管理層發言
Good day, ladies and gentlemen, and welcome to the 3Q 2025 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 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. 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 periodic reports that are filed with the SEC by the company from time to time, including our annual report on Form 10-K for the 2024 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 also will make reference to certain non-GAAP measures of financial performance. The reconciliation to GAAP for non-GAAP financial measures 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. And now, I would 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 Arch's Third Quarter Earnings Call. We delivered record results in the quarter with over $1 billion of after-tax operating income and over $1.3 billion of net income, both up 37% year-over-year. After-tax operating earnings per share of $2.77, another record, represented an 18.5% annualized operating return on average common equity. These results reinforce the strength of our diversified platform, which enables our underwriters to pursue opportunities and deploy capital across the enterprise. Meaningful contribution from all three segments combined with solid investment returns pushed year-to-date book value per share growth to 17.3%. Our quarterly consolidated combined ratio of 79.8% reflects excellent underwriting and low catastrophe activity in the quarter. Big picture, our 9 months combined ratio of 83.6%, which includes the impact of California wildfires and severe convective storms, highlights the strong underwriting performance across our businesses. Now some comments about market conditions. As you have heard on other calls, competition is generally increasing. As cycle managers, we lean into the strikes of our brand, including underwriting discipline and using risk-based pricing tools to generate profitable business. We deployed capital into businesses we believe will generate superior risk-adjusted returns. However, given relatively weaker market pricing and an attractive entry point for our stock, we repurchased $732 million of shares in the quarter. Critically, our strong balance sheet and strong capital-generating capabilities permit us to both invest in our business and return capital to investors. Our objective is clear: throughout the cycle, to maximize return for our shareholders over the long term. Importantly, I want to emphasize that we are actively looking to deploy as much capital as possible towards attractive underwriting opportunities. Our playbook remains consistent: allocate capital to attractive opportunities that meet our risk-adjusted target returns, pursue profitable growth while prioritizing renewals that meet our return thresholds, and take full advantage of our operating flexibility across insurance, reinsurance, and mortgage. Over time, this playbook has been key in enabling us to deliver consistently strong returns without regard to market cycles. I will now provide some color from our reporting segment, starting with our Property and Casualty Insurance Group. Underwriting income for the quarter was $129 million, up 8% year-over-year or nearly $2 billion of net premium written. Our combined ratio was 93.4%, with a current accident year ex-cat combined ratio of 91.3%, reflecting the strong underlying margins of our insurance portfolio. The distinguishing strengths of our insurance segment is its breadth across specialty lines, areas where our team applies deep knowledge and experience to drive better risk selection. Successfully navigating a transitioning market demands that our underwriters employ the capabilities and experience they have developed to leverage our differentiated offerings and market leadership position as we look to drive profitable returns. When compared to the third quarter last year, we grew net written premium in North America other liability occurrence by 17%, supported by growth in the middle market and double-digit rate increase in E&S casualty. Net written premium in our North America property and short-tail book increased 15%. Growth in middle market and middle property more than offset declines in excess and surplus property. International premium volume was essentially flat. The strategic element of our insurance growth is our middle market business in North America, which was significantly enhanced through the MidCorp and Entertainment acquisition last year. As discussed previously, the acquired business provides a significant platform from which we intend to build further scale in the middle market sectors. Importantly, it is already driving growth and yielding tangible returns. At the outset, we set three integration priorities for the acquired business: roll over the portfolio, remediate less attractive areas, and separate from legacy systems. We have completed the portfolio rollover, remediation and separation are on target. Even though there is still work to do, we remain excited about this opportunity, which has been well received by our distribution partners. Next to reinsurance, which delivered another strong quarter with a record of $482 million of underwriting income—a 76.1% combined ratio was a significant improvement over last year's cat-heavy third quarter and illustrates our ability to generate attractive underwriting returns. Net premium written was $1.7 billion, down roughly 11% year-over-year, reflecting current pricing conditions in short-tail and property cat lines and increased retention by cedents. The diversity of our reinsurance platform means we aren't overly concentrated in any one line. For example, property cat, which has been a hot topic of recent industry conferences, represents only 14% of reinsurance total net premium written for the trailing 12 months ended September 30. Our diversified reinsurance platform, supported by strong relationships with our brokers and ceding companies across multiple lines and geographies, further enhances our ability to navigate a competitive environment. We continue to like our prospects in most lines of business, and with improving conditions in casualty lines, our agility and ability to create opportunities is an advantage for us in this market. Moving to mortgage, which continues to operate exceptionally well, generating $260 million of underwriting income