Good day, ladies and gentlemen, and welcome to the Q4 2023 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with this 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 periodic reports that are filed by the company with the SEC from time to time. 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 reference 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 at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sirs, you may begin.

Thank you, Gigi. Good morning and thank you for joining our earnings call. Our fourth quarter results conclude another record year as we continued to lean into broadly favorable underwriting conditions in the property and casualty sectors. Our full year financial performance was excellent with an annual operating return on average common equity of 21.6% and an exceptional 43.9% increase in book value per share, which remains an impressive 34.2% if we exclude the one-time benefit from the deferred tax asset we booked in the fourth quarter. The $3.2 billion of operating income reported in 2023 made it Arch's most profitable year-to-date. Growth was strong all year as we allocated capital to our property and casualty teams, we wrote over $17 billion of gross premium and over $12.4 billion of net premium. While most current growth opportunities are in the P&C sector, it's important to recognize the steady quality underwriting performance of our mortgage group. Although, mortgage market conditions meant fewer opportunities for top-line MI growth, the business unit continued to generate significant profits totaling nearly $1.1 billion of underwriting income for the year. As we have mentioned on previous calls, those earnings have helped fund growth opportunities in the segments with the best risk adjusted returns, demonstrating that the disciplined underwriting approach and active capital allocation are essential throughout the cycle. Our ability to deploy capital early in the hard market cycle is paying dividends as we own the renewals, a phrase I learned from Paul Ingrey, a personal mentor and foundational leader of Arch. What Paul meant was quite simple. When markets turn hard, you should aggressively write business early in the cycle. This puts your underwriters in a strong position to fully capitalize on the market opportunity. By making decisive early moves, you become a preferred partner and others want to do more business with you. In some ways, the growth becomes self-sustaining, which explains part of our success throughout this hard market. At Arch, our primary focus has always been on rate adequacy, regardless of market conditions. Our underwriting culture dictates that we include a meaningful margin of safety in our pricing, especially in softer conditions. We also take a longer view of inflation and rates. For these reasons, Arch was underweight in casualty premium from 2016 to 2019, when cumulative rates were cut by as much as 50%. I thought I'd borrow a soccer analogy to help explain the current casualty market. In soccer, players who commit a deliberate foul are often given a yellow card. Two yellow cards mean the player is ejected from the remainder of the match and their team continues with a one player disadvantage. Today's casualty market feels as though some market participants took to the field with a yellow card from a prior game. They're playing in a match cautiously, not wanting to make an error that will put their entire team at a disadvantage. So whilst Arch sometimes plays aggressively, we've remained disciplined and avoided drawing a yellow card. At a high level, we must remember that casualty lines take longer to remediate than property. If insurers are being cautious and adding to their margin of safety, we could experience profitable underwriting opportunities in an improving casualty market for the next several years. Now, I'll provide some additional color about the performance of our operating units, starting with reinsurance. The performance of our reinsurance segment last year was nothing short of stellar. For the year, reinsurance net premium written was $6.6 billion, an increase of over $1.6 billion from 2022. Underwriting income of nearly $1.1 billion is a record for this segment and a significant improvement from the cat-heavy 2022. Reinsurance underwriting results remain excellent as we ended the year with an 81.4% combined ratio overall in a 77.4% combined ratio ex-cat and prior year development both significant improvements over 2022. Turning now to our insurance segment, which continued its growth trajectory by writing nearly $5.9 billion of net premium in 2023, a 17% increase from the prior year. While the business model for primary insurance means that shifts may not appear as dramatic as our reinsurance groups, a look at where we've allocated capital year-over-year provides meaningful insight into our view of the market opportunities. In 2023, the most notable gains came from property, marine, construction, and national accounts. The $450 million of underwriting income generated by the insurance segment in 2023 doubled our 2022 output as we continue to earn premium from our deliberate growth during the early years of this hard market. Underwriting results remained solid on the year as the insurance segment delivered a combined ratio of 91.7% and a healthy 89.6% excluding cat and prior year development. Now on to mortgage, our industry-leading mortgage segment continued to deliver profitable results, despite a significant industry-wide reduction in mortgage originations last year. The high persistency of our insurance in-force portfolio, which carries its own unique version of owning the renewals, enables a segment to consistently serve as an earnings engine for our shareholders. The credit profile of our U.S. primary MI portfolio remains excellent and the overall MI market continues to be disciplined and return-focused. These conditions should help to ensure that our mortgage segment remains a valuable source of earnings diversification for Arch. Onto investments, net investment income grew to over $1 billion for the year due to rising interest rates that enhanced earnings from the float generated by our increasing cash flows from underwriting. The significant increases to our asset base provide a tailwind for our creative investment group to further increase its contributions to Arch's earnings. Over the past several years, Arch has leaned into both the hard market and our role as a market leader in the specialty insurance space. We have successfully deployed capital into our diversified operating segments to fuel growth, while also making substantial operational enhancements to our platform, including entering new lines, expanding into new geographies, and making investments into new underwriting teams, technology, and data analytics. Finally, as we bid adieu to 2023, I want to take a moment to thank our more than 6,500 employees around the world who help deliver so much value to our customers and shareholders. Our people are our competitive advantage and without their creativity, dedication, and integrity, none of this would be possible. So thank you to Team Arch. François?

