Arch Capital .(ACGL) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported an annualized operating return of 25% and a 4% increase in book value per share, reaching $38.62 as of September 30, 2023, which is up 4.3% for the quarter and 18.4% year-to-date [5][18] - Underwriting income for the quarter was$ 721 million, with a combined ratio of 80% for the reinsurance segment and 90.9% for the insurance segment [5][10][19] - Net cash flow from operating activities exceeded $4 billion, contributing to a 20% growth in the invested asset base over the last 12 months [23] Business Line Data and Key Metrics Changes - The property and casualty segment achieved$ 3 billion in net premiums, a 26% increase year-over-year [6] - The reinsurance group saw net premiums written of $1.6 billion, up 45% from the same quarter in 2022, with a combined ratio of 80% [10][19] - The insurance segment's net premiums written increased by 16% over the past 12 months, with strong growth in small- and medium-sized specialty accounts [10][19] Market Data and Key Metrics Changes - The current hard market is expected to persist, with increasing evidence that casualty rates are underpriced and oversold [8] - The mortgage segment's underwriting profit included approximately 40% from non-U.S. operations, indicating a strategic diversification yielding positive results [12][13] - The company noted that the investment side is in a positive cycle, with new money rates exceeding book yields, which should enhance investment income over time [13] Company Strategy and Development Direction - The company aims to capitalize on favorable market conditions and is well-positioned to navigate various insurance cycles by reallocating capital to segments with the best risk-adjusted returns [7][15] - The management emphasized a data-driven approach to capital management, focusing on superior risk selection and prudent reserving [15] - The company is committed to maintaining a disciplined approach in the mortgage insurance market while exploring growth opportunities in both insurance and reinsurance segments [12][20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ongoing hard market supporting profitable growth, despite potential shifts in dynamics [7][8] - The company anticipates continued opportunities in liability insurance as the market evolves [10] - Management highlighted the importance of maintaining a strong capital base, which currently stands at$ 18 billion, providing flexibility for future capital deployment [23] Other Important Information - The company reported $180 million in current accident year catastrophe losses, with half related to U.S. severe convective storms [22] - The leverage ratio is under 20%, indicating a strong capital position [23] - The company is actively monitoring reserve adequacy in the casualty market, particularly in the context of social inflation and litigation funding [31][62] Q&A Session Summary Question: Thoughts on January 1 property cat renewals on the reinsurance side - Management expects improvements in rates for the January 1, 2024 renewals, though not as significant as the previous year [26] Question: Timing of casualty market developments - Management indicated that the liability market will take longer to stabilize, with a focus on evaluating reserves and client needs [28] Question: Industry reserves in casualty - Management acknowledged pressures in reserves and noted that larger accounts are likely to feel more pressure than smaller ones [32] Question: Mortgage insurance outlook and COVID-related reserves - Approximately 85% of reserves are from post-COVID years, and management remains cautious about delinquencies and market conditions [34][36] Question: Sustainability of double-digit insurance premium growth - Management suggested that while growth may decelerate, there is potential for returning to double-digit growth in the future [39] Question: Investment portfolio duration strategy - Management is considering extending the duration of the asset portfolio if interest rates become more favorable [41] Question: Capital deployment priorities - Management emphasized the importance of capital flexibility and the ability to deploy capital in favorable market conditions [42] Question: Retention of premiums and profitability - Management confirmed that increased retention is a result of improved capital availability and a focus on profitable lines of business [51][54] Question: Discretionary compensation patterns - Management indicated that compensation decisions are made in the first quarter, with a careful approach to avoid volatility in expenses [56] Question: Casualty reinsurance market dynamics - Management noted that the industry is facing challenges due to social inflation and increased litigation funding, impacting reserve adequacy [62]