorp business was 62% in the quarter. So that's how we came up. So effectively, it kind of increased, call it, by 70 basis points and increased the reported loss ratio for the ex-cat loss ratio.
Okay. And then in reinsurance, the margin sometimes does fluctuate quarter to quarter, but the underlying loss ratio did trend up in Q3. Was there anything business mix in there that might have impacted that in the quarter?
Nothing specific. Again, we will go back to our trailing 12 months way of looking at things. I mean, I took another look this morning, and there's nothing unusual in the quarter. I mean, the trends are very consistent. Trailing 12 months are doing very well. So, the answer is nothing to report. I mean, there are just kind of some claims that happen, some don't. And over the last 12 months, we're very comfortable with the loss picks and how things are behaving.
And then my last question is on capital, right? You guys have left the Doral ban, just given your excess capital position to doing something to return to shareholders, be that a quarterly dividend, a special, or even a return to repurchase. So, what's the timing there? I thought maybe it was post the end of the wind season. Does that still apply? And how are you thinking about how you might look to return capital to shareholders?
You've covered all the important points. This is an ongoing discussion that we have regularly, and it's not something new. We've mentioned before that we would prefer to wait until the wind season concludes, which is approaching its end. As we prepare for growth opportunities in 2025, we will definitely consider how and where to invest our capital. It's clear that this area is a priority for us. Just to assure you, we are actively engaged with it, and we will provide updates when we have more information to share.
Our next question comes from the line of Andrew Kligerman with TD Cowen.
Good morning. Maybe following up on the insurance division and MidCorp. And I think France Swap, I heard correctly the MidCorp impact on the underlying loss ratio was about 60 basis points to 70 basis points, and if that's the case, it kind of moved up a fair amount, like 250 bps year-over-year. So, I'm trying to get a sense of should we be thinking that this is kind of a good run rate underlying number for the loss ratio? How should we think about it going forward?
Well, I mean, we indicated that we thought initially, I mean, we have to get, call it, under the hood, we have to understand the business. But we certainly have said that in the first year, we thought this business was going to be breakeven for us. So yes, we should expect a little increase in the loss ratio and the combined ratio for the segment. No question. In terms of run rate, I'd be a little bit hesitant to commit to anything beyond, call it, the first year. I think we're already making adjustments, taking underwriting actions in terms of we like what we don't like as much. I think there is good traction, good opportunities in terms of the casualty business that they write. The rates are in a very strong environment, so that will help. So, again, the short-term answer is yes. I think the combined ratio will probably inch up a little bit, but we have very definitive ideas and plans on how to bring that down as we move forward.
Yes, I think it's dynamic. If you look at the insurance group overall, it's heavily weighted toward non-property lines, so the property line has lower loss ratios. We have been growing in the property line over the last couple of years, but the current market makes it more challenging. We also have a significant portion of professional lines where rates have been tough, likely leading to a higher loss ratio. In terms of casualty, we believe there are opportunities to grow with higher margins, though this may come with increased risk compared to property. That's the situation we are dealing with.
Interesting. And maybe breaking down some of the lines of business in insurance: what kind of rate are you seeing? And is this rate exceeding loss costs? I suspect it's not in property, but maybe you could talk a little bit about some of the key lines in insurance?
Let's discuss casualty, which is a key topic right now. In casualty, we are definitely experiencing an upward trend in rates, and there are solid reasons for this. The market is facing challenges, and as a result, we are underweighted in casualty. Historically, we have focused on underwriting liability. Based on our evaluation of the areas of casualty business that we prefer, we are selectively growing from both the insurance and reinsurance perspectives, which I anticipate will lead to expanding margins. Regarding property, particularly in reinsurance versus insurance, our primary focus remains on insurance. We find the profitability in excess and surplus property to be quite appealing. Over the last few years, especially after Hurricane Helene, the business has seen significant rate increases and changes in terms and conditions, making it very attractive. After a year without losses, we see many players bolstering their positions, and there is an influx of competition from Lloyd's and new entrants looking to capture a share of that market.
Currently, our rates are relatively flat; however, I believe the margins for the business will depend on how we respond to the recent catastrophes. With Milton and Eli, we have set our pricing expectations with the belief that things will stabilize. Ultimately, while supply and demand indicate an increase in supply, we perceive that demand has been limited by high prices and retained capital on the reinsurance side. As a result, we are nearing a balanced year, and I believe the business will continue to be attractive for some time.
Our next question comes from the line of Mike Zaremski with BMO Capital Markets.
