Prepared remarks
Good day, ladies and gentlemen, and welcome to the Second Quarter 2025 Arch Capital Earnings Conference Call. As a reminder, this conference call is being recorded. Before the company begins its update, management would like to remind everyone that certain statements made in yesterday's press release and discussed on this call may be considered forward-looking statements under federal securities laws. These statements are based on management's current assessments and assumptions and are subject to various risks and uncertainties. As a result, actual outcomes may differ significantly from those expressed or implied. For more details on the risks and other factors that might impact future performance, investors should review the periodic reports filed by the company with the SEC, including our annual report on Form 10-K for the 2024 fiscal year. Additionally, some statements during the call that are not based on historical facts are forward-looking as defined by the Private Securities Litigation Reform Act of 1995.
The company intends for these forward-looking statements to fall under the safe harbor provisions provided by the act. Management will also reference certain non-GAAP financial measures, with reconciliations to GAAP for each non-GAAP measure available in the current report on Form 8-K submitted to the SEC yesterday, which includes the earnings press release and can be found on the company’s website and the SEC’s website. I would now like to introduce your hosts for today’s conference call, Mr. Nicolas Papadopoulo and Mr. Francois Morin.
Good morning, and welcome to Arch's second quarter earnings call. We are pleased to report another solid quarter with after-tax operating income of $979 million, resulting in an operating earnings per share of $2.58. On a year-to-date basis, we have grown book value per share by 11.4%, a strong outcome that reflects our focus on execution and long-term value creation for our shareholders. We achieved this result by staying true to our core principle of cycle management, where we actively grow our writings in lines of business that offer attractive returns while selectively reducing exposure in areas where risk-adjusted returns fall short of our targets. This disciplined underwriting approach paired with proactive capital management positions us to consistently generate superior returns across market cycles. P&C market conditions were largely consistent with the first quarter. Some sectors are seeing increased price competition, while others continue to achieve rate improvements.
In the current environment, much of our growth is because of the strength of our relationship with distribution partners and insurers. This not only reflects Arch's increased scale, but also the increased relevance of our platform, one built on a broad and flexible set of capabilities. Our underwriting expertise, supported by our advanced data and analytics capabilities enables us to deliver valuable insight and innovative solutions that help our customers achieve their ambitions. Ultimately, the strength of our relationships, our commitment to consistently deliver meaningful customer value and our ability to respond quickly to changing market conditions are significant differentiators in today's environment. As we've discussed on previous calls, there isn't one underwriting cycle, but many. This principle was reinforced last month where Paul Ingrey, Arch's former Chairman and one of its founder, spoke to a gathering of our top leaders.
It was a unique opportunity for our newer team members to hear directly from someone whose vision continues to influence our culture and operations. In addition to sharing stories from Arch's early days, Paul reminded us of the enduring value of a diversified platform, a core part of Arch's original vision. He explained that the insurance market is comprised of 1,000 points of light, each representing a potential opportunity. While the intensity and location of some of those lights may have shifted in today's underwriting environment, many continue to shine. Our role, as always, is to find those with the greatest potential. Our message is this. The P&C industry still presents meaningful opportunities for disciplined underwriters to generate attractive risk-adjusted returns on capital. Now I will briefly walk through segment performance, starting with our Property and Casualty Insurance group.
Underwriting income for the quarter was $129 million and net premium written surpassed $2 billion, up 30.7% from the second quarter of 2024. This growth was largely driven by our acquisition of the U.S. middle market and entertainment businesses, which contributed $451 million in net premium written. Organic growth outside the acquisition was modest. We remain focused on integrating the new unit with client retention and portfolio optimization progressing in line with expectations. Growing our presence in the small and midsized market is central to our strategy. Elsewhere in North America, rate increases broadly offset loss trends. We saw selective growth in casualty lines, particularly in alternative market, E&S casualty and large account casualty, where pricing continued to outpace loss trends. However, competitive pressure persists in E&S property, excess D&O and cyber. While pricing in excess D&O and cyber appears to be stabilizing, we are maintaining a cautious stance and prioritizing margin over volume in these lines.