for the quarter. The segment remains on pace to deliver approximately $1 billion of underwriting income for the year and is a steady diversifying contributor to Arch's earnings. While mortgage originations remain modest due to affordability challenges, our high-quality in-force portfolio continued to outperform expectations. We are well positioned to support first-time homebuyers when the U.S. housing market eventually expands. The broader mortgage insurance market remains healthy with disciplined underwriting and stable pricing. Now turning to investments, where strong earnings and cash flow grew investable assets to $46.7 billion this quarter with net investment income of $408 million, a quarterly record for Arch. We continue to position the portfolio to remain conservative in the current environment with an eye toward generating reliable and sustainable earnings and cash flows for the group. To conclude my opening remarks, I want to emphasize that we manage Arch with a long-term lens. That was true in the past, it is true today, and it will be true tomorrow. Market cycles span years, not quarters. And in a transitioning environment, our focus remains on producing superior returns and profitable growth. Our ability to remain successful is rooted in our differentiated customer experience, superior risk-based pricing, and the creativity of our underwriting teams, which are empowered and incentivized to generate profitable businesses aligned with shareholder value. Today, we are well positioned to outperform in an increasingly competitive market. Our strong capital position gives us the flexibility to invest in the most attractive risk-adjusted opportunities, whether in the business or by returning capital to shareholders. This transitioning market is a moment to lean into our strengths with confidence and clarity. I'll now turn the call over to Francois before returning to answer your questions.
Thank you, Nicolas, and good morning to all. Last night, we reported our third quarter results with after-tax operating income of $2.77 per share and an annualized net income return on average common equity of 23.8%. Book value per share grew by 5.3% 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 80.5%, down 40 basis points from last quarter. Our underwriting income included $103 million of favorable prior year development on a pre-tax basis in the third quarter or 2.4 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 seen in our short-tail lines in our P&C segments and in mortgage due to strong cure activity. Current year catastrophe losses were low at $72 million, net of reinsurance and reinstatement premiums in what is typically our most active quarter for catastrophes. The Insurance segment's net premiums written grew by 7.3% compared to the same quarter 1 year ago, mostly due to the contribution of the MidCorp and Entertainment unit for a full 3 months this quarter compared to only 2 months from the same quarter 1 year ago. The ex-cat accident year loss ratio improved by 10 basis points to 57.5% compared to the same quarter 1 year ago, and the 220 basis point increase in the acquisition expense ratio is primarily due to the benefit we observed in the third quarter of 2024 from the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP. Profit commissions paid for prior accident years also explain some of the increase from the same quarter 1 year ago by approximately 40 basis points. The reinsurance segment produced its best quarter ever in terms of pre-tax underwriting income at $482 million, a direct reflection of the strong underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity in the quarter. Overall, net written premium was down by approximately 10.7% from the same quarter 1 year ago. Of note, approximately 75% of the overall reduction is the result of two large transactions from the third quarter in 2024 in our specialty line of business that did not renew this quarter. The absence of reinstatement premiums also negatively impacted our top line this quarter. Our ex-cat accident year combined ratio remained very strong at 76.8%, reflecting the robust level of underwriting margins in our book of business. Once again, our mortgage segment delivered another very strong quarter with underwriting income of $260 million. The improvement from last quarter was primarily due to a lower level of ceded premiums as a result of the tender offers we executed in the second quarter for two Bellemeade Re securities. There was also a slight benefit due to a higher level of cancellations on CRT transactions. The delinquency rate of our USMI business increased to 2.04%, in line with our expectations due to seasonality in the business. On the investment front, we earned a combined $542 million from net investment income and income from funds accounted for using the equity method or $1.44 per share pre-tax. Net investment income remains an important source of income for us. And with the help of strong positive cash flow from operations, $2.2 billion in the quarter, it should continue to grow in line with the size of our investment portfolio. The allocation of our portfolio remained neutral relative to our targeted benchmark. Income from operating affiliates was strong at $62 million due especially to a very good quarter at Somers Re. Our operating effective tax rate on a year-to-date basis stands at 14.7% and reflects the mix of income by tax jurisdiction. It is slightly below the 16% to 18% previously guided range, mostly due to a 1.7% benefit from discrete items. As of October 1, our peak zone natural cat probable maximum loss for a single event, one in 200-year of return level on a net basis remained flat at $1.9 billion and now stands at 8.4% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased $732 million of our shares in the quarter and added $250 million to this number so far in October. On a year-to-date basis, we have repurchased 15.1 million shares, representing 4% of the outstanding number of common shares at the start of the year. As Nicolas mentioned, our balance sheet is stronger than it's ever been, and it remains a significant asset for us as we focus on executing our playbook and leveraging the value of the Arch brand as we move forward in this dynamic market. With these introductory comments, we are now prepared to take your questions.
