Arch Capital Group Ltd. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen, and welcome to the Q3 2024 Arch Capital Earnings Conference Call. As a reminder, this conference call is being recorded. Before the company begins its update, management would like to remind everyone that certain statements in today's press release and during this call may be forward-looking statements under federal securities laws. These statements are based on management's current assessments and assumptions and are subject to various risks and uncertainties. As a result, actual outcomes may differ significantly from those expressed or implied. For further information on the risks and other factors that may influence future performance, investors should review the periodic reports filed by the company with the SEC, including our annual report on Form 10-K for the 2023 fiscal year. Additionally, some statements made during the call that are not based on historical facts are forward-looking statements under the Private Securities Litigation Reform Act of 1995. The company intends for the forward-looking statements provided in this call to be protected by the safe harbor established therein. Management will also refer to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each of these non-GAAP financial measures can be found in the company's current report on Form 8-K submitted to the SEC yesterday, which includes the company's earnings press release and is available on the company's website and the SEC's website. I would now 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 our third quarter earnings call. I'd like to begin by wishing the best to my friend and my business partner of 23 years, Marc Grandisson, who retired earlier this month, after the fantastic road under Marc's leadership. While we will miss him, I'm very excited about the opportunities before us. My message to our shareholders, employees, brokers, clients, and business partners is that it is business as usual at Arch. Our core objective remains unchanged to be the best-in-class specialty lines insurer in the market. We will continue to execute on the key pillars of our strategy, which are to build a diversified mix of businesses, actively manage the underwriting cycle, remain prudent stewards of capital, be dynamic managers of a data-driven enterprise, and foster a culture that attracts best-in-class talent. Back to the quarter, where Arch generated strong top and bottom line results with an annualized operating return on equity of 14.8% and an 8.1% increase in book value per share. Our third quarter results included $450 million of cat losses across multiple levers, including Hurricane Evan. It's worth noting that this cat loss is within our third quarter seasonally adjusted cap load. Overall, the P&C environment remains very favorable despite increasing competition in many lines of business, making underwriting and risk mitigation increasingly important. Underwriting strategies empower our businesses to respond quickly to their trading environment. This has been and remains a competitive advantage as we pursue those opportunities with the best risk-adjusted return. Industry cat losses have once again exceeded $100 billion for the third quarter. We should continue to support increasing demand for property insurance and reinsurance. Even with this increased cat activity, we believe the property market remains attractive and one in which disciplined underwriters can produce attractive returns on capital. Reinsurance rates continue to outpace trends which is consistent with our hypothesis of a hardening casualty market. We have selectively increased our casualty writing in both insurance and reinsurance as the markets respond to claim inflation and uncertainty around loss trends with higher prices. Turning now to underwriting segments. Our insurance segment was $1.8 billion of net premium and delivered $120 million of underwriting income in the third quarter. The acquisition of the MidCorp and entertainment business from Valiance in August helped drive a 20% growth over the same quarter a year ago. We are confident that the MidCorp team will be an important part of our growth story as we further enhance our capabilities in the middle market. Excluding MidCorp, insurance growth was mid-single digits as we continue to find attractive growth opportunities in casualty programs and our London market specialty business. Premiums are competitive in E&S property and professional lines. Reinsurance had another excellent growth quarter with net premium return up more than 24% to over $1.9 billion, along with underwriting income of $149 million as our team continued to benefit from a more robust relationship with our brokers and cedents. Growth was driven by property ex-cat, including facultative business, casualty, and other specialty. Our industry-leading mortgage segment again contributed significantly to our earnings with $269 million of underwriting income for the quarter. Underlying fundamentals remain excellent for the mortgage insurance industry, including strong credit conditions and continued favorable house price appreciation. Mortgage origination activities remain light; the new insurance return of $13.5 billion was in line with our expectations as relatively high mortgage rates and continued house price appreciation have kept most buyers on the sidelines. Finally, the contribution from our investment portfolio was substantial. In the quarter, Arch Investment Management generated $399 million of net investment income. Significant operating cash flows from our underwriting units should support continued growth of our assets under management, setting us up for strong investment contributions in the years to come. Looking ahead, we like our position and the market opportunities. This is true as we enter a responsible growth part of the P&C cycle where disciplined underwriting and thoughtful rate collection are essential to success. A few final comments in closing. Arch has proven to be an exceptional company defined by a culture of underwriting excellence, underpinned by our core strategies of cycle management and thoughtful capital allocation. That was true yesterday, it is true today, and it will be true tomorrow. I'm very excited and proud to lead this company and work with our leadership team as we continue to strive to deliver the greatest value to our clients and shareholders over the long term. I'll now turn it over to Francois to provide some more information on our financial results in the quarter, and then we will return to take your questions.