Internationally, our Lloyd's and London market businesses are experiencing increased but rational competition. Our long-term investment in establishing a leadership position at Lloyd's continued to yield strong results, reflected in favorable signing and our ability to attract top-tier underwriting talent. The Reinsurance segment delivered strong second quarter results, generating $451 million in underwriting income and over $2 billion in net premium written. The underlying business is attractive with gross written premium increasing 8.7% compared to the second quarter of 2024. We grew our casualty reinsurance premium year-over-year, supported by selective new business and rate improvements. We also expanded our property catastrophe writings, particularly in Florida, where we identified attractive risk-adjusted returns and responded to increased client demand for additional limits. Specialty lines remained a strategic focus and our teams found several new opportunities this quarter.
That said, our property portfolio, other than cat excess of loss contracted. As cedents retained more risk and margins on certain portions of the portfolio fell below our target. We are actively managing our exposure in these areas to maintain underwriting discipline and long-term profitability. We were generally pleased with the state of the midyear catastrophe excess of loss renewals. Pricing was slightly down, but terms and conditions were stable with primary insurers maintaining high retentions. Overall, catastrophe excess of loss margins remained attractive. The broader reinsurance market continued to exhibit discipline. We are growing selectively, focusing on areas where margins are attractive. We are committed to pursuing the brightest opportunities, those offering the strongest risk-adjusted return. Our mortgage segment delivered $238 million of underwriting income in the second quarter.
Mortgage originations remained relatively low, reflecting the impact of higher mortgage rates and affordability. Still, the strength of our global in-force portfolio and high persistency allows the mortgage group to provide steady profitability and valuable earnings diversification even with lower volumes of new insurance written in recent years. Despite ongoing economic uncertainty and low origination activity, we remain confident in the quality and durability of our in-force portfolio, which is the core driver of our mortgage earnings. Investable assets grew 4.4% in the second quarter, benefiting from our strong premium growth and cash flow. Net investment income rose 7% from the first quarter to $405 million with overall yields remaining elevated. Arch's ability to dynamically adapt to multiple underwriting cycles continues to set us apart. This is a function of both our founding principle and a culture that prioritizes and rewards underwriting profit over premium volume.
Even in a competitive environment, our global diversified platform offers many points of light for our underwriting teams to pursue. For a company with a strong underwriting culture like Arch, this remains a market where we can deliver differentiated performance and maximize long-term shareholder return. I will now turn the call over to Francois, who will provide more details on the financial results before we open the line for your questions.
Thank you, Nicolas, and good morning to all. Last night, we reported our second quarter results with after-tax operating income of $2.58 per share, resulting in an annualized operating return on average common equity of 18.2%. These operating earnings, combined with a high level of realized gains, solid contributions from our equity method investments and a noticeable appreciation in our fixed maturities investment portfolio resulted in our book value per share growing by 7.3% in the quarter. Similar to last quarter, our three business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 80.9%, down 10 basis points from last quarter. Our underwriting income included $139 million of favorable prior year development on a pretax basis in the second quarter or 3.2 points on the overall combined ratio. We recognized favorable development across all three of our segments and in many of our lines of business.
The most significant improvements were, once again, most seen in short-tail lines in our reinsurance segment and in mortgage due to strong cure activity. Current year catastrophe losses at $154 million, net of reinsurance and reinstatement premiums were slightly below last year's level for the same quarter and were primarily the result of severe convective storms in the U.S. This is the fourth and last quarter where we are separately reporting the contribution of the MidCorp and entertainment unit to the insurance segment financial results. For the quarter, net premiums written for the acquired businesses were $451 million, contributing 28.9 points to the reported year-over-year premium growth for the segment and generally consistent with last quarter. The strong premium volume this quarter reflects the seasonality of the business with the second quarter generally having the most significant renewal activity.
We are now on track to write slightly more than $1.5 billion of annualized premium for the first year of owning this business, which is slightly higher than the forecast at the time of the acquisition. The inclusion of the acquired business in the segment's results increased the current accident year ex-cat combined ratio by 40 basis points. This can be further broken down to include the other operating expense ratio that was lowered by 40 basis points, the current year acquisition expense ratio that was lowered by 20 basis points due to the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP. As expected, this benefit has become less significant as policies written before the acquisition date have rolled off and the accident year ex-cat loss ratio that was 100 basis points higher, reflecting the underlying results of the acquired business. The reinsurance segment produced its best quarter ever in terms of pretax underwriting income, reflecting the underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity.