Thank you, Marc, and good morning to all. Thanks for joining us today. As Marc mentioned, we closed the year on a high note with after-tax operating income of $2.49 per share for the quarter for an annualized operating return on average common equity of 23.7%. Book value per share was $46.94 as of December 31, up 21.5% for the quarter and 43.9% for the year aided by the establishment of a net deferred tax asset related to the recently introduced Bermuda Corporate Income Tax, which I will expand on in a moment. Our excellent performance resulted from an outstanding quarter across our three business segments highlighted by $715 million in underwriting income. We delivered strong net premium written growth across our insurance and reinsurance segments, a 22% increase over the fourth quarter of 2022 after adjusting for large non-recurring reinsurance transactions we discussed last year, and an excellent combined ratio of 78.9% for the Group. Our underwriting income reflected $135 million of favorable prior year development on a pretax basis or 4.1 points on the combined ratio across our three segments. We observed favorable development across many units, but primarily in short-tail lines in our property and casualty segments and in mortgage due to strong cure activity. While there were no major catastrophe industry events this quarter, a series of smaller events that occurred across the globe throughout the year resulted in current accident year catastrophe losses of $137 million for the Group in the quarter. Overall, the catastrophe losses we recognize were below our expected catastrophe load. As of January 1, our peak zone natural cat PML for a single event, one in 250-year return level on a net basis increased 11% from October 1 but has declined relative to our capital and now stands at 9.2% of tangible shareholders' equity, well below our internal limits. On the investment front, we earned $415 million combined from net investment income and income from funds accounted using the equity method, up 27% from last quarter. This amount represents $1.09 per share. With an investable asset base approaching $35 billion, supported by a record $5.7 billion of cash flow from operating activities in 2023 and new money rates near 5%, we should see continued positive momentum in our investment returns. Our capital base grew to $21.1 billion with a low leverage ratio of 16.9%, represented as debt plus preferred shares to total capital. Overall, our balance sheet remains extremely strong and we retain significant financial flexibility to pursue any opportunities that arise. Moving to the recently introduced Bermuda Corporate Income Tax. As mentioned in our earnings release and in connection with the law change, we recognized a net deferred tax asset of $1.18 billion this quarter, which we have excluded from operating income due to its non-recurring nature. This asset will amortize mostly over a 10-year period in our financials, reducing our cash tax payments in those years. All things equal, we expect our effective tax rate to be in the 9% to 11% range for 2024, with a higher expected rate starting in 2025. As regards our income from operating affiliates, it's worth mentioning that approximately 40% of this quarter's income is attributable to non-recurring items such as Coface adoption of IFRS 17 and the establishment of a deferred tax asset at Summers in connection with the Bermuda Corporate Income Tax. With these introductory comments, we are now prepared to take your questions.

Thanks. Marc, my first question, I wanted to expand on some of your introductory comments just on the casualty side. We've started to see some reserve additions this quarter, and I think you alluded to that last quarter as being what was going to drive the market turn. So how do you see it playing out from here? I know you said it should play out over the next several years. Could you just give us a little bit of a roadmap in how you think about this opportunity emerging for Arch?

