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 company with the SEC 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 at www.archgroup.com and on the SEC website at www.sec.gov. 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 who 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 toward 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 are its breadth across specialty lines, areas where our team applied 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 increases 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 catastrophe-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 catastrophe 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 partnership with our broker and ceding company 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 towards 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 business 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 one 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 one year ago. The ex-cat accident year loss ratio improved by 10 basis points to 57.5% compared to the same quarter one 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 one 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 one 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 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 catastrophe probable maximum loss for a single event, one in 200-year 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. We view the capital return options as two distinct choices, but we are unlikely to pursue both simultaneously. In the current environment, we believe our earnings profile is very strong, yet opportunities for aggressive growth are somewhat limited. Therefore, returning capital to shareholders will remain a priority. Given the current stock price, share buybacks will be our preferred approach moving forward. At least for the near term, we will monitor how things develop, and this is a topic we regularly discuss with our Board. That's where we stand. Our balance sheet is robust, so there is certainly potential for more buybacks as we progress, and we will continue to assess this as we move ahead.
My second question is about the growth of insurance premiums. We have annualized the MidCorp deal, but we expect some effects from non-renewals. Additionally, the overall market is softening. Considering these factors, how do you view the impact of non-renewals on MidCorp in relation to the premium growth outlook for your insurance portfolio going forward?
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. The first one being areas where we still see some rate increases, 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 general liability or cyber. The good news there, I think the rate decrease has really moderated on the general liability, 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 layered 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 as well, if I look at the outlook, I would expect us to have the ability to grow the insurance 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 some high-level thoughts there just on potential exposure?
I think it's just too early to tell. I think for sure, it's going to be a big event potentially for Jamaica. And it's big enough to have repercussions that go beyond effecting the Caribbean overall, but it's too early to tell.
It's still early to determine the specific impact, but depending on where the hurricane makes landfall, some resorts may have insured values that could be relevant for us. At this stage, we aren't sure where things will settle, but I believe our focus should be on understanding the exposures and potential impacts involved.
Next question will be from Andrew Kligerman at TD Cowen.
So, starting with the growth in insurance related to a lease, could we shift to reinsurance? In the first quarter, you mentioned that you achieved adjusted net written premium growth of 6% or 7%. You reiterated this for reinsurance in the second quarter. In this quarter, you mentioned that two deals and reinstatement premiums added some complexity. So, first, what would the normalized growth have looked like without those factors? Second, how do you view 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 kind of 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 we reported in the quarter.
Thank you, Francois. Regarding the growth outlook for reinsurance, it mirrors that of insurance. There's rate pressure on short-tail lines, but casualty lines are experiencing rate increases that may present opportunities. Overall, the situation is similar, although a significant challenge is that many ceding companies prefer to retain their business, which is a trend we see as companies grow more confident in their balance sheets. Consequently, we are witnessing companies keeping more business, which poses a notable challenge for the reinsurance sector. When they do retain, they often shift to an excess of loss position, which can create additional opportunities for us. Typically, the margin on excess of loss is more favorable than on quota shares, suggesting we might see a different margin composition in the future.
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.
I believe the industry's outlook can be seen from two different perspectives. On the casualty side, due to current market conditions and challenges related to previous years, I foresee a trend where more business shifts towards the excess and surplus side. This side offers more flexibility in rates and forms and allows for exclusions, which takes longer to implement in the admitted market. We might also see some shared and layered business, as well as catastrophe-exposed business, returning to the admitted market, similar to historical trends. While it's difficult to make predictions, I anticipate that the fundamental shift driven by casualty will persist.
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 kind of caught up into 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 conducted a significant amount of buybacks in the third quarter. Some companies refrain from buybacks during this period due to concerns about the hurricane season's effects. I am trying to understand your plans for the fourth quarter and possibly the first quarter. When did your buyback activity begin? Were you purchasing throughout the entire quarter, or did you manage to buy back $732 million in approximately a month towards the end of the quarter?
Yes, it has been fairly consistent throughout the quarter. There was a bit more activity in September, and as I mentioned, we've been active in October as well. A while back, we would have said we wouldn't consider buying during hurricane season. However, Arch is different now compared to then. We are much more diversified and stronger, with less exposure in terms of equity to a massive or catastrophic potential maximum loss, even at the 1 in 250 level or lower. For all these reasons, we felt, and still feel, much more comfortable with buybacks during the wind season. As I stated earlier, we plan to continue pursuing this opportunity as we move 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 review it on a daily basis. I believe we can increase our capital returns, though we don't have a specific target in mind. It's an ongoing process. There is significant liquidity in the stock currently, allowing us to buy back shares at what we consider an attractive price. We will proceed as much as we feel is appropriate and assess the situation as we move forward.
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?