Of note, the 5.8% growth in net premium written in the quarter was muted due to the timing of certain ceded premium accruals. The effect of this change in timing was to reduce our net premiums written in the property catastrophe line of business by approximately $94 million this quarter. We expect to record an equivalent offsetting benefit in net premiums written next quarter. Overall, this item should not have a significant impact on net premiums earned. Once again, our mortgage segment delivered another very strong quarter with underwriting income of $238 million. We note that these results reflect the completion of tender offers for two Bellemeade Re securities at a onetime cost of $15 million. We expect that this expense will be recouped through lower levels of ceded premium over time, mostly through the end of 2027 and will ultimately result in a net economic benefit to us. The delinquency rate for our U.S. MI business increased slightly to a very low 1.93% as new notices of default were more than offset by strong cure activity.
On the investment front, we earned a combined $567 million from net investment income and income from funds accounted using the equity method for $1.50 per share pretax. Net investment income in the next few quarters should grow in line with the size of our investment portfolio as our portfolio book yield and new money yield have converged in the last few quarters. Income from operating affiliates was comparable to the amount in the same quarter last year with contributions from both Coface and Somers Re. Cash flow from operations remained strong at approximately $1.1 billion for the quarter. As of January 1, our peak zone natural catastrophe PML on a single event, 1-in-250-year return level on a net basis increased slightly to $1.9 billion and now stands at 8.6% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased $161 million of our shares in the month of July, in addition to the $360 million worth of common shares repurchased this year through the end of the second quarter.
In closing, our strong balance sheet affirmed by our recent credit ratings upgrade and our diversified platform position us well to deliver superior results in the periods ahead. With these introductory comments, we are now prepared to take your questions.
Questions and answers
Our first question comes from Elyse Greenspan from Wells Fargo.
My first question is just on the insurance segment. If we back out MCE, right, growth was around 2% in the quarter. It feels like based on commentary, the market was stable. So maybe that's about where you guys are running in the short term. But I know, obviously, there's a lot of business lines that triangulate into that number. So just hoping to get kind of a forward view just on premium growth within the insurance segment unlike the exMCE piece.
Yes, it is. I believe the key takeaway here is that we are focusing on the opportunities available to us and scaling back in areas that seem less attractive. This quarter, we are pleased with our performance in the casualty line and saw growth there, as well as in our international business. We have a substantial portfolio of professional lines, but faced challenges in this area due to increased competition, which negatively impacted our premiums for the quarter. The positive news is that the rate decreases in excess D&O and cyber insurance appear to be stabilizing. Looking ahead, while I can't predict the future, we believe the favorable conditions in the casualty line will continue to support further growth.
And then my second question was just on capital. It sounds like, right, Francois, capital return, share repurchase picked up in July. Just kind of looking for current thoughts just around excess capital levels and just willingness, I guess, to lean into buybacks as we go through the third quarter and get into the peak of wind season.
Sure. We've seen excellent results in the second quarter, and our capital position is very strong. There's no doubt that we're actively trying to deploy that capital in the business, which remains our top priority. We believe there are still opportunities to do so, but perhaps not to the full extent of the capital generation we've achieved. Capital return is definitely a focus area for us, as it has always been. We regularly review this with management and the Board. We anticipate engaging in capital return in the second half of the year, although we cannot predict what opportunities might arise. We consider both share buybacks and potentially dividends as part of this strategy. Historically, we've tended to slow down during the wind season, but I believe we're a different company now, and we'll continue to assess the opportunities ahead. At current price levels, we find the stock attractive and are ready to engage in buybacks as we progress.
And then just my last one. Was there any adverse development in the quarter from the U.K., Russia aviation ruling? And if it was even small, if you could just let us know the number?
We did experience some adverse effects, as we did increase our incurred but not reported reserves for both insurance and reinsurance. However, we are not major players in that area, and while claims have changed, we managed this within our IBNR through short-tail lines. Overall, what you'll see and what we'll provide more detail on in our 10-Q is that there is no total adverse impact. We still have a favorable position overall, but we did note some changes and developments related to the Ukraine-Russia conflict.
And your next question is from Michael Zaremski BMO.