Yes, that's a great question. We're closely monitoring our own business and also considering the broader information available. From an actuary's point of view, both François and I are revisiting our actuarial knowledge. We depend on data that has historically been stable or predictable. However, over the last few years, particularly due to the pandemic, court closures, and general uncertainty, plus inflation, we've encountered a lot of data that is challenging to analyze for accurate pricing predictions. As is well known, reserving informs pricing, and having the right reserve numbers directly influences that. Currently, there is less visibility about how reserving will evolve, which is why I understand our clients and competitors need to adjust their strategies gradually. In casualty insurance, even when you have the necessary information and make adjustments, it takes time to assess whether those actions were sufficient. We've experienced several rate increases in casualty since 2020, but we're starting to realize as an industry that the situation may be worse than anticipated. There is increased uncertainty and inflation, which is a significant concern. I expect that companies will begin refining their businesses and may underwrite away from areas impacted by social inflation. They will likely push for rate increases and some may shift business to excess and surplus lines until we have more stability in reserving and loss emergence relates to initial pricing assumptions. The process in casualty takes several years; looking back at the soft market of the late 90s, it took about three to four years to gain clarity, even though the market became much tougher around 2004 or 2005 compared to 2002. Actions need to be taken, and we need time to evaluate their effectiveness. This is the journey that our industry is currently navigating, and it is being reflected in our interactions with clients.

Thanks. And then, my second question, this is the second quarter in a row, right, we've seen the underlying loss ratio within your reinsurance business come in sub-50, and you guys are obviously earning in like cat business written at strong rates last year. How should we think about the sustainability of a sub-50 underlying loss ratio within your reinsurance book?

Well, sustainability is a great question. I think you're absolutely right that we have more property premium that is more short tail and should have a lower loss ratio ex-cat than not, right, compared to other lines. It's a good market. Obviously, profitability embedded in the business should be strong. But we send you back to kind of quarterly volatility, where you sometimes have a better than, call it normal quarter, even as a function of the book and sometimes not. There's going to be volatility. We said it before; the 12-month kind of rolling average is to us a better way to look at it and that's how we see it. But certainly we like the profitability in the book, and it should remain strong. One thing I will tell you, Elyse, by heard on the other calls is that the reinsurance market is continuing to improve somewhat into the one, one renewal. So it is still a very good marketplace. So what it means for the loss ratio, I don't know. But certainly, we're seeing improvement.

And then, just one last one on capital, right? I believe there were some pushes and pulls from the S&P capital changes on your capital but should be positive relative to your mortgage business. Can you just help us think through your capital position relative to just organic growth opportunities you see at hand over the next year?

Well, certainly, I mean S&P is one thing that we look at. We consider many different ways – I mean, we have different perspectives on capital adequacy. We have our own internal view which drives really how we make our decisions. Rating agencies are an important factor but I think more importantly is how we think about it. But you're right. I mean no question that from the S&P point of view, the change of their model was a net benefit and that's reduced kind of give us, I say a bit more excess capital. But we look at it very carefully. We want to make sure that we're able to seize the opportunities that will be in front of us and we see plenty for 2024. So right now our very main focus is growing the business and deploying that capital into what's in front of us and then we'll see how the rest of the year plays out.

Thank you. One moment for our next question. Our next question comes from the line of Andrew Kligerman from TD Cowen.

Good morning. My first question is about M&A. We've seen a lot in the media regarding potential acquisitions of other specialty players, including Arch and other companies. I understand you can't discuss specific transactions and that you've mentioned a goal of achieving a 15% return on capital over time. However, when considering transactions, could you provide some insight into what parameters are important to Arch?

On the M&A front, we are very cautious and strategic about any potential activities. Our historical track record can give you insight into our approach. We seek opportunities that provide a solid return with a sufficient margin of safety. Our motivation isn’t growth for the sake of growth; it’s focused on return on capital. The presence of opportunities above 15% in the market certainly complicates decisions. While we may consider exceptions, we also look at factors such as strategic interests, new types of products, geographical regions, or potentially new teams that can offer underwriting expertise. Our approach to M&A is very disciplined, and we are fortunate to have significant organic growth available. Therefore, any engagement in M&A must be compelling. A key consideration for us is maintaining our culture, which is vital and often plays a significant role in our decision-making regarding M&A.

That makes a lot of sense. You mentioned on the favorable developments that short-tail property was a big driver. So looking at insurance at $21 million favorable, reinsurance at seven favorable. Just trying to understand, were there any large casualty offsets that might have played in and if so, what would they be?