分析師問答
And your first question will be from Elyse Greenspan at Wells Fargo.
My first question is just on capital. The level of buyback went up in the quarter. So, I guess my question is maybe two-pronged. Just how do we think about the level of buybacks going forward just given the strong earnings this year? And then, I know last year, you guys had gone the route of a pretty substantial special dividend. So, is this year the route more of buyback versus a special in terms of capital return?
Yes. Regarding our options, we likely won't pursue both simultaneously. In the current environment, we're observing a strong earnings profile, but limited opportunities for aggressive growth in the business. Therefore, returning capital to shareholders will remain a priority. Given the stock price, share buybacks will be our preferred approach moving forward. At least in the short term, we will monitor how things develop, and this is something we regularly discuss with our Board. Our balance sheet remains very strong, and I believe there is definitely room for more buybacks as we progress. We will continue to evaluate this as we move ahead.
My second question is regarding the growth of insurance premiums. We have annualized the mid-corp deal, but there will be some impact from non-renewals. Additionally, the overall market is softening in spot. Considering the pricing and the effect of the non-renewals on MidCorp, what is your outlook for premium growth in your insurance book from here?
On the insurance side, I think we're still very much bullish about the business. I think we like the market we trade in, and we would like to grow and we talk about profitable growth. That's what we're really focusing on. And you have to divide the market into three broad categories. First one being areas where we still see some rate increase, like casualty will be the main one and the middle market business where we think we have the rate increase, and I think we have the propensity to grow. Then, you have the second segment, which is the one that has witnessed headwinds in the past, which is mostly professional lines, whether it's GNO or cyber. The good news there, I think the rate decrease has really moderated on the GNO, pretty flat. And on cyber, there are signs that they are moderating. So, that should be less of a headwind going forward. And third, it's really the property, whether it's the large account property and the E&S property. The good news for us is that we don't write much of the shared and layer property business. And we have a relatively small footprint on the E&S side, which is really under a lot of pressure today. So, I think overall, if I look at the outlook for us and our positioning in the London market, I would expect us to have the ability of the insurance to grow better than the market we play into.
That's helpful. And then just one last one. There's a hurricane out there right now with the potential to impact the Caribbean. I don't think there is a lot of insurance or even reinsurance exposure there. But do you guys just have high-level thoughts there just on potential exposure?
I think it's just too early to tell. It looks like it could be a significant event for Jamaica, and it could have repercussions that might affect the Caribbean as a whole, but we won't know for sure yet.
It's too early to determine the extent of the impact, but depending on where the event strikes, some of the resorts may fall under the insured values we could be involved with. At this time, we can't predict the exact outcomes, but identifying the areas of exposure and potential impacts will be our main focus.
Next question will be from Andrew Kligerman at TD Cowen.
Starting with the growth in insurance mentioned by Elyse, let's shift to reinsurance. In the first quarter, you noted an adjusted net written premium growth of 6% or 7%. You reiterated this in the second quarter, and then in this quarter, you mentioned that the two deals and the reinstatement premium have created some noise. First, what would the normalized growth have been without those factors? Secondly, how do you anticipate growth in that segment moving forward?