In your prepared remarks, you mentioned the expansion of property catastrophe writings, particularly in Florida. I think you've done a great job with underwriting in this area. Can you share if you expect returns on equity to be around the 20% range, down from the 30%? Also, we often hear questions about whether property catastrophe reinsurance pricing can keep declining from strong levels. It seems like the general agreement is that it can. Given the rate of decrease we've seen over the past year, how do you view the returns on equity in relation to the associated risks?
Yes. We believe that return on equity remains very attractive. To clarify, the price decreases are not uniform across the board. For example, in Florida, much of the competition is focused on the higher end of the market. During this renewal, the Florida Hurricane Catastrophe Fund adjusted their attachment points, creating a need for capacity below and around the fund's size. As a result, we were able to write more coverage across the board. When looking at pricing below the fund, decreases have remained relatively flat. Compared to where we were a year ago, when we saw significant rate increases, we have experienced some reductions, but the overall business still looks very appealing to us.
Okay. Got it. That's helpful. Maybe pivoting to the strategy about growing your presence in the SME marketplace. I know you've been doing that strategically, inorganically and organically. But just curious, maybe you'd be willing to elaborate, is there kind of a specific pocket that's really high up on the wish list like U.S. retail, traditional main market? Or is it kind of a broad appetite to just go continue going kind of down market more broadly?
I think for us, I think we really start in the mid-market that you've seen with the acquisition we've made of the Allianz portfolio that's our sweet spot. We come from the larger accounts. So I think we had strategic aspiration to grow in the upper middle market. And I think that's why the acquisition fits strategically well. And I think the strategy thesis behind it. I think it's even more compelling today than it was when we did the deal.
Yes, while small business is not an immediate focus, it may have potential in the future. However, right now, we need to concentrate on middle market acquisition, as there's a lot of work and opportunities there. It's still early days, but we believe we can generate significant value from that asset, which will be our short-term focus.
Okay. I'll sneak in one last question. I'm going to keep it high level; mortgage insurance continues to be a valuable asset. We're seeing some data points, although not as much, with delinquency rates increasing a bit, but we're still observing some positive home price appreciation. More broadly, has anything changed in the mortgage outlook over the past few quarters, aside from the clear expectation that the top line in the U.S. will remain negative? Are there any macro data points that might be altering Arch's perspective on a medium-term basis?
I wouldn't say anything has changed our viewpoint. Certainly, the housing market data has itself evolved a little bit, which is maybe in line with how we thought about home prices moving forward. For example, we have shied away or we've been, I think, underweight in certain geographical areas that seem to be currently under pressure in terms of home prices maybe even coming down in some of those places. So that's been part of our, I'd say, approach is to manage our production or manage our new insurance written strategically with having a focus on where we thought home prices would be more sustainable and less risky, I'd say. So that's been kind of a little bit how we constructed the portfolio. And so far, that seems to be paying off well for us.
Your next question is from Cave Montazeri from Deutsche Bank.
My first question is on the Florida market. Can you give us a bit more color? Is it mainly like the tort reform from 2 years ago that are feeding through that's making the market a bit more attractive now? Can you like maybe break down a bit more what's making Florida a lot more attractive now?
I believe that the tort reform has influenced the signed benefits. We've observed a decline in the local companies' attritional loss ratio from over 50 to now in the 20s. The positive aspect for us is that we primarily engage in excess of loss in Florida. This situation allows these companies to secure the necessary reinsurance to safeguard the capital invested by shareholders. However, the cost varies; purchasing a limited capacity comes at one price, but as they aim for a return closer to 100 or 200, their expenses increase. This, along with the multiple storms affecting Florida, has made the excess of loss market more appealing.
Helpful. And my follow-up, sticking with reinsurance. The 5.8% growth you said had a bit of negative impact from a timing point of view of some business that you said it was $94 million negative impact. So does that mean that your premium growth in reinsurance in the quarter would have been double digit this quarter, adjusting for that? And if so, what are the pockets of growth that you were able to just lean on for reinsurance? I mean, Florida is one of them. Was there anything else that you want to flag?
