管理層發言
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 and on the SEC's website. I would now like to introduce your host for today's conference, Mr. Nicolas Papadopoulo, and Mr. Francois Morin.
Good morning, and welcome to our third quarter earnings call. I'd like to begin by wishing the best to my friend and 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 cat 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 those opportunities with the best risk-adjusted return. Industry cat 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 cat activity, we believe the property market remains attractive and one in which disciplined underwriters can produce attractive returns on capital.
Overall, rates continue to outpace trends, which is consistent with our hypothesis of a hardening casualty market. We have selectively increased our casualty riding in both insurance and reinsurance as the markets respond to claim inflation and uncertainty around loss trends with higher prices. Our insurance segment was $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 MidCorp 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 returning 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 clients.
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 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.
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, with 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% to 20% between the reinsurance and 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, 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 PML 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. 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.
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. Operating expenses in the new business were also somewhat lower than ultimately expected as we ramped 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. While still early, the MidCorp 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. 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%. Overall, our investment portfolio generated significant operating cash flows, supporting continued growth of our assets under management, setting us up for strong investment contributions in the years to come. 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 the flexibility to deploy capital as needed and continue delivering outstanding results for the benefit of our shareholders.
分析師問答
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 provided some good color on the expenses. But could you give us a sense of just the impact on the underlying loss ratio within the insurance segment in the quarter?
Yes, sure. To give you more details on that, the normalized, meaning ex-cat accident year loss ratio for the segment was 57.6%. The stand-alone loss ratio for the MidCorp business was 62% in the quarter. That's how we came up with it. Effectively, it increased by around 70 basis points when accounting for both. Subsequently, it increased the reported loss ratio for the ex-cat loss ratio.
Okay. And then in reinsurance, the margin sometimes fluctuates quarter-to-quarter, but the underlying loss ratio did trend up in Q3. Was there anything in the business mix that might have impacted that in the quarter?
Nothing specific. Again, we'll go back to our trailing 12 months in terms of our analysis. There’s nothing unusual in the quarter—the trends are very consistent. The trailing 12 months are performing well, so the answer is nothing to report. Claims happen or they don’t, but over the last 12 months, we're very comfortable with the loss picks and how things are behaving.
My last question is on capital. You mentioned your excess capital position. Is there a timeframe for doing something to return capital to shareholders, whether it's a quarterly dividend, a special dividend, or even a stock repurchase? Is this post the end of wind season?
You hit all the good points. It's very much a conversation we have all the time. Yes, we wanted to wait until the end of the wind season, which is nearing its close. As we prepare for 2025, part of the outlook for growth opportunities and how we may deploy capital is certainly something we will consider. We're not ignoring this, and we will report back when there's more to say on that.
Our next question comes from the line of Andrew Kligerman with TD Cowen.
Good morning. Maybe following up on the insurance division and MidCorp. I think I heard correctly that the MidCorp impact on the underlying loss ratio was about 60 to 70 basis points. If that's the case, it kind of moved up a fair amount, like 250 basis points year-over-year. Should we be thinking this is a good run rate underlying number for the loss ratio going forward?
We indicated that in the first year, we thought this business would be breakeven for us. Yes, we should expect a slight increase in the loss and combined ratios for the segment. In terms of run rate, I’d prefer not to commit to anything beyond the first year. We are already making adjustments and taking underwriting actions regarding the business we want to grow and what we are less keen on. Ultimately, there are good opportunities in the casualty business we want to explore, and the rate environment is strong. So, in the short term, yes, the combined ratio may inch up a bit, but we have definitive plans on how to minimize it moving forward.
It's dynamic. If you look at the insurance group overall, it's heavy on non-property lines, so the property line attracts a lower loss ratio. We've been growing in the property line the last couple of years, and the market is making it more difficult. We have a large component of professional lines where rates have been challenging, which is likely to incur a higher loss ratio. However, there are opportunities in casualty that we think will bring higher margins, albeit potentially with a higher loss ratio than property.
Interesting. Could you break down some of the lines of business in insurance? What kind of rates 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?