Well, I'll take the first part, and then maybe Nicolas can share in the second. I mean, the normalized growth absent all of these one-offs, or again, and they happen, right? We talked about it in the past, it's reinsurance can be lumpy. There's deals that happen, they don't happen. The timing of it is not always predictable. But yes, the fact that with a little bit of the headwinds that we're seeing, again, coming from a very high bar on the property, property cat 7/1 renewals, I'd say our growth in the quarter might have been around, like, call it, a decrease of 3% to 4% not the 10% that was reported in the quarter.
Yes. Thank you, Francois. And on the outlook for growth on the reinsurance side. So, I think, think of reinsurance, it's pretty much the same outlook as insurance. I think you have rate pressure on the short-tail lines, but I think you're seeing a rate increase in this location on the casualty lines that could provide opportunity. So, I think, I would say a similar picture, but for, I think, a big headwind is like a lot of ceding companies like the business like we do. We like the insurance business. So, after a few years, there's less fear in the marketplace. People feel better about their balance sheets. So, what we're seeing is company retaining more, which creates a significant headwind for the reinsurance group. I mean, by doing so, they either retain the business or move very often to an excess of loss position that presents additional opportunities for us. And I would say that the margin on the excess of loss is usually better than the margin on the quota share. So, I think we may see a different makeup of the margin going forward.
I see. And then, maybe shifting back to insurance. As a specialty writer, and especially with pressure in E&S property these days, just more from the industry perspective, and you touched on your view of how Arch is going to do, but maybe again a little bit. But how do you see E&S premium for the industry playing out over the next few years? I mean, not only have we seen such tremendous growth over the last few years, but is it possible that E&S premium as an industry starts to decline over the next few years? So, outlook and then just Arch in E&S over the near intermediate term as well.
So, I think, the outlook of the industry is a tale of two stories. I think, on the casualty side, because of what's happening in the market and because of the issues people are having with the prior years, my view is that the trend of more business moving to the excess and surplus side, where you have freedom of rate and forms and where you can add exclusions, that take a much longer time to be able to do on the admitted side, that will continue. On the shorter line, we could see some of the shared and layer business and cat exposed business going back to the admitted market as we've done historically. So, I think it's hard to predict, but I think the fundamental shift, which is driven by casualty, I expect to continue.
I see. And then Arch, how do you see yourselves? Do you see gaining share on the short-tail and the casualty, respectively?
I mean, the short-tail will be a challenge based on what we see in terms of the pricing. I think we are more optimistic on the casualty side where we've been underweight in the difficult years. And I think our loss picks have been holding pretty well. So, that gives us confidence in how we price the business forward. So, I think that as rates continue to improve, I think that gives us an opportunity certainly to do more at a time maybe where our competitors are still caught up in looking at the right things they did in the earlier years.
Next question will be from Josh Shanker of Bank of America.
Yes. I don't want to limit your response too much, but you certainly engaged in a lot of buybacks in the third quarter. Some companies avoid buybacks during this time due to concerns about the hurricane season. I'm trying to understand your intentions for the fourth quarter and possibly the first quarter. When did your buybacks begin? Were you active throughout the entire quarter, or did you manage to execute $732 million in buybacks within about a month before the quarter ended?
Yes, it was quite consistent throughout the quarter. There was a slight increase in September, and as I mentioned earlier, we have been active in October as well. A few years ago, we would have avoided buying during the hurricane season, but Arch is different now. We are more diversified, stronger, and have less exposure in terms of equity from a massive or cap PML, even at the 1 in 250 threshold or lower. For all these reasons, we felt much more comfortable with buybacks during the wind season, and as I said earlier, we intend to continue pursuing that opportunity going forward.
And you're not worried, in the past, you've said part of the reason to do a special dividend was because you just don't think you can return as much capital as you desire to through the buyback of the limitations as you look out into the end of this quarter and beyond? Do you think you can satisfy every bit of capital return you need through repurchases?
We evaluate this on a daily basis. I believe we can increase our capital return. We don’t set specific targets for ourselves, so it’s a continuous process. Currently, there is significant liquidity in our stock, allowing us to buy back shares at what we consider an attractive price. We will do as much as we feel is appropriate and then assess our position.