No, I mean yes, you're right. I mean, again, it's a timing issue. So it's really something that typically would happen in Q3, it happened in Q2 in terms of ceded premium. If you adjust for the $94 million, it is correct, the net written premium growth for the segment would have been double digits, slightly higher than the gross written premium growth of 8% or so, right? So in line, and we bought a little bit less reinsurance in some pockets. So I mean, that's part of the strategy along the way. So I think those two numbers in terms of written premium are aligned. And if you convert more specifically the growth to property cat, you see property cat premium growth, call it, higher than the segment, right? So 20% range. And that was really the story I'd say this quarter. I think we saw some attractive opportunities in property cat. And the rest, as you know, there's offsetting in other property and other specialty, but a good part of the story would have been in prop cat.
There was more demand in the marketplace, which allowed us to secure what we considered attractive pricing. It's not just about gaining market share, but also about meeting the needs of our major clients as they purchase more limits. This is a significant factor in our growth.
And your next question is from Andrew Kligerman from TD Cowen.
So in reinsurance, you mentioned that you're growing in casualty. And I'm kind of curious, on a lot of the calls that we've heard so far, casualty rates in general, I'll and point them at around 10%. But I'm hearing reinsurance pricing in the casualty area has come down a bit. So I'm wondering if you could give a little more color on what you're seeing on the primary level in various casualty lines and what's happening in reinsurance, particularly for Arch?
Yes, the casualty business is primarily about quota share. The situation on both the primary and reinsurance sides is quite similar regarding the underlying business. We've observed that rates are likely surpassing trends, which allows us to selectively grow in both insurance and reinsurance. However, the reinsurance market is experiencing a significant amount of supply, making it challenging for many players to increase their writings, as there is considerable competition also aiming to expand. This results in terms, conditions, and ceding commissions remaining stable, as the experience of those portfolios and prior year developments suggest that some of those treaties should ideally have lower ceding commissions.
I see. Could you provide an update on the progress of incorporating data and analytics at MidCorp? Is the underwriting performance meeting your expectations? When do you think MidCorp might shift towards growth?
Yes, it's a process that takes time. The integration is mostly on track. We have nearly completed the transfer of the book to Arch, which is almost finished. I want to emphasize that we are still a year away from fully separating from Allianz. However, we are confident in the rollover of the book and the team, as well as the underlying business we've acquired. The strategic thesis appears to be even more compelling in our view.
I would like to emphasize that the middle market book is part of our overall acquisition strategy and the pricing environment is favorable, which is encouraging for us. This presents an opportunity as we progress, allowing us to pursue new avenues aggressively. We're enthusiastic about this development. The necessary platform, distribution, and team are in place, and we believe the current rate environment will support our efforts. Overall, this is a positive indication.
And your next question is from Josh Shanker from Bank of America.
So looking at your commentary about Florida and the general traction of the property cat market, you can't help, but look at the underwriting and see how they've declined. There were some one-off transactions in 2Q '24. Can you square how much of the business a year ago was just a few unique things that really boosted the numbers and what a normalized year-over-year growth rate might be for the property cat line and the property other line reinsurance?
Yes. I think your question is other property? I just want to make sure I answer that.
I look at both. I mean the premium volumes are down fairly dramatically from where they were a year ago, but you're leaning in and you like the line, there's a disconnect there. So I'm trying to bridge that.
On the cat side, I think I'll let Francois explain because we covered it earlier, so we can move on. Regarding the other property, I want to emphasize that it's quite varied with a mix of homeowner and commercial lines, and it's geographically diverse across the U.S., Canada, and internationally, with both fact and treaty elements. The decline in other property this quarter is mainly due to some cedents opting not to purchase and revisions in specific subsegments of the book because companies didn't meet their targets. For example, in E&S, we've noticed a significant reduction, along with a few strategic decisions made by our team, including the important choice not to renew a contract. Overall, the business remains attractive but requires careful management. I would compare the experience of the other property to what we face in specialty, where we also have a diverse range of lines but have encountered headwinds from cyber risks. However, this quarter in the international sector, we successfully secured a few large transactions, resulting in a significant increase. In reinsurance, as we pursue large deals, one must be prepared for the inherent volatility, with some quarters showing increases that are welcome, while others may decline, which is the case this quarter for other property.
Yes, to conclude on property catastrophe, once we account for the timing issue with the retro, property catastrophe is up around 20% year-over-year in the quarter. This really reflects the bigger picture; we are optimistic about both property catastrophe and other property lines, which remain appealing businesses. However, addressing Nicolas' point, there are transactions that don't always revert or change in terms of their form or substance, and that's what we experienced this quarter. Unfortunately, I can't provide insights on how the third and fourth quarters will unfold, but we still see it as a very attractive market.