Yes, I would say there are no offsets. We evaluate each line individually, and there will always be positives and negatives every quarter. We analyze the data and respond accordingly. Given the type of business we've been writing in recent years, particularly in reinsurance, we've seen significant growth in property. We applied our standard methodology and approach to reserving, which resulted in some redundancies or releases this quarter on the short-tail side. There is always some variability in any line of business. Yes, we did experience some adverse outcomes in a couple of sub-lines in casualty, but I wouldn't categorize that as an offset. We recorded every single line independently, responded to the data, and arrived at our final numbers based on that.

One thing I would add to this, our reserving approach at a high level is typically to recognize bad news quickly and good news over time. So again, our philosophy hasn't changed at all in all those years.

Maybe if I could sneak one quick one in. You mentioned during the call that one of the growth areas in insurance was national accounts. What type of limits do you write on national accounts?

It's statutory and based on an excess loss model. These are losses, and there's a significant amount of sharing of experiences, both positive and negative, with clients, who are typically larger. The national account is primarily focused on workers' compensation, with over 95% involvement. We offer a self-insured structure that provides the necessary documentation for clients to prove their workers' comp insurance in compliance with state requirements. This is statutory and therefore unlimited by definition. We have some reinsurance in place to protect against certain caps. That summarizes the situation.

Thank you. One moment for our next question. Our next question comes from the line of Jimmy Bhullar from JPMorgan.

Hey, good morning. So, first, just a question on the casualty business. We've seen significant growth in your property exposures with the hardening of the market since early last year. What are your views on just overall market trends on the casualty side, and are you comfortable enough with pricing in terms to increase volumes in that area?

Yes, I think we're comfortable with the casualty and liability market in general, excluding professional lines. The market is showing signs of pressure on the primary side. Our current focus is on the primary market, as reflected in our reinsurance activity over the last year. We believe the reinsurance market has been slow to respond to recent developments and inflation increases. As I mentioned, the insurance market will likely take time to harden due to necessary remediation efforts. The reinsurance market may follow this trend, potentially responding in its own way, similar to past hard markets. On the reinsurance front, a beneficial aspect at this time is that industry players recognize our clients are making necessary changes, and we’re aligning our support with them. We are waiting to see how this develops, but I anticipate that it will create additional opportunities for growth.

And then on mortgage insurance, I would have assumed that reserve releases would moderate over time, and they've actually become even more favorable. And I think there's a shift in what's driving that. It used to be COVID reserves last year, and now it's stuff written post-COVID. As you think about, just want to get an idea on what you are assuming in your reserves that you're putting on the book right now? Are you assuming experience commensurate with what you're seeing in the market or is it reasonable to assume that if the environment stays the way it is, there's more room to go in terms of reserve releases?

Great question. I say reserve releases this year in general were somewhat driven by our views on the housing market at the start of the year, right? So if you rolled back the tape a year, we were more concerned about home prices dropping fairly rapidly, recession, no soft landing, et cetera. So those reserves we set, call it a year ago were very much a function of those assumptions, and they just didn't materialize throughout the year. Throughout the year, we saw a very strong or well-performing housing market. People are hearing their delinquencies much higher than we'd actually forecasted. Home prices are holding up. Unemployment remains relatively low. So you put it all together. I mean, it's really, what transpired in 2023 is very much a function of the reserve releases reflecting kind of how things played out relative to what we thought a year ago. Where we are today at the start of 2024 is certainly a bit more, I wouldn't call it optimistic in the sense that we see good home prices and a solid housing market for 2024. So on a relative basis, the reserves that we're holding today are not as high as they were a year ago. So if you extrapolate from that, is there room for as much in reserve releases going forward? Probably not, but we just don't know. I mean, the data will again play out as it does and we'll react to it, but hopefully that helps you kind of compare and understand how, where we sit today versus a year ago.

Okay. Thanks. And just lastly, your comfort with the reserves in your casualty book, despite all the industry-wide issues, does that apply to the business that came over from Watford as well? Because that company obviously had a decent amount of exposure to casualty.

That's an easy one. Watford, really the underwriting is managed by our team here. So the reserving and approach is aligned with our overall standards and philosophy.

Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO.

Hey, good morning. First question for François on capital in regards to mortgage specifically. So my understanding of the mortgage reserving rules is that after a decade or so, you can start releasing a material amount of reserves. And mortgage obviously isn't growing now, but you also have a Bermuda, I think some captives there too. So just curious, is there a material amount of capital coming or expected to come from releasing from the legacy mortgage or old mortgage business?