First question is on catastrophes. So, I don't know if you disclosed what you're assuming for Hurricane Helene. I know you're, I think the cats were a bit higher than the consensus, but you guys have done a good job of giving us disclosure that you've been taking more risk in Florida specifically and just overall? And then also, should we be thinking about Milton as well? I think there's some conflicting numbers out there on open sure PCS is only a $5 billion so far, but there's some much bigger numbers out there?
Yes, on Helene, we believe the event might have more leakage than expected due to multiple states and significant flooding. Currently, we estimate the industry loss to be between $12 billion and $14 billion, which could be higher than other estimates. This perspective is reflected in our third quarter results. Regarding Milton, we still need to gather more information, but we'll share our initial thoughts on potential loss estimates in the coming weeks. It’s clear that what was anticipated to be a large and frightening event isn't turning out to be as severe. Industry estimates are decreasing, and we believe a market loss of around $30 billion seems reasonable based on current knowledge. As for our related losses, we anticipate nothing out of the ordinary, and we expect to maintain a relatively consistent market share for an event of this scale.
Okay. That's helpful. My last question for Nicolas is whether you can provide any context regarding the reason for the CEO change. This is likely the number one question people have, and there are a couple of individuals curious if it's related to performance or if it involves other circumstances. Can you share any insights on that?
I didn't understand the deal?
The CEO Marc's departure.
You should know that. No. I mean, again, it was a personal decision that is, I think as I said, Marc and I were a good trend. It's a bit bittersweet for me, but based on this decision, I'm actually very excited about the opportunity in front of us. I think Marc is, I think Arch is bigger than any one of us, and I think we have a lot to do, and we have not an exciting thing to continue to do in the coming years. And I think we have a really good management team. We have 7,000 employees that are really engaged. And as I said, I think Arch is an exceptional company, and I'm really looking forward to continue this journey, and certainly, I think Marc's departure is not performance related that the guy under his leadership, and I said the company has performed amazingly well.
And I guess, Nicolas, it's helpful. Obviously, you put your own stamp on the company over time and you're a different type of leader, and we're all excited about your position. But I'm just curious, is there now that you are at the boss, are there certain things we should kind of stay tuned for that have kind of been on your wish list that you'll be able to kind of push through? Or do you kind of expect just more of the same directionally?
No, it's really business as usual. I've been with the company for 23 years and have closely collaborated with Marc over the past 5 or 6 years on strategies, operational changes, and cultural aspects. I feel that Marc and I are very much aligned. Therefore, I don't anticipate any changes in our operations.
Our next question comes from the line of Jimmy Bhullar with JPMorgan.
Good morning. I have a question about your thoughts on 1/1 renewals and how you view the supply-demand imbalance. Has that perspective changed due to losses from Milton, or do you think it remains consistent with your previous views?
So, is the question on property cat I assume?
Yes, yes.
Yes. So, I think on property cat, I think, as you've seen, we've grown the book quite a bit in the last 2 years or 3 years. So, we think the returns are really attractive. I think the vet of midterm and Helene in my view, what we hear is that you stabilize the market. I think there was a lot some supply, as I said earlier, is there from nodes or from MGAs or from our competitors. After one year without losses really wanting to get back in the business and realizing that they may have missed out on a profitable line of business. So, what I would expect, and we see it on the insurance side that things have stabilized. And I think my guess is at this stage is that we will do the same on the cat reinsurance side.
Are you expecting pricing to be down, flat, or can you provide any estimates on that?
Yes. I don't have a crystal ball. I would say, again, it's always the same with programs that are being impacted by losses. I would expect prices to go up in regions that had no losses; you could see in the bottom of the programs, I think people are still really scared about frequency. So, I'd expect the bottom to middle side of the program to perform well. The upper layers where people seem to be more comfortable to play where competition is coming because you are away from the midsize also, it could be a little bit of weakness, but not really have a strong conviction in a way. But I think mostly stable.
And then on casualty reserves, a lot of companies have had adverse development, some on recent years, some money even some on peak over the years as well. Can you talk about your own comfort with your casualty reserves on your legacy book as well as the Watford business?
Certainly. We regularly assess our reserves on a quarterly basis, so this is not new information. To answer your question, we feel very confident about our reserve levels for several reasons. First, as Nicolas mentioned, we have intentionally underweighted our casualty lines for several years. This approach has been beneficial, particularly as we do notice the effects of social inflation and pressures on loss trends in the casualty sector. We are actively monitoring our casualty reserves and while we have seen some adverse developments, it has been manageable overall. We believe this is a significant factor contributing to the rising rates, as the industry faces pressure and adjusting rates is a necessary response to those challenges.