And just in terms of the impact on acquisition cost ratios, did that cause a one-time unusual item that we should feature and think about going forward for normalization?
Not significantly. The acquisition for reinsurance can show variability, particularly related to profit commissions. The overall performance of the portfolio may have a larger influence. Therefore, the nonrenewal and growth factors, in general, should not create a considerable impact by themselves.
And your next question is from David Motemaden from Evercore ISI.
On the Reinsurance segment, the press release mentioned some higher attritional losses within the underlying loss ratio. Could you provide further details on the nature of these losses? What lines are affected? Or is it more of a typical volatility that can occur in any given quarter?
Yes, there's no doubt that when we look at the year-over-year results, last year was possibly one of our best quarters ever. There wasn't much action in the large attritional space. This quarter, we faced some impact from the Air India crash and a couple of refinery explosions. These events made news, and while we won't delve into the specifics of each, they contribute to some of the volatility we see. This is the nature of our industry. The key takeaway is that there is nothing concerning; it's simply part of the regular fluctuations in our business. Typically, we prefer to analyze our performance on a trailing 12-month basis to mitigate the effects of such shocks or events that may or may not occur in a given quarter. That's the essence of the situation. We experienced a couple of significant claims this quarter that we did not have last year.
Got it. Makes sense. And then just also just sticking with the reinsurance business. So I think you called out specialty lines there remaining a strategic focus and that there were some new opportunities that were bound in this quarter. Wondering if your outlook has changed at all in terms of the growth outlook there, how the pipeline is looking and if you see this sort of growth being sustained?
In the specialty sector, we've been facing significant challenges, particularly in cyber, where we have a substantial portfolio that is currently experiencing pricing pressure. Consequently, we've allocated less capital to this line compared to a year ago. Overall, it's a varied situation across different lines of business, many of which we aim to expand. The key question is whether our teams are effectively working to uncover new opportunities. We secured a few this quarter and strive for more, but in a competitive environment, identifying new business can be difficult. While I'm optimistic about our prospects, I can't predict if we'll be able to uncover those opportunities.
And your next question is from Alex Scott from Barclays.
I wanted to ask about the Insurance segment. And I guess I just wanted to see if you could provide an update on sort of how far you are through some of the MidCorp remediation and just maybe high-level comments on how we should think about some of the benefits from that, which would help margins and any potential offsets from just thinking through like pricing versus loss cost trend spread and whether there's deterioration.
I think we're going through the integration and feel good about our current position. The main area I would highlight regarding performance is likely on the program side. We've implemented some underwriting actions in that area that should lead to performance improvements over the next 12 to 18 months. That's the key update I can share. We are making significant efforts, but these will take time to materialize. However, the actions regarding the program will allow you to see some impacts within the next 12 to 18 months.
Yes, on the loss ratio. On the expense ratio, I'd say the operating expense benefit that we're getting in terms of scale, I think, are sustainable, right? So there is no question that adding, call it, $1.5 billion of premium to the insurance segment with not necessarily a corresponding amount of operating expense in terms of IT and management, et cetera. So that's a benefit that we think is here to stay.
That all makes sense. I have a follow-up on insurance. Are you noticing any changes in the dynamics between admitted and E&S regarding volume? Reflecting on the rationale for acquiring MidCorp, it seems that having a stronger position in admitted insurance could be beneficial if the volume and demand shift back to it, creating a growth opportunity. Are we approaching that situation? Are you identifying opportunities to shift some business from the E&S market?
I believe the MidCorp business is quite distinct from the E&S business. Currently, the E&S business is under significant distress. In contrast, the MidCorp business is primarily focused on property and has low severity claims, which makes it less suitable for the E&S market. The appeal of the MidCorp business lies in its limited accessibility. We had to acquire a platform to establish a foothold in this market. For the past five to six years, we have aimed to become a more significant player there, but we recognize that scale is important. Having substantial property limits in the hundreds of millions is crucial to addressing the challenges posed by the agency network. Therefore, I see these as two separate businesses. The MidCorp sector is particularly attractive because it is less influenced by market cycles and provides a stronger value proposition, as it allows for multiline offerings and involves a single agent. Overall, I view it as a different type of business altogether.