The short answer is yes, regarding the contingency reserves. We will begin releasing more progressively starting in 2024 and 2025, and we already had some of that in the fourth quarter of this year. The drop in our PMI's ratio in the fourth quarter was largely due to a dividend we extracted from our regulated USMI Company to the Group. If everything goes as planned, we expect to continue receiving dividends in 2024 and beyond. However, I want to emphasize that while it appears that capital is being released on a regulatory basis, we believe some of it is already being utilized in the business. It's not just sitting idle; it's being used in other areas, as regulators and rating agencies evaluate the overall capital at the Arch Cap Group level. So, while our goal is to position the capital effectively, the overall impact may not be as significant as one might think.

Okay. That's helpful. And sticking with capital, when Elyse asked about you mentioned the S&P Capital model, but I don't think you actually gave any quantitative answers on the benefit because when we see that Arch appears to be one of if not the most diversified. Any help there on how much of a benefit or how to think about how much of a benefit the model offers Arch?

Yes, you're correct. I didn't provide a specific number, and we're not planning to do so, but it's a net positive. There's no doubt that mortgage charges and diversification benefits have reduced our capital requirements, but the final rulings on debt were not as advantageous. For instance, S&P and their new rules no longer classify $1.75 billion of our debt as capital, which is a substantial offset. However, taking everything into account, it is positive. It's important to note that this is just one factor we consider among many, and other rating agencies are also significant. More crucially, it's about how we assess the capital required to operate the business.

Okay. And lastly, since everyone else is sneaking in a lot more questions, based on the remarks you've made it, unless I'm understanding it incorrectly, it sounds like the growth might be you're more excited about the primary insurance segment. Can primary insurance potentially grow just as much in 2024 as it did in 2023?

If the opportunities are there, we'll do more, both on insurance or reinsurance for that matter.

Thank you. One moment for our next question. Our next question comes from the line of Josh Shanker from Bank of America.

Hey, everyone, I think there might be an issue with the phones. We heard Jimmy and Mike clearly, but we couldn't hear your responses to the questions. Let me check with my team. Can you hear me on the phone? They can hear me, so it seems like the issue has been resolved. Great.

Yes, Josh, we can hear you. So hopefully, it's been recorded. I don't know if it's been recorded.

So yes, I've got a couple of quick ones. So it's the lowest quarter of new insurance written in the mortgage insurance business since acquiring UGC. And yet it looks like the capital utilization went up, at least the risk to capital, and the PMR's capital ratio went up. Can you sort of talk about the moving pieces that are driving that?

Well, our PMIers, this is very much a function of a Bellemeade transaction that we called Josh, I think there's significant amounts of capital protection that we exercised on and no longer give us capital credit.

Yes, that's obviously what it is. Yes, definitely that makes sense.

Yes. Coface, I mean, the stock price is one thing, but obviously for us, we booked the income, right. And they declared pretty much. I don't know the exact numbers, but their dividend, their annual dividend has been close to their full net income, 100% kind of payout ratio. So that ends up being what we book in our financials. So yes, the stock price is going to move up and down over the year, but it doesn't directly factor in or end up in their financials.

Okay. And just so I'm getting a lot of inbound call volume or emails from people right now. Nobody can hear these answers that you're giving me. It may be being recorded. They hear me, but they don't hear you.

Thank you. One moment for our next question. Our next question comes from the line of Yaron Kinar from Jefferies.

Hey, good morning, everybody. Should I ask the questions or should we wait till this issue is fixed?

I think we should continue on. Just ask your question. It's recorded. Hopefully, people can hear. We apologize for this, but we'll try to figure it out afterwards.

Yes, no problem. So I guess first question, when you set loss fix into a year, do you update those other than for bad news or frequency? And what I'm trying to get at here is when we look at the reinsurance loss ratios, are they already incorporating the step change in the reinsurance market that we saw in 2023, or were those losses or the loss ratio essentially a reflection of your expectations heading into 2023 and we should therefore see another step up in margins over the course of 2024?

Yes, I think our tendency when we do loss ratio picks; you're on the spot, especially on the long-tail line. Remember François mentioned that earlier, we're much more of a short-tail player than we were in proportion, right? So property is a bit easier to understand; it is what it is. You get the loss; you don't get the loss. You do pick the loss ratio at the end of the year for what you think the attritional will be and there's no cap, you can't really book the cap. There are a couple of things you need to address. On the liability side, our tendency as an insurer or reinsurer on both sides is actually pick a loss ratio that has a little bit of a margin of safety at the beginning, not 100%, recognizing all potential benefits, and we let it season for a while before we go in and make a change to them. What we look at is obviously how the emergence is, which I mentioned about, and how they are emerging versus what we expected. You do this throughout the lifecycle of the deal, but that's a longer-term phenomenon.