Our next question comes from the line of Cave Montazeri with Deutsche Bank.
First question is on growth. I guess, Francois, you've already explained the growth in primary insurance I guess, underlying once you exclude MidCorp, is about 5%. In reinsurance, you also mentioned the impact of reinstatement premium. I think you said it was still 22% growth even adjusting for that, still a big number. Could you give us a bit more color on like what drove that in terms of how much of that was pricing? How much of those like unit growth? How much of that was maybe writing more casualty business? Any type of color on that would be quite helpful, please.
For the quarter, the main driver of growth was a return in casualty, particularly from our U.S. company, where we are selectively engaging in programs as rates improve, which gives us opportunities to write appealing casualty business. Additionally, our specialty business has also experienced growth, largely due to business we wrote at the beginning of the year, which is now coming through in quarter shares. We have a substantial portfolio that supports Lloyd's, known as Ponat, where we receive quarter shares of what they write, net of their protection, contributing to our growth. Similarly, Lloyd's is expanding, and we believe this is a profitable venture for us. Furthermore, we have a significant portfolio in the UK motor sector, which has been disrupted for some time. We've been active in this market as rates continue to rise, benefiting from an additional relationship established at the start of the year, although no specific action was taken in this quarter that influenced it. Lastly, our facultative operation has an excellent reputation and is one of the leading property operations in North America, and they have also demonstrated remarkable growth.
Perfect. My follow-up is on the mortgage insurance business. I guess two parts to that question. The first one is the growth in the quarter, was that primarily driven by the Fed cuts that just boosted demand? And I guess linked to that is the pickup in delinquency in mortgage insurance, is that also just linked to more activity? I know you mentioned some seasonal factors. I don't know what those were. If there's any details we can have on that, please?
I think the delinquency is within our expectations. It's important to note that since we've refinanced a significant portion of our loans in 2020 and 2021, we are now entering the prime years for recording delinquencies. As new loans are added, it typically takes three to four years for delinquencies to show predictable patterns. This trend explains the slight increase in our overall delinquency rate. Additionally, there are seasonal behaviors we observe from borrowers, such as tax refunds in the first quarter that allow them to catch up on mortgages and increased borrowing for holiday purchases. We've seen this pattern continue, especially in the third quarter, where delinquency rates tend to rise. Overall, we are comfortable with the delinquency rate. There are still some differences related to the RMIC acquisition, as it involves a pre-financial crisis book with unique characteristics. Regarding the premium, there are a few accounting nuances this quarter, so I wouldn't place too much emphasis on the growth we've seen. It relates to some catch-up on premiums from earlier Bellemeade transactions. Generally, the mortgage segment is fairly flat in terms of growth opportunities.
Our next question comes from the line of David Motemaden with Evercore ISI.
Thanks, Francois, thanks. So much for all the detail you gave on the insurance underlying loss ratio, both including and excluding the mid-corp acquisition. So, I guess just sort of running through those numbers there, it looks like if I take out mid-corp, it was about a 57% underlying loss ratio for the sort of core Arch insurance business. And so that picked up a little over 100 basis points versus last quarter and also on a year-over-year basis. So, I'm just wondering if you could help me think through some of the drivers of that increase?
Yes. I would say it's growth related in mix. The areas where we experienced growth this quarter have shifted. If you look at how we report the lines of business, we've made changes this quarter compared to the past. We've seen more growth in casualty and other liability lines, primarily on an occurrence basis, while claims made lines, which are more aligned with professional lines and cyber, have decreased. However, that segment usually has a higher accident year loss ratio than property once we exclude disaster-related losses. Therefore, the main factor behind the increase is the shift in mix, as we have grown more in casualty while remaining relatively flat in property.
Got it. Okay. That's helpful. I appreciate that. And then maybe a follow-up on the reserves just within insurance and reinsurance. I was wondering if there's any way you could size those moving pieces for us between the short tail and the long tail development?
Well, overall, we are favorable on short tail lines of business, but we are experiencing some challenges with long tail lines, which aligns with recent trends. As I mentioned earlier, there is some pressure on casualty and longer-tail business. However, we have seen some positive developments in workers' compensation, which many of our competitors have also reported. This has been a consistent trend for a while. Ultimately, we are observing favorable development overall, with actual results being lower than expected, and that is reflected in our numbers.