Thank you, Nicolas, and good morning to all. As you know by now, we reported third quarter after-tax operating income of $1.99 per share for an annualized operating return on average common equity of 14.8%. Book value per share was $57 as of September 30, up 8.1% for the quarter and 21.4% on a year-to-date basis. Once again, our three business segments delivered excellent underlying results highlighted by $538 million in underwriting income and an 86.6% combined ratio, which was slightly elevated from an active catastrophe quarter. Our combined ratio was 78.3% on an underlying ex-cat accident year basis. Overall, current accident year catastrophe losses were $450 million for the group in the quarter, split roughly 80%, 20% between the reinsurance and insurance segments. Approximately 45% of our catastrophe losses this quarter are due to Hurricane Helene, with the rest coming from a series of events, including Canadian events, smaller named hurricanes, U.S. severe convective storms, flooding in Europe, and other events across the globe. As of October 1, our peak zone natural catastrophe probable maximum loss for a single event 1-in-200-year return level on a net basis increased slightly and now stands at 8.1% of tangible shareholders' equity as we incorporated exposures from the MidCorp acquisition on August 1. Our PML remains well below our internal limits. Our underwriting income included $119 million of favorable prior year development on a pretax basis in the quarter, or three points on the combined ratio across our three segments. We recognize favorable development across many lines of business, but primarily in short-tail lines in our Property and Casualty segments and in mortgage due to strong cure activity. As you know, we closed on our purchase of the U.S. MidCorp and entertainment insurance businesses from Allianz on August 1, and I would like to expand on a few items that impacted our financials this quarter. First, the net written premium coming from the acquired businesses was $209 million for the 2-month period, contributing to the reported year-over-year premium growth for our Insurance segment. Second, in accordance with U.S. GAAP, the fair value of the acquired balance sheet does not include an asset for deferred acquisition costs. Therefore, since there is no amortization of deferred acquisition costs associated with the in-force business at the time of the acquisition, the current quarter's acquisition expense ratio is lower than in the third quarter of 2023. This item resulted in a benefit this quarter of approximately 1.9 points in the Insurance segment's acquisition expense ratio. Although we would expect this benefit to become less significant over the next three to four quarters as a larger proportion of our earned premium relates to premium written after the closing date. Operating expenses in the new business were also somewhat lower than ultimately expected as we ramp up operations, contributing to a 60-basis point benefit in the quarter. Third, as is required with business combinations, we recorded goodwill and intangibles in connection with the transaction, primarily from the value of the business acquired, distribution relationships, and the present value adjustment related to the reserves for losses and loss adjustment expenses. This quarter, we incurred an expense for the amortization of intangibles of $88 million, $63 million of which was for the MidCorp and entertainment acquisition. We expect our overall amortization expense across the group to be approximately $100 million in the fourth quarter of this year and $195 million in 2025, spread evenly throughout the four quarters. While still early, the MidCorp business is performing as expected or even slightly better, and we are satisfied with the progress we are making in our integration activities. Turning to our reinsurance group. The team delivered a very solid 92.3% combined ratio in an active catastrophe quarter. Of note, the reported net written premium growth of 24.5% in the quarter was augmented by reinstatement premiums. Adjusting for this item, the growth rate would have been approximately 22.4%. The mortgage segment reported an excellent 14.8% combined ratio as cure activity on delinquent mortgages is strong, and the underlying credit quality of the book remains very high. The reported delinquency rate at USMI inched up slightly this quarter and was impacted primarily by seasonal factors. On the investment front, we earned a combined $570 million pretax from net investment income and income from funds accounted using the equity method, or $1.49 per share. Our investment income reflects approximately $20 million earned during the 2-month period from the assets we've received in connection with the MidCorp acquisition. Total return for the portfolio came in at 3.97% for the quarter, as there was significant price appreciation on our fixed-income portfolio due to lower interest rates. The appreciation of our available-for-sale investment portfolio resulted in a book value increase of $1.56 per share net of tax. Cash flow from operations remained strong and exceeds $5 billion on a year-to-date basis. Our effective tax rate on pretax operating income was an expense of 8% for the third quarter, and our annualized effective tax rate remains in the 9% to 11% range for the full year 2024. In closing, our balance sheet is strong with common shareholders' equity of $21.4 billion and a debt plus preferred to capital ratio of 14.2%. This level of financial resources gives us flexibility to deploy capital as needed and continue delivering outstanding results for the benefit of our shareholders. With these introductory comments, we are now prepared to take your questions.