Got it. And then my second question Marc, I think in your prepared comments you'd said that casualty may be collectively worse than expected for the industry. And I'm curious that comment, is that really referencing kind of the soft market years of 2013 through 2018 or 2019? Or do you think there could also be some of that emerging for the more recent accident years, where market conditions were clearly good, but maybe the expectations of inflationary trends were still a bit lower than what they ended up being?

It's a really good question, Yaron. We look at the actual versus expected outcomes and notice this more in the softer years. In recent times, the differences are minor, as François mentioned, but overall, our portfolio remains within a reasonable range of expectations. Nothing particularly surprising, because, as you recall, since 2019 there have been improvements in the marketplace, along with price increases. Therefore, those years are definitely not as soft as the period from 2016 to 2019.

Right. But I guess the question would be, even if they weren't as soft and you were getting a lot of piece, the industry was getting a lot of rate at that point, if the expectation was for a inflationary trend of five and it ended up being seven, you could still see some deterioration of very profitable years nonetheless.

You could, but we do reserving with the rate level in mind. So when we were writing the bids in 2021, we tend to look at a longer-term loss ratio and not the more recent years that before the stock market, for instance. So when you factor it all that in, we will tend to take a higher loss ratio pick ourselves on the liability side. So you don't have a similar. One of the things that happened in 2016, 2019, and it was mentioned before is that people probably were more aggressive than they should have been on the loss ratio pick that they did in those years. I think by the time we get to 2021, I think already there was recognition and we saw through the rate increases that the market was trying to get to. I think the loss ratios lifted up a little bit, and I don't think we have a similar kind of deviation from initial loss ratio in those years.

Got it. I'll just end by saying I think you disappointed a lot of soccer fans, including my daughter, by referencing the rest of world football instead of U.S. football this quarter.

We'll do better; it looks like.

Thank you. One moment for our next question. Our next question comes from the line of Bob Jian Huang from Morgan Stanley.

Hey, good morning. Just two quick ones. First, I think two quarters ago on the earnings call, you said when we look at the insurance underwriting cycle, we were at about 11 o'clock. That’s kind of where we were implying improved rates and also lost trend stabilization. Just curious, in your view, what time is it right now? Is it 11:30 or is it 11:59, 2:00 p.m.? Just kind of curious is where you think.

It’s the longest 11 o'clock I’ve ever seen in my life is what I’m going to tell you. So I think we’re still roughly around the 11 o'clock, which again, that clock is never like a one year after the other. You can stay at 11:00. Unfortunately, you can stay into the 3 o'clock and 4 o'clock or where you would want. So I think that it’s still roughly around that level the 11 o'clock, 11:30, perhaps in some cases, but, yes, roughly in that range.

Okay. That’s helpful. 11:00 to 11:30, that's very helpful. Thank you.

Yes.

My second question regarding MGA and capacity in general. There has been some concern that MGAs have been increasingly aggressive. Is this something you're seeing? Is this concern rightfully placed? Does it have any impact on how you think about your underwriting cycle management? Are you becoming more cautious, especially within your reinsurance?

That's a great question. I think I mean the MGAs emerge, as we all know, when there’s a dislocation where there's a need for capacity. I think we see it more acutely in the professional lines and some of them in property. But again, between the supply and demand on the professional lines, I think now that the capacity is probably more plentiful than. It's not more probably, it is more plentiful than it was. So I think it has some impact at the margin. Of course, it does. I think the answer to your second part of the question, which is, how do we react? Well, we do it the same way we always do it, which is if the pricing is going down and the returns are not as good. We will tend to deemphasize or pick or select the better clients that we have in our portfolio and still react the same way we would do in cycle management. On the property side, we also have similar MGAs and MGUs, right? But I think these guys, there’s an acute need for property coverage and capacity. It feels like we need all the capacity we can get our hands on a property at this point in time. So we're not seeing that much of an impact. The property market is still very strong.

Thank you. One moment for our next question. Our next question comes from the line of Meyer Shields from Keefe, Bruyette & Woods.