Our next question comes from the line of Yaron Kinar with Jefferies.
I think he might have dropped. We're not hearing anything.
Our next question comes from the line of Meyer Shields with KBW.
Great. I think we've talked about this in the past, but I wanted to get Nicolas' thoughts on cycle management. Specifically, I guess, with retail distribution and in particular, the mid-core business, is that less amenable to cycle management?
In my opinion, the approach to cycle management differs in this case. The mid-core business is attractive because it tends to be more stable. This stability results in less volatility in pricing compared to areas like excess D&O. In the middle market, changes happen more gradually, both in terms of growth and decline. This situation benefits our insurance portfolio, which heavily includes larger corporate risks that are more sensitive to significant rate fluctuations. What appeals to us about the MidCorp segment is that the value proposition is stronger, as brokers typically depend on carriers to offer multiple types of business. This relationship enhances the importance of the carrier, fostering a valuable interaction that leads to customer loyalty. Unlike large accounts where pricing is a major factor in decisions, this segment experiences less price competition, contributing to its stability and attractiveness. Additionally, we believe the timing of the MidCorp acquisition is favorable given recent price increases in property insurance, since this segment is more exposed to secondary periods. The liability aspect also aligns with our earlier discussions. Overall, we feel the timing is advantageous, the book appears to be performing well, and we're excited about securing a substantial portion of this business and expanding our presence in a promising market segment.
Okay. That's very helpful. And then if I can switch gears a little bit, I know it's early on the January 1 discussions for property cat. Is there anything you can share with regard to expectations for seating commission trends in casualty reinsurance?
I believe that as we gain insight into the challenges ahead, we will see some pressure on seating commissions. The key question is about supply. The pressure on seating commissions might be lessened by the availability of supply; if more people are interested in the business while the total amount of business remains limited, brokers will play a crucial role in influencing the direction of seating commissions. This situation may create a conflict between the desires of reinsurers and what seating companies are prepared to accept. Ultimately, the balance will depend on supply versus demand, and from what I'm hearing, there seems to be a sufficient supply in the market.
Our next question comes from the line of Yaron Kinar with Jefferies.
Good morning. I apologize for dropping earlier. I wanted to dive a little bit deeper into the other liability occurrence growth in insurance. How much of that came from MC versus just organic or legacy growth?
That's a great question. We experienced a significant amount of organic growth in our E&S casualty business, which is one of the most promising areas for us. Rates are increasing substantially, reaching well into double digits. This sector is very appealing. The MC book has a variety of components, including some commercial multi-peril and liability occurrences, making it quite diverse. While I don't have the specific figures at this moment, the important point is that the rate environment in this particular line of business is currently very favorable.
Okay. And what is it about the third quarter where the environment it seems to have accelerated significantly or at least the opportunity set in other liability occurrence accelerated significantly?
I believe people are starting to understand that their previous views on reserves over the last few years are not quite holding true. For a while, COVID dampened claims, leading people to pause and evaluate their decisions. Since the pandemic, we've noticed a rise in severity globally, particularly in the jewelry sector, along with an increase in significant jury awards across larger European regions. Social inflation is contributing to this increased severity, and the frequency of court cases has shifted. Previously confined to certain counties, now we see cases in places like Georgia and Nevada, where juries have been known to issue much larger awards. It's a mix of rising frequency and severity, prompting people to recognize the need to stay ahead of these trends. The appropriate market reaction seems to be to reduce coverage limits, as being part of a challenging jury could lead to substantial payouts. Additionally, we've shifted from placements with around 10 insurers for a $200 million coverage to about 40 insurers participating, which has started to push some layers into the excess and surplus market, leading to some rate increases, and that’s what we’re currently observing.
Our next question comes from the line of Brian Meredith with UBS Financial.
Nicolas, I want to follow up on that a little, just a little bit. So, I understand what you're saying about your opportunities for growth here in some of the casualty lines. But maybe I can get your perspective a little bit more on what do you think casualty trend is? And where is it going, just because you must be pretty confident in kind of having a good grasp on where casualty trend is, given that you're growing and some others are shrinking?
Yes, it's a complex situation. At the core of the program, people can generally gauge what the casualty trend looks like, typically in mid-single digits. The real challenge arises when you exceed $50 million or even $100 million, which significantly increases operational costs, pushing you into double digits. Fortunately, we don't have a vast presence in the casualty business, but we have enough involvement to conduct our own analysis. It's crucial to take a selective approach to different business classes, applying targeted price increases and careful analysis to ensure that in specific regions and business segments, the actual experience supports a return to the business. It's not a simple shift where any business opportunity that arises is guaranteed to be profitable. A selective and thoughtful underwriting strategy is essential in the current market.