Our first question comes from Elyse Greenspan with Wells Fargo. Please go ahead.

Thanks. Good morning. I guess my first question is on the Allianz deal. You gave us some good color on the expenses. But anyway, could you give us a sense of just the impact on the underlying loss ratio within the insurance segment in the quarter?

Yes, sure. I mean, just to give you a bit more details on that, the normalized ex-cat accident year loss ratio for the segment was 57.6%. And the stand-alone for the MidCorp business was 62% in the quarter. So that's how we came up. So effectively, it kind of increased by 70 basis points and increased the reported loss ratio for the ex-cat loss ratio.

Okay. And then in reinsurance, the margin sometimes does fluctuate quarter-to-quarter, but the underlying loss ratio did trend up in Q3. Was there anything business mix in there that might have impacted that in the quarter?

Nothing specific. Again, we'll go back to our trailing 12 months way of looking at things. I mean I took another look this morning and there's nothing unusual in the quarter. I mean the trends are very consistent. Trailing 12 months are doing very well. So, the answer is nothing to report. I mean, there's just kind of some claims happen, some don't. And over the last 12 months, we're very comfortable with the loss picks and how things are behaving.

And then my last question is on capital, right? You guys have left the Doral ban, just given your excess capital position to doing something to return to shareholders, be that right a quarterly dividend, a special or even a return to repurchase. So, what's the timing there? I thought maybe it was post the end of wind season. Does that still apply? And how are you thinking about how you might look to return capital to shareholders?

I mean, you hit all the good points. I think it's very much a conversation and it's not a new conversation. It's a conversation we have all the time. And yes, we had certainly mentioned that we wanted to wait until the end of the wind season, which is coming close to an end. And as we get ready for 2025, certainly part of the outlook for 2025 growth opportunities, how we may be able to deploy the capital is something we'll consider as well. But yes, no question that this is an area that we're focused on. And I'll say you should know we're not sleeping on it, and we'll report back when there's more to say on that.

Our next question comes from the line of Andrew Kligerman with TD Cowen.

Good morning. Maybe following up on the insurance division and MidCorp. And I think France Swap, I heard correctly the MidCorp impact on the underlying loss ratio was about 60 basis points to 70 basis points, and if that's the case, it kind of moved up a fair amount, like 250 bps year-over-year. So, I'm trying to get a sense of should we be thinking that this is kind of a good run rate underlying number for the loss ratio? How should we think about it going forward?

We initially believed we needed to gain a deeper understanding of the business. We expected the business to break even in its first year. Therefore, we should anticipate a slight increase in the loss ratio and the combined ratio for this segment. I am cautious about committing to anything beyond the first year regarding the run rate. We are already making adjustments and taking underwriting actions based on what we prefer and what we don't. There are promising opportunities in the casualty business we underwrite, and the rate environment is very favorable. So, in the short term, yes, the combined ratio may increase slightly, but we have clear strategies and plans to lower it as we progress.