Hi, I think we're in the same situation where people can only hear the answers to their specific questions. So I'm hoping that comes through here as well. Similar question to Bob, we've seen a lot of companies report some reserve problems in the fourth quarter. I'm wondering, when you look at the book of sedans that you have within reinsurance, is what we're seeing in the public companies a good representation of overall trends, or is it something different in the non-public world?

I believe that's a good question. For the record, this will be recorded, so you'll have access to all the other questions and answers. I hope that's alright.

Yes, that's perfect. Thank you.

So I think the issue with casualty reserving, and you’re an actuary as well as I am, the actual number is in the high of whoever is doing the work. So I think it's like everything else. Our teams may have different views about the loss ratio pick for some of the things that we’re looking at than they would have themselves. So I wouldn't say that it's a one to one. Some of them will not renew, or some of them we may not be able to participate on because we have a different view of the ultimate loss ratio. Each individual underwriter and company come up with their own number, and you have to make your own decision and your own opinion as to where it is.

Okay, I'm sorry, go ahead.

No, no, go ahead. I was wondering whether you were still there, so carry on, please.

Yes, no, I'm still here. Similar question, I guess, obviously what we've seen here is a lot of domestic concerns over liability lines on the international casualty side. Is that concern worsening as well, or should we think of that as just a domestic concern?

It's a similar issue. It's not to the same acuteness in some kind of level, but the world has similarly closed down in a courts. It's not as litigious internationally as you would expect, but we're still seeing some hardening in international casualty as well. We saw this for the last two, three years. So it’s a very similar hardening of the market, may not be as acute in terms of reserving potential issues. I'm not talking now to the globals that are underwriting internationally, that's a different story. If they write in the U.S., they will have similar issues, but there are similar issues all around, but it's not to the same level internationally as we see in the U.S.

Thank you. One moment for our next question. Our next question comes from the line of Elyse Greenspan from Wells Fargo.

Hi, thanks for taking the follow-up. I will say I think you have a lot of folks wondering who's writing the coverage for your conference call provider. But my follow-up is on casualty insurance. Can you give us a sense of the loss trend that you're booking your casualty insurance book to and what rate you're getting in casualty insurance as well?

It varies by line of business, Elyse, but the figures typically range from 5 to 10, depending on several factors such as the line of business, attachment point, limit provided, and risk size. The market reflects a similar trend. Historically, we’ve noted that the liability insurance trend generally exceeds the CPI increase. We're observing numbers coming back at 200 to 300 basis points above this trend, so we are largely aligned with these figures.

So loss trends, you said 7, 8, 9, 10, but can vary by line and sometimes be 5%. Where would you put the price increase?

Oh, again, depending on line of business, but we're low to mid-teens, I would say right now.

Okay. Low to mid-teens. I'm just also repeating. So folks listening?

Yes, I appreciate. I appreciate, Elyse. Thank you. Yes.

Can't hear the answer. So low to mid-teens. Yes, I think that's one, I guess on your, one last one, your cat, you said your PML went a little bit higher, right? But the percent of equity is lower, given the equity rise in the quarter, where would you put your cat load at the start of 2024?

Well, certainly up from 2023. I'd say for the year, we’re looking at somewhere in loss ratio points, right? Call it 6% to 8% of like our premium would be kind of like the cat load.

Okay. 6% to 8% cat load. Thank you for taking the follow-up.

Thanks, Elyse.

You're welcome.

Thank you. One moment for our next question. Our next question comes from the line of Cave Montazeri from Deutsche Bank.

Good morning, guys, it's Cave.

Good morning.

Hey, I have a question on reinsurance terms and conditions and attachment points. Does feel like overall the industry probably took on more high frequency, low severity risk than they should have over the past couple of years. And now maybe on aggregate reinsurers are probably more willing to negotiate on price than on attachment points or terms and conditions. Just tell me what your view is on that topic.

Are you talking about property?

Yes, property.

Yes. What we've observed is that in the lower layers over the past four or five years, there has often been a lot of money simply being exchanged back and forth. There was an increase in activity, as you noted, and the reinsurance market was open to taking on more. This created an inclination to raise premiums at those levels, but eventually, it leads to a situation where the clients purchasing reinsurance are paying more than they realize they should be keeping for themselves. This is why retention has increased. With higher retention, clients need to manage their own portfolios better to improve their overall losses. Currently, regarding catastrophic excessive losses, we see clients opting to buy more coverage at the top because they are recognizing and assessing the full extent of exposure capacity needed in their probable maximum loss (PML). Essentially, people are moving away from the lower layers and focusing on acquiring more coverage at the top. I anticipate we will see this trend continue into 2024, which makes complete sense.