I think there is still business flowing into the E&S market, which is slightly different from what we see as middle market. The E&S markets are growing, although perhaps not as quickly as in recent years. There has been some moderation in the shift of business because, as you know, certain markets require rate approvals, which takes time, and some of that work has already been done. Admitted carriers may be in a better position in certain areas to retain this business, but overall, the E&S market is still performing well.
Yes, I think it's worth noting that as long as we face social inflation, we're seeing more casualty business moving into the E&S market. This is because companies can set their own prices and have a flexible set of exclusions that aren't always available in every market. I believe this trend will continue.
And your next question is from Andrew Andersen from Jefferies.
You had mentioned some casualty pricing above loss trend. And I think in the past, your view of loss trend was maybe 2 to 2.5 points above CPI and for excess layers, perhaps even higher. Can you just provide us with your latest view on loss trends?
Yes. It would be unchanged. I think I would say mid-single digit on the primary and double digit on the excess. I think that's what we used. And I would say unchanged compared to a year ago.
And then just on the Mortgage segment, I think some mortgage associations are talking about originations picking up in '26. Are you kind of thinking about that as we turn to next year? Or are you still envisioning more of a softer market there?
Great question. As you know, economic forecasts are updated regularly. For the time being, we expect mortgage rates to remain stable. This situation is not ideal for stimulating more housing demand. However, we might see some changes by 2026, possibly with interest rates decreasing and mortgage rates following suit. We are monitoring this closely, but it's still too early to have a definitive outlook at this stage.
And your next question is from Brian Meredith from UBS.
Just two quick ones here. The first one, just following back up on the MCE program business. Can you scale how much business is that? And did you just start nonrenewing? I was surprised you said it's another 12 to 18 months before we're going to see the benefits there given I thought you started to get notifications when you closed the deal.
Yes. In total, I would say that about one-third was related to the program. I want to clarify that this is not the reason we made the purchase; the primary motivation was the other two-thirds. We have been able to analyze this, and as you know, it takes time to reach conclusions. We need to wait until the end. I believe we have primarily focused on underwriting actions and reviewed the list of programs that we could renew when the time is right, while also communicating with the NGS to provide them ample notice. That's our current status, and I anticipate that most effects will begin in 2026.
Brian, just to clarify, we're discussing this from an earned perspective. Some of the actions were implemented late last year and early this year. Therefore, you will begin to see some reductions or changes in the second half of 2025 on a written basis. However, the full impact on an earned basis will take about 12 to 18 months to materialize, as earnings typically take longer to come through.
All right. That makes sense. And then the second one, Francois, I'm just curious, could you give maybe an update on where we stand with Bermuda tax credits, not the DTA stuff, but the credits that I know the Bermuda Monetary Authority has been talking about providing?
Unfortunately, there is no official news at this time. Discussions are ongoing, and we remain hopeful and optimistic about reaching a positive outcome with the Bermuda government. We have a strong presence in Bermuda and believe the government supports our role in the community. This situation involves negotiations not just with Bermuda's stakeholders but also with the OECD, which has some oversight. We anticipate further developments in the late third quarter, with the possibility of actionable items in the fourth quarter. We will provide an update in the next quarter, but currently, we do not have any official information to share.
And your next question is from Meyer Shields from KBW.
Two quick modeling questions. First, if we add back the 20 basis points of, I guess, acquisition accounting impact for the insurance segment's acquisition expense ratio, is that a good run rate going forward? Or are the changes in the program business going to change that as well?
I would begin there. The benefits or impact on the loss ratio due to our underwriting actions on the programs business are expected to materialize over time. We hope to see improvements in our underlying performance, but the timing isn't entirely clear. However, we are optimistic that we can achieve better results. If not by the end of this year, then certainly by 2026.
Okay. That's helpful. And then second, just because MidCorp, I think in the past, you've talked about having a significant property exposure. And a couple of carriers this earnings season have talked about particularly benign weather and low non-cat losses. I was wondering if you saw anything like that in the MidCorp book.
I think this quarter was a pretty low cat quarter. So I think when we started, we got a little bit unlucky, I think, with some of the hurricanes and then the wildfire. But I think for the first time this quarter, I think we got a low cat quarter. So I agree with the sentiment.