It's not critical, but it definitely provides us with an advantage, and we've already seen some benefits, especially in Europe. There's no doubt that the new higher rating has been positively received, and we are reaping the rewards of 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 perspective on capital, along with insights from other rating agencies. Overall, I believe our capital position is very strong, and it has always been strong. We aim to optimize within the constraints set by various rating agencies and regulators. The AAA capital level you mentioned is not something new for us; we were already at that standard, so it wasn't an additional burden for us to meet.
I believe we don't just focus on one rating. Typically, we consider both AA and AAA ratings, and for a period, we were somewhat restricted due to the MI. Currently, I think our capital structure remains largely unchanged. Additionally, it's been beneficial for some of the MI, CRT, and SRT as buyers are very responsive to the ratings of those layers and often offer different prices for better ratings. As Francois mentioned, in Europe, particularly in the reinsurance and insurance sectors, our strength lies in casualty professional lines. Venturing into those markets, having an AA- rating gives us a competitive edge.
Okay. I mean, do you view it just opportunistically? Or could you see a scenario where you could reduce capital and live with the back to the A+ rating?
It's a trade-off that we constantly evaluate. We consider how much capital we need to maintain on the margin for the additional rating. Currently, we are in a strong capital position and already have the necessary capital. However, if conditions change in the future, we will need to assess how much capital is truly worth holding at that incremental level. At this moment, considering our capital situation and the strength of our earnings, which allows us to generate capital regularly, we are in an excellent position.
My next question is about your positive outlook on the insurance business and the increases in casualty rates. Casualty can encompass various areas, so after excluding some lines like professional lines, what remains in terms of attractive pricing for general liability, commercial auto, and excess liability, including auto? I'm curious about where you see the opportunities. Is the focus more on auto-related lines, or could you clarify which casualty lines you find appealing?
So, I think 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' compensation, 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 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 maybe 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 are that a couple of our clients on the E&S side are retaining more of their business. We would like to do more. Additionally, let's not forget that rates are going down, so some of our cedents are also reducing their ceded premium. These are the two components: their desire to retain more business and their downward revision of growth expectations, which affects our insurance volume.
Ryan, just to confirm, it's clear that the rate environment is decreasing in property. There is also a reduction in exposure, but I want to clarify that this reduction is usually not our choice; it's the cedent's decision. In some cases, they choose to keep it net or adopt a different structure, but we still value the product and the line. Generally, we are quite satisfied with what we do. Any decrease in exposure that you notice on our end is mostly due to the cedents opting for different strategies, not because we are choosing to step back.
Got it. And then just a follow-up. You guys talking about the transitioning market. I think a lot of times we just kind of focus on pricing. But I'm curious about what type of lines or — it might be in primary, because there's business going back to admitted and just some of the more bad stuff stays E&S or facultative, I guess it could be a cedent just choosing to I guess just continue to seed the stuff where they feel like there's an arbitrage. But like are there pockets you can point out that are kind of particularly challenging to underwrite in this type of market where you really got to kind of cross your Ts and dot your Is?
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 on what we should price for which risk and which limit for which risk. So, I think underwriting in 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.
Without knowing what the next cycle will entail, it's hard to make predictions. We've previously discussed a normalized loss ratio around 20% throughout the cycle. We firmly believe that home prices are the primary factor affecting the performance of the mortgage portfolio. So far, home prices have remained robust nationally, although there have been some areas with declines. This strength in home prices largely explains why our mortgage business has performed better than expected over a long period. Whether this trend continues is uncertain, as there are various macroeconomic factors that could influence it. However, we strongly believe that the current lack of inventory and housing in the U.S. will help maintain home prices in the near future. Based on that, we hope to see strong performance continued. While it may slightly increase over time, as we've had exceptional results for an extended period, 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, we have a long wish list, but we are currently focused on many initiatives. The middle market is a significant area of interest for us, and we have discussed other growth areas. However, M&A opportunities are infrequent and take time to materialize, so we won’t hold onto a large amount of excess capital just for the chance of an M&A deal. Our leverage ratio is at one of its lowest points, giving us a lot of flexibility. Our balance sheet is strong, and we have some excess capital. We believe our ability to act on opportunities is quite good. If there are additional opportunities that could improve our position, we would be keen to pursue them. In the meantime, we already have numerous assets that can generate solid 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 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 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 in 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. We are seeing a slight negative impact in casualty, but nothing significant. It could relate to one accident year within a specific business unit or line of business. So, there’s a minor adverse effect in casualty, which isn't surprising to us. However, looking at the overall picture regarding our reserves and how they are performing, our quarterly actual results compared to expectations are still favorable, meaning they are lower than expected, which gives us a lot of confidence. We are responding to the data, and in certain areas, there are no concerns, with trends emerging that we are addressing. Overall, the short-tail lines have performed exceptionally well, as they have for some time, and we will continue to assess this every quarter.
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 happen, but I believe the loss peak on the casualty line is somewhat higher than on the short-tail lines. However, I think the mix hasn't changed significantly at this stage. Looking ahead, it might change.