Yes. And I think it's dynamic. I mean, again, if you look at the insurance group overall, it's heavy non-property lines, so the property line attract lower loss ratios. So, we were growing in the property line in the last couple of years, and the market now makes it more difficult. And we have a large component of professional lines where rates have been challenging, so that probably incurs a higher loss ratio. And then we have casualty where I think we think there are opportunities potentially to grow more with higher margins, but it may come also with a higher loss ratio than property. So that's a playbook that we are facing.

Interesting. And maybe breaking down some of the lines of business in insurance, what kind of rate are you seeing? And is this rate exceeding loss costs? I suspect it's not in property, but maybe you could talk a little bit about some of the key lines in insurance?

Let's discuss casualty, which is a hot topic right now. In casualty, we are definitely observing a trend in rates, and there are valid reasons for this. The market is experiencing some challenges, and we are somewhat underweight in casualty. Historically, we have taken a conservative approach to underwriting in this area. Based on our analysis of the segments of casualty business we favor, we are selectively expanding our growth on both the insurance and reinsurance fronts, and I anticipate margins will improve as a result. When it comes to property, particularly in reinsurance compared to insurance, our focus is primarily on insurance. We find the profitability in the E&S property sector to be particularly appealing. In recent years, especially after Hurricane Helene, the market has seen significant rate increases and alterations in terms and conditions, making it very attractive. After a year without losses, many players have narrowed their focus. We are witnessing increased competition from Lloyd's and newcomers eager to enter this market. While our rates are generally stable, the margins will largely depend on how the market reacts to recent catastrophes. With Milton and Eli, we set our pricing expectations with the hope that things will stabilize. Ultimately, the balance of supply and demand suggests there is more supply than demand. We believe that while there is increased demand, it has been limited by high prices, high deductibles, and high retention levels in reinsurance. We are nearing an equitable year, and I believe the business will continue to remain attractive for some time.

Our next question comes from the line of Mike Zaremski with BMO Capital Markets.

First question is on catastrophes. So, I don't know if you disclosed what you're assuming for Hurricane Helene. I know you're I think the cats were a bit higher than the consensus, but you guys have done a good job of giving us disclosure that you've been taking more risk in Florida specifically and just overall? And then also, should we be thinking about Milton as well. I think there's some conflicting numbers out there on open sure PCS is only a $5 billion so far, but there's some much bigger numbers out there?

Yes, on Helene, we believe the event will likely experience more leakage than usual due to its impact across multiple states and extensive flooding. We currently estimate an industry loss of around $12 billion to $14 billion, which may be higher than others' estimates, but that’s our perspective at this time. These projections could change, but they reflect our initial analysis and are incorporated into our third-quarter results. Regarding Milton, we need to examine it further, but we plan to share our preliminary thoughts in the coming weeks about potential losses and estimated ranges. Importantly, the event, which was initially perceived as potentially severe, does not appear to have had as significant an impact as anticipated. Industry estimates are decreasing, and a market loss of approximately $30 billion seems accurate based on current information. As for our own losses related to this event, while details will emerge later, we do not foresee anything unusual and expect our market share to remain fairly consistent for an event of this magnitude.

That's helpful. My last question for Nicolas is if you can provide any context about why the CEO change occurred, as I'm sure this is the number one question from everyone here. Are there any insights you can share about whether this is related to performance or other circumstances?

I didn't understand the deal?

The CEO Marc's departure.

Should know that. No. I mean, again, it was a personal decision. I think, as I said, Marc and I were good friends. It's a bit bittersweet for me, but based on this decision, I'm actually very excited about the opportunity in front of us. I think Arch is bigger than any one of us, and I think we have a lot to do, and we have exciting things to continue to do in the coming years. And I think we have a really good management team. We have 7,000 employees that are really engaged. And as I said, I think Arch is an exceptional company, and I'm really looking forward to continuing this journey. And certainly, I think Marc's departure is not performance-related; the company has performed amazingly well under his leadership.

Nicolas, you've made your own impact on the company over time and your leadership style is different, which has us all excited about your role. I’m curious now that you are in charge, are there specific initiatives you’ve been wanting to implement that we should be aware of, or should we expect to see more of the same direction?