And your next question is from Jamie Bhullar from JPMorgan.
Sort of question just differentiating between pricing movements versus price adequacy. If you look across your business, where is it that you're seeing attractive growth opportunities across reinsurance and insurance versus maybe highlight some of the lines where you might have been active in the past, but you just feel like the risk reward is not that compelling.
Yes, I believe that in most of the casualty line, we are seeing pricing outpacing loss trends. While I don't find the entire casualty market appealing, there are specific areas of opportunity, particularly in the excess and surplus market, which are more specialized in both insurance and reinsurance. We have a strong desire to expand in these areas. Our insurance team is highly specialized, which gives us confidence in their ability to identify the right opportunities. For reinsurance, it's about supporting the right underwriting teams who have expertise in handling the challenging liability risks that are hard to price. We also see growth potential in our retail casualty segment, where we operate as a primary insurer, as our value proposition is well-received by both large and mid-sized retailers. We have developed a solid platform in London that should support our growth despite competitive pressures. In the MidCorp segment, we are still experiencing double-digit rate increases, and as we continue to enhance our platform, we believe we can achieve further growth based on our value proposition. That said, there are some areas facing challenges, such as D&O and cyber, which are well-known, as well as E&S property where the rates remain attractive but competition is intense. These are areas we are monitoring closely.
And then on MI, like obviously, if rates decline, there would be a pickup in growth. But do you think a decline in rates overall would be a positive for the business or negative given that there's a high likelihood that if rates decline a decent amount, then persistency suffers and the in-force book, which is producing very high margins might begin to run off a lot faster. So what's sort of an ideal scenario for the MI business from a profitability standpoint? And how do you view declines in interest rates affecting that?
Yes, we do all this work, and it depends on how much rates decline for the existing book to become more likely to refinance. If rates drop by 50 basis points, it wouldn't significantly impact us. We see more advantages from homes becoming more affordable. I believe that new production would compensate for any negative effects from refinancing. However, if there is a substantial refinancing wave, we would gain market share. We value our existing book highly; it comprises high-quality mortgages with considerable home equity. We wouldn't mind sacrificing a small portion of that for new business. But unless there is a significant drop in interest rates, I think the existing book will remain with us for a long time.
Yes, we have some room in that respect.
And your next question is from Wes Carmichael from Autonomous Research.
I know we're over time, so I'll just keep it to one. But I had a question on reinsurance. From some of our conversations with some industry participants, it sounds like there was a bit of a return of aggregate treaties with midyears. So I was just curious how you think about your exposure to aggregates and if your appetite at all has changed to write that business.
I don't think there’s anything significant to report. For clarification, we typically write aggregate treaties, but it only represents a very small part of our operations. A few years ago, aggregate dropdowns were popular, especially in a softer market. However, we haven't observed a significant resurgence, and our team has not backed the few that have been introduced to the market.
And your next question is from Elyse Greenspan from Wells Fargo.
I have a follow-up regarding the MidCorp discussion. We talked about the programs aspect, which I know will impact the margin. When you announced the deal, the aim was to align this business with legacy Arch. There was a 100 basis point drag on the underlying loss ratio this quarter. Can you clarify whether we should expect to see some improvement in MidCorp that could help the insurance segment's underlying loss ratio next year, with further progress in 2027? I want to understand the timing of the improvements in the MidCorp margin and how it will align with legacy Arch.
Yes. So our long-term thesis for making the acquisition and the targeted profitability, I think, is unchanged. I mean the timing, it's hard to predict. We're doing a ton of work around it, preparing again. But I don't have a crystal ball as far as what the market will do around us. But I think the thing we feel good is that the assumption that we use, I think we'll be able to realize over time.
I am not showing any further questions. I would now like to turn the conference call over to Mr. Nicolas Papadopoulo for closing remarks.
Yes. So I want to thank you all for participating in the call and wish everyone a great summer. Definitely, Francois, we need to take some time off. And I want to reiterate one more time that we think the market we trade in is very attractive and the challenge, our challenge and a lot of challenge around this market is really generating new business. I think that's really it. So again, thank you, and enjoy the summer.
Thank you, ladies and gentlemen, for participating in today's conference. This concludes the program. You may all disconnect your lines.