Next question will be from Tracy Benguigui at Wolfe Research.
This is a bit belated, but it's been a while since I've been on your call. Congrats on your S&P upgrade back in June. Since capital is so topical, my question is, while it's great that you have a AA- rating, it's a new category. You now have to hold AAA capital, back when you were rated A+, you only had to hold AA capital. And I realize a lot of that was just model methodology driven. But my question is, how important is it to you to stay in this new rating category when you're thinking about your ability to deploy capital?
Is it critical? Not necessarily, but it definitely offers an advantage, and we've already observed the benefits in certain regions, especially in Europe. The new higher rating has been positively received, and we are capitalizing on that. However, it does come with certain costs. That said, the S&P capital model is just one aspect we consider. We also have our own internal view of capital and take into account other rating agencies as well. Overall, our capital position remains very strong; it has always been strong. We aim to optimize within the constraints set by all the rating agencies and regulators that oversee us. The AAA capital level you mentioned isn’t new territory for us as we were already operating at that level. So, it wasn't an extra burden or an initial requirement we needed to fulfill.
I believe we manage more than just one rating. Typically, we consider AA and AAA ratings. For a while, we faced some challenges due to the MI situation. However, I think our capital structure hasn't changed drastically. It's been beneficial for some of the MI, CRT, and SRT areas where buyers are very attentive to the ratings and will pay more for better ones. As Francois mentioned, in Europe, especially on the reinsurance and insurance sides, our strength is in casualty professional lines. As we enter these markets, having an AA- rating is beneficial.
Okay. I mean, do you view it just opportunistically, or could you see a scenario where you could reduce capital and live with a back to the A+ rating?
It's a trade-off we continually assess. We consider how much capital we need to maintain the margin for an incremental rating. Currently, we have sufficient capital and are in a strong position. However, if circumstances change in the future, we will revisit the question of whether it is worth holding that additional level of capital. At this moment, given our capital situation and the strength of our earnings, where we consistently generate capital internally, we are in a very favorable position.
Okay. My next question is regarding your enthusiasm for the insurance sector and your positive outlook on the business, particularly concerning increases in casualty rates. Since casualty can refer to various lines, once I exclude some casualty categories, such as professional lines, what remains in terms of appealing pricing like general liability, commercial auto, and excess liability, which includes auto? I'm curious about where you're identifying the opportunities. Are they more focused on auto, or could you share the different casualty lines that you find attractive?
So, I think the one of the opportunities on the E&S casualty side, which would be excess, excess liabilities. So that will include some auto, but usually, we don't focus on the auto on the E&S side. And then, we have other franchises, like sensitive business, like national accounts or constructions, which are casualty-led lines with heavy components of workers' comp, general liability, and a lesser amount of auto. So, those are the places where we think we have the ability to grow.
Next question will be from Ryan Tunis at Cantor.
Just wanted to go back, I thought it was an interesting comment that on the reinsurance side, you're seeing cedents proactively retain more. And I guess I'm curious, when I look at like the facultative property decline of 17% this quarter, how much of that is, I don't know, you guys proactively walking away or a decline in exposure as opposed to rate, because I was thinking it was kind of more rate driven, but that comment has me think it might be more volume-based.
No, I don't think we are cutting back. At this stage, regarding the other property line of business, the main factors involve a couple of our clients on the E&S side retaining more of their business. We would like to do more. Additionally, the rates are also decreasing, leading some of our cedents to adjust their ceded premium downwards. These two factors are significant: their desire to retain more business and their downward reforecasting of growth, which affects our insurance volume.
Ryan, just to confirm, there's no doubt that the rate environment in property has decreased. Additionally, there's been a reduction in exposure, but it’s important to clarify that this reduction is usually not our decision. It's made by the cedents. There are situations where they choose to keep it net or adopt a different structure, but we still have a positive view of the product and the line. Overall, we are quite fond of most of what we do. Any decrease in exposure that we experience is primarily because the cedents are opting for different strategies, rather than us choosing to withdraw.