No, it's really business as usual. I have been with the company for 23 years and have closely collaborated with Marc over the last 5 or 6 years on strategies, operational changes, and cultural aspects. I believe we are very much aligned, so I do not anticipate any changes in our operations.

Our next question comes from the line of Jamminder Bhullar with JPMorgan.

Good morning. I would like to know your perspective on the 1/1 renewal and your thoughts on the supply-demand imbalance. Has this shifted due to the losses from Milton, or is your view the same as it was before?

So, is the question on property cat, I assume?

Yes, yes.

Yes. I believe that in property cat, we've significantly expanded our portfolio over the past two to three years, and we find the returns to be very appealing. From my perspective, we have a good understanding of the medium-term outlook. The market appears to have stabilized, and as I mentioned earlier, there is some supply available from nodes, MGAs, and competitors. After a year without losses, many are eager to re-enter the market and may realize they missed out on a profitable opportunity. Therefore, I anticipate that, similar to the insurance side, we will see stabilization on the cat reinsurance side as well.

Are you expecting pricing to decrease, remain the same, or if possible, could you provide some specifics?

Yes. I don't have a crystal ball. I would say, again, it's always the same with programs that are being impacted by losses. I would expect prices to go up. In regions that had no losses, you could see in the bottom of the programs, I think people are still really scared about frequency. So, I'd expect the bottom to middle side of the program to perform well. The upper layers where people seem to be more comfortable to play, where competition is coming because you are away from the midsize, also, it could be a little bit of weakness, but not really have a strong conviction in a way. But I think mostly stable.

And then on casualty reserves, a lot of companies have had adverse development, some on recent years, some money even some on peak over the years as well. Can you talk about your own comfort with your casualty reserves on your legacy book as well as the Watford business?

Sure. We regularly review our reserves on a quarterly basis, so this is not something new to us. To answer your question, we feel very comfortable with our reserve levels for a couple of reasons. One reason is that, as Nicolas mentioned, we have been underweighting casualty for several years. While we do recognize the impacts of social inflation and trends in loss rates for the casualty business, our conservative approach has been beneficial. We are keeping an eye on casualty reserves, and although we have seen some adverse development, it has been largely manageable. This situation is a significant factor contributing to the increase in rates, as the industry is feeling pressure and needs to respond by raising rates to address these results.

Our next question comes from the line of Cave Montazeri with Deutsche Bank.

First question is on growth. I guess, Francois, you've already explained the growth in primary insurance I guess, underlying once you exclude MidCorp is about 5%. In reinsurance, you also mentioned the impact of reinstatement premium. I think you said it was still 22% growth even adjusting for that, still a big number. Could you give us a bit more color on like what drove that in terms of how much of that was pricing? How much of those like unit growth? How much of that was maybe writing more casualty business? Any type of color on that would be quite helpful, please.

For the quarter, the main driver of growth was mainly a return in casualty, particularly from our U.S. company. We are selectively engaging in programs that we had not previously participated in, and as rates improve, we see opportunities to write appealing casualty business. Additionally, the specialty business also experienced growth, driven by business written on January 1st, which is now contributing through quarter shares. We have a significant book of business supporting Lloyd's, specifically through a program called Ponat, where we receive a portion of what they write after accounting for their protection. This segment is expanding, and we believe it is profitable. Another key area is our sizable portfolio in UK motor insurance, which has faced disruptions for some time. We have been active in this market, and as rates continue to rise, we anticipate benefiting from an additional relationship established on January 1st, although no specific actions were taken in this quarter. Lastly, our facultative operations, recognized for their strong performance and one of the leading property facultative operations in North America, have also demonstrated significant growth.

Perfect. My follow-up is on the mortgage insurance business. I guess two parts to that question. The first one is the growth in the quarter; was that primarily driven by the Fed cuts that just boosted demand? And I guess linked to that is the pickup in delinquency in mortgage insurance, is that also just linked to more activity? I know you mentioned some seasonal factors. I don't know what those were. If there's any details we can have on that, please?