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 that what we've experienced so far, and with the complete transfer of the book to Arch, has been positive. Personally, I am very satisfied with our observations thus far. The loyalty of the business, our ability to offer additional services to our distribution partners, and the property expertise we've gained are all advantages we didn't previously have. The initial assumptions we made at the time of the acquisition have proven to be accurate, which makes me glad about our strategic decision to pursue it. Regarding the dedicated side, with the MGA, we opted not to go forward with the deal due to the MGA portfolio associated with the acquisition. We've initiated the remediation process, and it's largely in line with our expectations. However, the timeline is longer than anticipated because these MGAs have notification periods. Therefore, we expect to see the effects of non-renewals in 2026 as we signed a number of those MGAs this year.
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. I think it's important to be cautious about what we're examining. There's no doubt that the headlines regarding subprime auto loans indicate some underperformance, but the customers in that segment are quite different from those we serve on the USMI side. We're not experiencing similar results, and the evidence lies in our quarterly reports. We're focused on the specific types of borrowers in the U.S. There's been some media coverage of insolvencies in the trade credit sector that may involve Coface, but we are not directly implicated. However, such events may lead stakeholders to reconsider their credit dependencies and the lines of credit they provide, which is to be expected. At this stage, we feel very comfortable with our exposure. We have a solid understanding of our position and continuously monitor external data and emerging trends. So far, there hasn’t been anything that compels us to rethink our strategy.
And more specifically on Coface, I think, is short-term credit. So, the game here of the 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. Regarding the programs we acquired, the premium we've identified to be non-renewed is approximately $200 million. As Nicolas mentioned, corresponding notices have been sent out, followed by a notice period, during which MGAs have 3 to 6 months to secure another carrier. Some may succeed in finding a replacement sooner, so we might start seeing some movement as early as the fourth quarter. I can't provide precise forecasts on when this will affect the top line in the upcoming quarters, but you can consider that $200 million as part of a $1.5 billion to $1.6 billion book, which represents the overall MCE premium volume that we expect to influence. On a positive note, the middle market business, which we found attractive and aimed to acquire, has performed exceptionally well. The rate environment for both casualty and property in this segment has been favorable. We just returned from several industry conferences where our business partners expressed strong support and satisfaction with Arch. We believe that the headwind generated by non-renewing some of those programs can be at least partially offset on the middle market side.
Got it. That's helpful. Second question I had is on the reinsurance business and casualty specifically. The repricing efforts, I guess, are a lot of it's on the quota share, the actual underlying primary taking rate. Can you characterize what you're seeing there? I mean, are the underlying primaries taking enough rate where it's in excess of loss cost and it's actually building improving margin in there? Is that why you're speaking more optimistically about it? Or is it still pretty obviously high loss cost environment? So I'm just trying to get a feel of whether that's actually improving or not.
I believe you have a good understanding. We are seeing that in general casualty, we are achieving rates that exceed the loss costs, which are currently elevated. If you look at the reinsurance side and partner with the right specialty underwriters who effectively manage their limits and steer clear of challenging areas like high auto risks, then that would encourage increased business with them. Over time, we anticipate being able to increase our share 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 catastrophe side, we are still optimistic. The outlook remains positive, and we like the margins. A couple of data points to consider: the market peaked in July 2024, which was a little over a year ago. By 2025, prices decreased by about 5% to 10%, indicating that we are entering our second round of rate reductions. Depending on the region, some rates have doubled since the increase we observed from 2021 to 2024. Overall, we believe we are in a good position. While it varies by region, we remain confident that the business is appealing, with growing demand. Last year saw increased demand, and we expect that trend to continue in the U.S. as well as internationally. Therefore, despite anticipated pressure on rates, we still find the margins to 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 the timing and maybe amounts of increased spending?
Increased spending was primarily the focus. We realized that the staff we brought back in August 2024 consisted mainly of underwriters and claims personnel. This was the majority of the team transferred. At that time, we acknowledged the necessity of hiring additional staff to bolster our capabilities, especially in actuarial data analytics and some support functions. We anticipated this process would take time due to the competitive job market. Although we have made some progress in addressing this, we still face challenges. Nonetheless, I believe we can manage the incremental mid-core business at a more efficient expense ratio than we had before the acquisition, thanks to the synergies and the ability to distribute some infrastructure costs across a larger base. We still have a few openings to fill in both underwriting and support roles, but we have accomplished a lot over the past year, which has been reflected in our business performance. We're successfully executing our strategy and working to grow in specific areas. While there is still some work to be done, we are in a good 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 come into play on an earned basis. So, the improvement, again, is not huge this quarter, but hopefully there will be some benefit as this business runs off, and we will see some improvement or at least some stable loss ratios.
Great. And then, Francois, I wonder if you could talk a little bit about the substance base 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 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.