Got it. I have a follow-up question. You mentioned the transitioning market. Often, the focus is on pricing, but I'm interested in the types of lines involved. It seems like there's movement back to admitted business while some of the more difficult cases remain in E&S or facultative. It could be that a cedent continues to cede where they see an arbitrage. Are there specific areas that you find particularly challenging to underwrite in this market where attention to detail is essential?
I think it's a competitive market, Ryan. So, I would say a lot of the market today, you get a lot of anti-selections. So, we develop a lot of data analytics tools to really segment our portfolios and provide underwriters some really granular information that determines how we price for which risk, which limit for which risk. So, I think underwriting the market, we are bullish because we have those tools. I think if you don't have the tools, I would be a lot less bullish about our ability to write profitable business going forward.
The next question will be from Mike Zaremski at BMO.
Great. Pivoting to the mortgage side of the business, I feel like when we were to quiz most people and ask them what the historical, I don't know, 5-, 6-, 7-year loss ratio was, most people wouldn't guess it was 0. And obviously, there were unique circumstances in the past 5-ish years. But just curious, and we know it's a future family business, but curious if your views on a normalized loss ratio is different than what it was in the past if we think about kind of the current cycle and the next cycle coming.
I believe it's difficult to predict what the next cycle will look like, so any speculation would be just that. We've discussed a normalized loss ratio in the 20% range throughout the cycle. We strongly believe that home prices play a crucial role in determining the performance of the mortgage portfolio. To date, home prices have remained robust, with some localized declines but generally staying strong nationwide. This largely accounts for the mortgage business outperforming our earlier expectations over a longer period. Looking ahead, many macroeconomic factors will influence this, but we are confident that the current lack of inventory and housing in the U.S. will support home prices for the foreseeable future. Based on this, we anticipate that performance will remain strong. However, it might gradually increase over time, as it feels like things have been exceptionally good for a long while. Nonetheless, we remain very optimistic about the mortgage business, which has been outstanding for us.
And the underwriting remains excellent. I think if you look at the FICO distribution, I think they are getting better. So that will drive a better outcome.
Got it. Moving to capital management. Clearly, you signaled buybacks are high on the list. Maybe you can just give us an update. Has anything changed quarter-over-quarter on maybe inorganic opportunities? Is U.S. small commercial still something that's on the retail small commercial still high up on the wish list?
Yes. The wish list is long. We have a lot that we are currently working on. The middle market is a significant focus for us, and we have discussed other areas for growth. However, M&A opportunities are infrequent and can take time to come to fruition. We do not plan to hold excessive capital solely for potential M&A transactions, especially since our leverage ratio is at a low point, providing us with considerable flexibility. Our balance sheet remains strong, and we have some excess capital, which enhances our ability to act on opportunities. If there are additional prospects that could improve our position, we will certainly pursue them. Meanwhile, we already have numerous assets generating good earnings.
Got it. And maybe just sneaking one last one in since you guys provide excellent market commentary. And Nicolas, you provided a good view of kind of how to think about the E&S marketplace going forward. Do you have a view on what has also been the kind of exponential growth of the MGA marketplace and kind of how it's been impacting Arch or maybe the industry? And do you view the MGA's marketplace growth to continue to grow much faster than the rest of the market?
Interesting subject. I'm personally bullish on the MGA. I think, historically, strong growth in the MGA, except for a few exceptions, didn't turn out to be good. I think the lack of incentive alignment, the delay in the information to the insurance carrier or the reinsurers, I'm not bullish on that model. So, I think it's been the flavor of the month the last few years. And I'm still a little bit questioning what the outcome is going to be.
Next question will be from David Motemaden of Evercore ISI.
Just had a question. Obviously, still very good reserve releases. Just focusing in on insurance and reinsurance specifically. Could you talk about the movement between long-tail and short-tail lines between those two? Any sort of things to point out on that front?
I would say there’s nothing out of the ordinary, very much in line with previous quarters. There is a slight downturn in casualty, but nothing particularly significant. It could be attributed to one accident year within a specific business unit. Therefore, a minor negative impact on casualty, which I don't believe is unexpected for us. When we assess the overall situation, particularly regarding how reserves are performing and our quarterly actual results compared to expectations, which still indicate a favorable outcome, I find that quite reassuring. We are responding to the data, and we definitely see trends in certain areas that we are addressing. Overall, the short-tail business has performed exceptionally well, as it has for some time, and we will continue to review it on a quarterly basis.