Okay. My follow-up question is on mortgage insurance. Now you had been kind of pulling back even before activity came to a halt. But if the fed rate cuts, if they do come, lead to a pickup in the U.S. activity in the housing market, would you be happy to grow in line with the market or should we expect you to kind of grow maybe less than the market?

Yes, mortgage, absolutely, we would be. I think that yes, the answer is we would be more than happy. We have the capacity, capital to be able to deploy and I think we would be very, very pleased to do more. Absolutely.

As you know, it's been a very good market, very rational market. So obviously, the rates we're able to charge for the risk will matter and how we position the book. But in terms of our ability to grow, when we get originations go up, we're absolutely capable and willing to do that.

Thank you. One moment for our next question. Our next question comes from the line of David Motemaden from Evercore.

Hi, thanks. Good morning, and apologies, I haven't been hearing the answers, so not sure if you've answered any of these already. But just Marc, you spoke a little bit at the beginning of the call about the need or the strategy to lean in at the early part of a hard market. I guess how do you manage that with potential false starts? It sounds like casualty market on the reinsurance side hasn't hardened as quickly as you've expected. But how do you manage that just internally between writing business that might be hardening, but not totally to where you think it should go and the potential for false starts?

It's a very, very good question. I think this is where Arch comes into play in experience and knowing some of the markings of a hardening market. A lot of it also has to do with things you won't hear, right, is our underwriting team sitting down with clients and potential clients, and trying to understand, how do you think about the risk? I've talked about reinsurance now specifically, and we also have a very healthy database like everyone else, but we also have our own, and we have our own view of claims and how it develops. And we have, again, experience over 20 years of data and information. This helps us hopefully get the compass in the right order. But I can't sit here and pretend that we're going to get everything right 100%; it's a little bit more art and science. As I'm getting older, the psychology of the market is becoming way more important than even the numbers. That's probably what compelled me or what made me ask the team to lean into 2019. You don't know for a fact until it's done, but there are markings or signs in the overall market that help you and support your decision to lean into it heavily. That's all I can tell you, as it's really not a one-for-one. There’s no one number one spreadsheet I can point to that will tell you the answer.

The one thing I'll add quickly, David, is the reverse is also true. When the market goes soft, sometimes you pull back and you might go back too early. But that's the game we play. It's the business we're in and we do our best. Again, we're never going to time it perfectly, but what matters more is the direction of it. Over the cycle, we think we should come out ahead.

Yes, no, understood. That makes sense. And then Marc, you had mentioned that at 1/1 the property market continued to improve, property cat reinsurance market. I guess as we sit here today and sort of looking forward at the sustainability of that as we move through 2024, what's your view now on that and the growth opportunities in property cat?

First, we have no growth constraints per se. We can grow. As you know, François mentioned, the value of our PML is 9.2%, so we have room to grow there. I think the question about where it's going to go is so difficult to answer because it's dependent on what happens and what kind of activity we see this year. If I would probably point to you to the 2006 turn of the market in 2007, that's probably a better way to think about it. 2006, or 2007 was a better year than 2006. 2008, 2009, and 2010 were really, really good years in property because the market, as we all know, goes up really, really quickly but does not go down in one fell swoop. You have a lot of sustainability in the returns for a little while. It takes a while before things get too close to the line or below the line of what we want to adjust. So we have some runway in front of us.

Got it. Understood. I know in the past you've said alternative capital, or ILS, has the ability to swing the market one way or the other. What exactly are you seeing there?

What we hear is there’s still a very high demand for returns, which prevents or hinders ILS capacity. In general, the ILS space is a little bit stunted as of late, which could change, but we'll see where that goes. At the margin, we see some increases, but it's not the wave that we saw probably in 2014, 2015, 2016, nowhere near that.

Thank you. Arch Capital Group answers have been captured and will be available in the replay. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.

First of all, I want to apologize thoroughly for the call quality and the dropping in and out. There will be a recording available for replay, and you know, our two esteemed colleagues, Don and Vinay will be available to follow up obviously. I want to thank you for listening to our call, and I'm looking forward to speaking to you again in April. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.