Yes, I'll start with that. The delinquency rate is very much in line with our expectations. It's important to note that we refinanced a significant portion of our loans in 2020 and 2021, and we are now entering the prime years for recording delinquencies. As new loans are added, it typically takes three to four years for delinquencies to appear, which explains why our overall delinquency rate is showing a slight increase. Specifically, there are seasonal patterns we observe each year, such as borrowers using their tax refunds in the first quarter to catch up on mortgages and potentially borrowing more for holiday shopping. Additionally, we typically see an increase in the delinquency rate in the third quarter. We are comfortable with the overall delinquency rate, and the differences I mentioned last quarter related to the RMIC acquisition remain relevant; that portfolio has unique characteristics since it predates the financial crisis. Overall, we are pleased with the delinquency rate. Regarding your question about premiums, there were some accounting nuances this quarter that might skew the perception of growth we experienced. There was a catch-up on premiums related to older Bellemeade transactions. Overall, I'd say the mortgage segment is relatively flat in terms of growth opportunities.

Our next question comes from the line of David Motemaden with Evercore ISI.

Thanks, Francois, thanks so much for all the detail you gave on the insurance underlying loss ratio, both including and excluding the mid-corp acquisition. So, I guess just sort of running through those numbers there, it looks like if I take out mid-corp, it was about a 57% underlying loss ratio for the sort of core Arch insurance business. And so that picked up a little over 100 basis points versus last quarter and also on a year-over-year basis. So, I'm just wondering if you could help me think through some of the drivers of that increase?

Yes. I would say, as Nicolas mentioned, the growth is related to the mix. We experienced growth this quarter, and if you take the time to look at the supplemental information, you'll see how we report the lines of business, which we have adjusted this quarter compared to the past. There has been more growth in casualty and other liability lines of business, mostly on an occurrence basis. Claims made, which relate more to professional lines and cyber, have decreased. However, that segment usually has a higher accident year loss ratio than the property business once we exclude catastrophic events. The main factor driving the increase is indeed the mix, as we have grown more in casualty while remaining relatively flat in property.

Got it. Okay. That's helpful. I appreciate that. And then maybe a follow-up on the reserves just within insurance and reinsurance. I was wondering if there's any way you could size those moving pieces for us between the short tail and the long tail development?

We are generally favorable on short-tail lines of business, while experiencing some adverse conditions on long-tail lines, which aligns with recent trends. As I mentioned earlier, there is a bit of pressure on casualty long-tail lines. However, we have seen some favorable developments in workers' compensation, which many of our competitors have also noted. This has been a consistent trend for quite some time. Overall, we are observing favorable development with actual results being lower than expected, and this is reflected in our financial numbers.

Our next question comes from the line of Yaron Kinar with Jefferies.

I think he might have dropped. We're not hearing anything.

Our next question comes from the line of Meyer Shields with KBW.

Great. I think we've talked about this in the past, but I wanted to get Nicolas' thoughts on cycle management. Specifically, I guess, with retail distribution and in particular, the mid-core business, is that less amenable to cycle management?

In my opinion, this involves a different approach to cycle management. The mid-core business is appealing because it is more stable, meaning the fluctuations in pricing are less drastic compared to the excess D&O market. In the mid-market, prices tend to rise more gradually and fall less sharply. This stability helps balance our insurance portfolio, which includes a significant amount of larger corporate risks that are more vulnerable to significant rate changes. Moreover, the value proposition for carriers in the MidCorp segment is stronger since distribution partners, such as brokers, depend on carriers that can offer a range of products, making us more valuable to them. This results in a stronger relationship, leading to client loyalty and less competition based solely on pricing. In larger accounts, price is a crucial part of the value proposition, but in this segment, I believe it faces less pricing pressure, contributing to its stability and attractiveness. The timing of our MidCorp acquisition is favorable as we've observed price increases in property lines, which are more responsive to secondary market conditions, while the liability aspect aligns with prior discussions. Overall, we feel that now is an excellent time to seize a significant share of this business, allowing us to expand our presence in what we believe is a very promising segment of the market.