Got it. And then just taking a step back, the mix shift to casualty lines in both insurance and reinsurance. At least if I look at it on an earned basis, that definitely is up a bit year-over-year hasn't really increased much, I guess, over the past few quarters. Is that having any bit of an impact at all on the underlying loss ratios in either segment? And how should we think about that going forward?
At some point, it will, but I believe the peak loss on the casualty line is somewhat higher than on the short-tail lines. However, I think the mix hasn't fundamentally changed at this stage. Down the road, it might.
Next question will be from Rob Cox at Goldman Sachs.
Just curious, as you start to renew the MCE book, anything interesting you're seeing either on the delegated or the non-delegated side? And how far are we through the non-renewals on the programs book?
I believe we have successfully renewed the entire book that was transferred to Arch, and I'm personally very satisfied with the results so far. The stickiness of our business and our ability to offer additional services to our distribution partners has made us more relevant, and the property expertise we gained in the admitted property sector which we previously lacked has proven our initial assumptions correct. I am very happy with the strategic decision to proceed with the acquisition. Regarding the dedicated side and the MGA, we did not go ahead with the deal specifically because of the MGA portfolio. We have initiated the remediation process, and it's aligning well with our expectations. However, the process is taking longer than anticipated due to the notice periods required by these MGAs. We expect to see the effects of the non-renewals resulting from the agreements we signed with several MGAs this year starting to materialize in 2026.
Got it. And then just wanted to follow up on credit. I mean, just given the mortgage book and the investment in Coface and I think a relatively larger private credit book that you guys have. Any thoughts on the credit environment and anywhere you're leaning into or out of just given some of the noise in private credit?
Yes, it's important to approach this with caution. While the headlines about subprime auto loans suggest they are not performing well, I believe those borrowers are quite different from our clients in the USMI sector. We aren't experiencing similar results, and our recent quarterly report reflects that. It's crucial to consider the specific types of borrowers in the U.S. Regarding trade credit, there have been some high-profile insolvencies, and while we may have some exposure through Coface, that is something they need to manage. Events like these often lead to increased scrutiny of credit dependencies and lines of credit, which is not unusual in our industry. At this time, we feel very secure about our exposure and understand it thoroughly. We continuously monitor external data and emerging trends, but currently, there is nothing alarming that necessitates a change in our strategy or approach.
And more specifically on Coface, I think, is a short-term credit. So, the game here in underwriting is really, as you are aware of a weaker credit, is really to over time, cut your line to that particular credit name so that when the inevitable happens, your exposure is much less. So, I think they played that game really, really well. And I don't know about the latest insolvencies, but historically, they've been very good at that.
Next question will be from Alex Scott at Barclays.
First one I had was just circling back on Rob's question on the remediation. Could you frame for us at all like how much impact that could have on the insurance segment? Just thinking through trying to dial in premium growth estimates and knowing how much some of us missed our reinsurance growth this quarter from not knowing about the transactions. I just want to make sure I'm layering in enough for this lagged remediation impact.
Yes. Specifically regarding the acquired programs, we've identified approximately $200 million in premiums that will not be renewed. As Nicolas mentioned, notices have been sent out, followed by a notice period, and MGAs have 3 to 6 months to secure another carrier, with some being more successful than others in finding replacements sooner. Therefore, we might start seeing some of these changes in the fourth quarter. I don't have exact forecasts on when this will affect our top line in the upcoming quarters, but to give you a rough idea, this $200 million is part of a $1.5 billion to $1.6 billion book, which is our total MCE premium volume. On the positive side, the middle market business that we were interested in has performed very well and the rate environment for both casualty and property in that sector has been favorable. We recently attended a couple of industry conferences where our business partners expressed strong support and satisfaction in working with Arch. We believe that while we may face some challenges from the non-renewal of certain programs, we have the potential to offset some of that impact, particularly in the middle market.