In casualty, we are indeed seeing rates on the rise, which is warranted given the market is facing challenges. Historically, we underwrite casualty cautiously. Now, based on our analysis, we see pockets of casualty business that we like and are selectively growing on both the insurance and reinsurance sides. If we talk about property, especially in the reinsurance versus insurance, we are primarily focusing on insurance. E&S property continues to show attractive profitability. In the last few years post-Hurricane Helene, the business has reacted with numerous rate increases and significant changes in terms and conditions, making it appealing. After a year without major losses, we see more competition coming from various sources, wanting to take advantage of this business. So, we find our rates stable, yet the margin will depend on reactions to recent catastrophes. Ultimately, the market remains attractive for now.
Our next question comes from the line of Mike Zaremski with BMO Capital Markets.
First question is on catastrophes. Can you disclose what you're assuming for Hurricane Helene? I know you're thinking the cats were a bit higher than the consensus, but you guys have been taking more risk in Florida. Should we think about Milton too? There are conflicting numbers out there.
On Helene, we expect it to generate a bit more leakage than expected due to its widespread impact, especially with flooding involved. We're currently assuming an industry loss of approximately $12 billion to $14 billion, which may indeed be higher than market expectations. For Milton, we still need to conduct more analysis, but as of now, the anticipated losses do seem to be lower than initially thought. The industry estimates are evolving and settling around a $30 billion loss range, in line with what we know today. Regarding our losses from this, they should fall in line with our market share during such an event.
That's helpful. My last question for Nicolas. Can you add any context to why the CEO change took place? We've had questions wondering if it's performance-related.
It was a personal decision; Marc and I were good friends, so it's bittersweet. Under his leadership, the company has performed exceptionally well. I believe Arch is larger than any one individual, and we still have much to accomplish. I feel confident with our management team and the engagement of our 7,000 employees. I genuinely look forward to continuing this journey; Marc's departure is not performance-related.
Thank you, Nicolas. It's helpful hearing your viewpoint as a different type of leader now at the helm. Are there specific things we should stay tuned for that might be on your wish list to implement, or do you anticipate a continuation of the current direction?
It's really business as usual. I've been with the company for 23 years and worked closely with Marc in setting up our strategies and operations. We were aligned in our thinking, so I wouldn't expect any major operational changes.
Our next question comes from the line of Jamminder Bhullar with JPMorgan.
I have a question regarding your views on 1/1 renewal and the impact of supply-demand imbalance, given the losses from Milton. Has your perspective shifted?
On property cat, we've significantly grown our book in the last couple of years because returns are attractive. With the impacts from both midterm and Helene, the market is stabilizing. We're seeing more supply from various competitors and new entrants that have been waiting to re-enter following years of profitability.
More specifically, do you expect pricing to go down, stay flat, or how should we quantify it?
I don't have a crystal ball, but in regions with losses, prices will likely increase. In areas without losses, you might see the bottom of the programs tighten up. However, competition is emerging in higher layers, so I anticipate moderate stability overall.
For casualty reserves, can you share your comfort level with your reserves on your legacy book and the Watford business?
We're very comfortable with our reserve levels. We review reserves regularly, and although we've encountered some adverse developments, we're managing it well. This helps justify the rate increases we see in the industry.
Our next question comes from the line of Cave Montazeri with Deutsche Bank.
Regarding growth, you've mentioned that primary insurance growth is about 5% excluding MidCorp. In reinsurance, you stated that even adjusting for reinstatement premiums, there's still a 22% growth. Can you elaborate on what drove that growth?
The growth was driven particularly by the casualty return, especially in the U.S. where we're keen to get on programs as rates improve. Additionally, the specialty business, especially from 1/1, is also contributing to growth, alongside our motor business in the UK that is experiencing dislocation due to rising rates.
On the mortgage insurance business, was the growth in the quarter primarily due to Fed cuts or linked to more activity? Also, regarding the delinquency rate increase, is that tied to increased activity or any specific seasonal factors?
