Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Arch Capital Group Ltd (ACGL, Financial) reported a record $762 million in underwriting income for Q2 2024.
- The company achieved an annualized operating ROE of 20.5%, reflecting strong profitability.
- The mortgage segment generated $287 million in underwriting income, with a 12% increase in new insurance written in the US.
- Investment portfolio increased to $37.8 billion, generating $364 million in net investment income.
- Regulatory approval secured for the acquisition of Allianz's US MidCorp and Entertainment businesses, expanding market presence.
Negative Points
- Higher frequency of catastrophic events impacted reinsurance underwriting income, despite overall profitability.
- Casualty lines remain an area of concern with ongoing rate increases and reserve strengthening across the industry.
- Catastrophe losses amounted to $196 million for the group in the quarter, primarily from US secondary perils.
- Expense ratio in the insurance segment increased by 70 basis points, partly due to investments in predictive analytics and tech companies.
- The company faces potential challenges in integrating the Allianz acquisition, which may incur additional costs.
Q & A Highlights
Q: How do you see the casualty market turn evolving, and what are your expectations for price increases in casualty lines?
A: Marc Grandisson, CEO: The casualty market turn takes time to fully materialize due to its long-tail nature. We are seeing early signs of impact from recent inflation, but it will take several quarters to stabilize. Historically, it took years for the last hard market to fully reflect in pricing, and we expect a similar timeline now.
Q: Can you provide more color on the mortgage releases and how we should think about their run rate level?
A: Francois Morin, CFO: The mortgage releases have been better than expected due to strong cure activity and a positive housing market. While we are cautious about future economic conditions, the current environment supports lower reserving levels for new delinquencies. However, we do not expect the same level of reserve releases going forward.
Q: Why do you think Arch is not as susceptible to the casualty reserve issues affecting some competitors?
A: Francois Morin, CFO: Our book of business is less exposed to problematic lines like commercial auto and general liability. We have a smaller and more diversified portfolio, including international business, which helps mitigate these risks. Additionally, our cycle management strategy means we wrote less during softer market years.
Q: How do you view capital deployment, including potential buybacks or dividends, given your current capital levels?
A: Francois Morin, CFO: While we are focused on closing the Allianz acquisition and navigating the active wind season, we remain committed to returning excess capital to shareholders if no attractive opportunities arise. This could include share buybacks or dividends.
Q: Given the deceleration in growth, how are you approaching the current market opportunity compared to past hard markets?
A: Marc Grandisson, CEO: We are aware of the need to balance growth with maintaining underwriting margins. While the market is reaching equilibrium, we continue to see opportunities for disciplined growth. Our experience and data help us navigate these conditions better than in past cycles.
Q: Can you explain the increase in the underlying loss ratio in the insurance business?
A: Marc Grandisson, CEO: The slight increase is due to a mix of business and conservative reserving practices. Our specialty lines can show variability, but we believe this is within normal expectations and does not indicate a broader trend.
Q: How does home price appreciation impact your mortgage insurance business?
A: Marc Grandisson, CEO: Home price appreciation increases equity in homes, reducing the likelihood of foreclosures and losses. This is beneficial for our mortgage insurance portfolio as it lowers the risk of claims.
Q: What are your thoughts on the CrowdStrike cyber event and its impact on the cyber insurance market?
A: Marc Grandisson, CEO: We are still assessing the impact, but initial estimates suggest a range of $500 million to $1.2 billion in losses. This event serves as a reminder of the risks in cyber insurance, and we expect it to influence pricing and underwriting practices going forward.
Q: How does the Allianz acquisition affect your peak zone natural catastrophe PML?
A: Francois Morin, CFO: The Allianz acquisition does not materially impact our peak zone PML as the acquired book is more diversified and less concentrated in high-risk areas like Florida.
Q: Are you seeing any inflection in public D&O pricing with the return of capital markets activity?
A: Marc Grandisson, CEO: We have not observed significant changes in public D&O pricing due to capital markets activity. The market remains rational and well-behaved.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