Got it. That's helpful. My second question is about the reinsurance business, particularly regarding casualty. Can you describe the repricing efforts? Is a significant portion related to the quota share and the underlying primary taking rate? Are the underlying primaries accepting enough rate to exceed loss costs and improve margins? Is this the reason for your more optimistic outlook, or is the loss cost environment still notably high? I’m trying to understand if there's real improvement in this area.
I think you understand correctly. We believe that in general casualty, we are receiving more rate than the loss cost, despite it being an elevated loss cost. If you consider the reinsurance side and back the right specialty underwriters who manage their limits effectively and avoid challenging classes of business like heavy auto, you would want to engage in more business with them. Over time, we expect to be able to write more of that business.
Next question will be from Andrew Andersen at Jefferies.
Maybe you could just expand a bit on how you're thinking about 1/1 prop cat renewals. Do you still see returns of kind of 20% here on this line? And how are you thinking about ILS impacting kind of return levels and industry capital?
Yes. On the cat side, we are optimistic. The outlook is positive, and we are pleased with the margins. A couple of data points to consider: the market peaked in July 2024, which was just over a year ago. In 2025, prices declined by 5% to 10%. We are currently in our second round of rate decreases. Depending on the region, some rates doubled from 2021 to 2024. Overall, we feel we are in a strong position, though it varies by region. Generally, we remain hopeful that the business is appealing, as demand has increased. Last year, we saw heightened demand and anticipate even more in the U.S. and internationally. Despite the expected pressure on rates, we believe the margins will still be very attractive.
Next question will be from Meyer Shields at KBW.
I guess, in the past, you've talked about ramping up some spending associated with mid-corporate. I was hoping if you could get an update on timing and maybe amounts of increased spending?
Increased spending has been a key focus for us. While I wouldn't characterize our organization as barebones, the staff that transferred back in August 2024 primarily consisted of underwriters and claims personnel. This formed the bulk of the team during that transition. At that time, we acknowledged the need to hire additional talent to strengthen our capabilities in actuarial data analytics and support functions. We anticipated this would take time due to the competitive job market, but we have made progress in addressing some of those needs. Ultimately, we believe we can operate the incremental mid-core business with a more efficient expense ratio compared to before the acquisition, thanks to synergies and the ability to distribute infrastructure costs over a larger base. While we still have a few positions to fill in underwriting and support functions, we've accomplished much of the necessary work over the past year. The business is performing well, and we are successfully executing our strategy while aiming for growth in certain areas. There's still some work ahead, but overall, we are in a solid position.
Next question will be from Brian Meredith at UBS.
Two quick ones here. Just going back to the whole MCE, MidCorp and the program business runoff, the underlying loss ratio improvement in insurance, is that a direct result of some of the actions being taken there? Is that something else? And therefore, as we start to see this runoff, should we start to see underlying loss ratios continue to improve in insurance?
It's more the latter. The impact of the non-renewals has not really affected our earnings on an earned basis. The improvement this quarter is not significant, but as this business runs off, we should hopefully see some benefit and at least some stable loss ratios.
Great. And then, Francois, I wonder if you could talk a little bit about the substance-based tax credits that Bermuda came out with, I think it was the end of September, what that impact could potentially be for you all?
A bit early to tell. No question, yes, the consultation paper is out. Comments have been submitted. We have had meetings with, obviously, as an insurance community with the government expressing our views. The biggest, I'd say, remaining item that we don't have clarity on is, is on the transition credits. I mean, at what pace will these kind of credits be allowed to be reflected starting in 2025? So, that is still to be determined. There's work being done on that right now. We expect to have clarity in the first, call it, first half of December, clarity/almost finality because it has to be enacted before the end of the year for us to be able to reflect it in our financials. But to your question, Brian, I think it will be substantial, we hope. And when we have like the law, I mean, we'll be very quick to share that with you all and give you a bit more color on what that might mean for us.
At this time, I'm not showing any further questions. I would like to turn the conference back over to Nicolas Papadopoulo, for closing remarks.
Yes. Thank you for spending time with us this morning, and we're looking forward to talking to you next quarter.
Thank you, sir. Ladies and gentlemen, again, thank you for participating in today's conference. This concludes the program. You may all disconnect your lines.