Got you. And the same question, I guess, for reinsurance, right? Reinsurance you're kind of relying on the seeds?
Yes. The role of the reinsurer continues to be backing the right companies. For some time now, we've been underweight in U.S. casualty quota shares and excess of loss. The current dislocation in the marketplace has provided us the opportunity to participate in programs that we wanted to join two or three years ago due to our confidence in the underwriting, limit discipline, and the class of business being written. We previously couldn't engage because there wasn't enough capacity. Additionally, there seems to be a movement towards quality, identifying who will remain committed in the long term, and we are benefiting from this shift.
Makes sense. And then, Francois, one quick one here for you on the investment portfolio. I guess, one, where are we looking at new money yields versus current book yields? And where are you deploying the assets you got out of MidCorp? Is there some more potential book yield to come out going forward?
Yes, part of the transaction involved a significant portion of the assets being received in cash. Our investment team has been very disciplined and thoughtful about how to deploy that capital. The good news is that even in money markets or cash, we are still obtaining a decent yield. I would estimate the new money yield is around 4.5%. Currently, the book yield and new money yields are quite similar. We continue to maintain a short duration, high-quality fixed income portfolio, and that approach will not change. We have around $2 billion in assets that we are working to integrate into the portfolio as effectively as possible.
Our next question comes from the line of Joshua Shanker with Bank of America.
So, I get it; there's less meaty sports talk than ever. But I was wondering, in the past, we've talked about the ROIC on the different legs of the Arch stool reinsurance, insurance mortgage. Could you review right now sort of the state of the union on what the return on new capital is for the various businesses?
We are pleased with all our businesses, and that hasn’t changed. Right now, as we look toward the fourth quarter, we are somewhat reliant on how the market develops at the beginning of the new year. The reinsurance sector has been very favorable for 2024, but it's still too soon to determine how things will progress in 2025. We anticipate that the market will continue to be strong, but it's unclear if conditions will improve enough for us to invest significant additional capital in reinsurance. Therefore, we are taking a wait-and-see approach regarding market developments. However, as we discussed earlier, we find the growth opportunities in casualty, in particular, to be very promising. We are prepared to engage in both insurance and reinsurance. As for the mortgage sector, I want to emphasize its importance to us. While the origination market isn't as robust as we would prefer, we are still generating strong earnings from our existing portfolio and discovering new opportunities beyond primary mortgage insurance in the U.S. We are effectively allocating our capital, and we feel confident about our current mix.
Would it be wrong to paraphrase that reinsurance is better than insurance and mortgage, but that's pending what happens on 1/1?
It's not wrong. I think it's a fair statement. It's better right now. We like to think it's going to stay better, but just don't know quite yet.
Reinsurance is a larger part of the property business. You have to consider that half of the business is property, which involves high risk and high reward. While we are seeing better returns, it's also associated with higher risk, as demonstrated this quarter. The insurance focus is more on casualty and professional lines. It's a challenging environment, but it offers a different set of returns. Balancing those factors is essential, and sometimes the earnings in the return on equity may not reflect that adequately.
Francois, you mentioned that the mortgage origination market isn't as strong as you would prefer. Additionally, Arch's market share of new business has decreased compared to three years ago. If Arch wanted to increase its activities, is there a chance of expanding that business without improvements in the origination market, or would that lead to weaker pricing and margins in that area?
Yes. The market is becoming more uniform, and as you mentioned, attempting to increase market share likely requires reducing prices. We have developed a robust and high-quality portfolio by selecting various loan types across different regions. We are confident in our approach. However, moving from our current market share of around 16% to 17% to 18%, 19%, or even 20% seems unlikely at this time because the market would likely respond by lowering prices. Therefore, it would be unexpected for us to achieve such significant market share growth in the near future.
Yes, we've asked this question all the time. And the answer is that we ended up in the worst place. I think status quo, the current status quo based on the Remember, we're dealing with monoline business. That's all what they have. So, I think, ultimately, they're going to defend their book and we'll end up in a worse place. That has been the analysis that we carried.
Yes, certainly. I think we will now move to...” And thank you for your questions, and we see you next quarter.
Yes. So, there's not any more questions. So, this will conclude our presentation today. Thank you for your questions, and we see you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.