The delinquency uptick is very much within our expectations. Given our significant refinancing from 2020-2021, we are now seeing the standard prime delinquencies. Seasonal factors also play a role, as we’ve noted trends in borrower behavior around the third quarter that traditionally reflect increasing delinquency rates. Overall, our delinquency rate is still within comfortable limits.
Our next question comes from the line of David Motemaden with Evercore ISI.
Based on your earlier comments, excluding MidCorp, it appears the underlying loss ratio for the core Arch insurance business sat around 57%. This is an uptick over both the prior quarter and year. Can you share insights regarding this increase?
The uptick largely stems from a shift in growth mix. With increased focus on casualty and liability lines, these typically yield a higher accident year loss ratio than property lines. Thus, the changes in mix contributed significantly to the increase.
Can you provide any granularity on the sizing between short tail and long tail reserve developments?
We're observing favorable development primarily in short tail lines, whereas we've faced some adverse movements in long tail lines. It’s consistent with trends across the industry, particularly with workers' comp showing favorable signs while long tail adjustments remain a challenge.
Our next question comes from the line of Yaron Kinar with Jefferies.
Can you share your thoughts on cycle management, particularly regarding retail distribution and the mid-core business?
The mid-core business offers more stability, leading to less price volatility during cycles. Clients tend to value the relationship with carriers, making it much more stable than other more volatile lines. The timing of the MidCorp acquisition aligns well with ongoing price increases on the property side, so we find ourselves in an advantageous position.
Our next question comes from the line of Yaron Kinar with Jefferies.
Can you provide your insights regarding the other liability occurrence growth in insurance? How much of that came from the MidCorp versus organic growth?
A fair amount of the E&S casualty business is organic. That has been an exciting growth area featuring double-digit rate increases. For MidCorp, while it includes some occurrence liability, it’s a combination of factors. The overall takeaway is that the current rates in that protection line are exceedingly favorable.
What has driven the significant change in growth rates, especially in the third quarter?
A lot of this stems from an increased sophistication in understanding reserves, with claims that were muted during COVID now surfacing. There’s been a notable uptick in severity, leading to a need for more robust actions through risk management and insurance placements in response to shifting claim behaviors.
Our next question comes from the line of Brian Meredith with UBS Financial.
What's the current state of return on new capital in your various business segments?
All our businesses are performing well. Reinsurance has been superior compared to insurance and mortgage right now, but that could change. We're closely monitoring how the market evolves, especially as we approach 1/1 renewals.
Reinsurance typically has higher risks and rewards, leading to better returns, while our insurance business tends to focus more on casualty lines with different returns. We find two components must be balanced together.
Do you expect to achieve greater returns in your reinsurance business compared to insurance and mortgage, pending 1/1? Is that a fair assessment?
That’s a valid observation. Reinsurance is currently outshining the other sectors, but there’s ongoing potential in mortgage and casualty insurance we believe could evolve positively.
The mortgage segment is stable and has provided solid earnings from our existing portfolio. The origination market, however, is not as robust at the moment, but we are finding growth opportunities elsewhere and deploying capital effectively.
I have a couple more questions regarding Hurricane Helene. Based on your earlier comments about it being 45% of cat losses, approximately $200 million was related to it. Does that share correlate well with your expectations for large events, particularly in regard to Milton?
Your math is correct, but Helene is slightly elevated for us based on the accounts we wrote. Milton presents a unique situation given it's Florida-focused. I wouldn’t draw direct parallels in terms of market share outcomes.
Lastly, do you anticipate changes with your reserves after the recent quarterly reviews, especially for longer tail losses?
We haven’t seen anything out of the ordinary since our trends remain relatively stable. We've always maintained a longer-term view of loss trends, and our expectations are consistent even at year-end. We don’t foresee anything concerning at this moment.
There's really nothing unusual to report. We continue to monitor closely and are comfortable with where we stand in our assessments.
I would now like to turn the conference back to Mr. Nicolas Papadopoulo for closing remarks.
There are no further questions. This concludes our presentation today. Thank you for your questions, and we look forward to seeing you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.