Okay. That's very helpful. And then if I can switch gears a little bit, I know it's early on the January 1 discussions for property cat. Is there anything you can share with regard to expectations for seating commission trends in casualty reinsurance?

I believe I have some insights to share. As we analyze the situation and anticipate more negative news emerging from past events, there will likely be pressure on seating commissions. The key factor here is supply. The impact on seating commissions will be influenced by suppliers, especially if there are many firms seeking business while the available opportunities are limited. Brokers will play a significant role in shaping the direction of seating commissions. This situation will create a conflict between the interests of reinsurers and what seating companies are prepared to offer. Ultimately, the balance will depend on supply and demand dynamics. From what I'm hearing, there is a strong supply in the marketplace.

Our next question comes from the line of Yaron Kinar with Jefferies.

Good morning. I apologize for dropping earlier. I wanted to dive a little bit deeper into the other liability occurrence growth in insurance. How much of that came from MC versus just organic or legacy growth?

It's a good question. There was a significant amount of E&S casualty business that is purely organic, which is one of the most exciting areas for us. Rates are increasing well into the double digits, making it very attractive. The MC book is diversified, including some commercial multi-peril and liability occurrences. While I don't have the exact numbers, the key takeaway is that the rate environment for this specific line of business is currently very favorable.

Okay. And what is it about the third quarter where the environment seems to have accelerated significantly, or at least the opportunity set in other liability occurrence accelerated significantly?

I believe people are starting to realize that their previous views on reserves have not been accurate. For a period, COVID muted claims, leading individuals to be cautious and avoid making decisions based on their own assumptions. Since COVID, we've observed increased severity in the broader world as well as the jewelry industry, with more instances where jury awards are occurring. Social inflation is contributing to higher severity, and we're seeing more frequent jury cases in places like Georgia and certain areas in Nevada, where juries can grant significantly larger awards. It's a mix of frequency and severity that is prompting people to recognize the need to adapt. A common response, which I believe is appropriate for the market, has been to reduce limits, since being involved in these challenging jury situations necessitates smaller limits. Typically, a $200 million placement shared among ten participants is now involving around 40 players, with some of those layers going to the non-standard market. We're beginning to see some rate increases, which is what we're currently experiencing.

Our next question comes from the line of Brian Meredith with UBS Financial.

Nicolas, I want to follow up on that a little, just a little bit. So, I understand what you're saying about your opportunities for growth here in some of the casualty lines. But maybe I can get your perspective a little bit more on what do you think casualty trend is? And where is it going, just because you must be pretty confident in kind of having a good grasp on where casualty trend is, given that you're growing and some others are shrinking?

Yes, I think there are multiple factors at play. At the core of the program, people can gauge the casualty trend, which seems to be in the mid-single digits. However, the situation changes significantly when you exceed certain thresholds, such as $50 million or $100 million, where the trends can escalate into double digits. Fortunately, we didn’t have a large presence in the casualty sector, but we have enough involvement to conduct our own analysis. It’s essential to approach different classes of business with care and implement selective price increases based on thorough analysis to ensure profitability in specific jurisdictions and segments. It's important to note that this isn't a drastic shift where every business opportunity will automatically be profitable; you need to be discerning and strategic in your underwriting approach. That reflects the current market conditions we are experiencing.

Got you. And the same question, I guess, for reinsurance, right? Reinsurance you're kind of relying on the seeds?

Yes. The role of the reinsurer is to support the right companies. For some time, we have been significantly underexposed to U.S. casualty quota shares and excess of loss. The recent changes in the marketplace have provided us with opportunities to engage in programs we sought to join two or three years ago, due to our appreciation for their underwriting practices, limit discipline, and the types of business they write, which we previously couldn’t access. There seems to be a trend towards favoring quality, highlighting who can sustain long-term involvement and who cannot, and we are seeing benefits from this shift.

Yes, a significant portion of the transaction involved cash assets. Our investment team has been very disciplined and thoughtful about how to allocate that money. The positive aspect is that even in money market or cash, we are still seeing a decent yield. I would estimate the new money yield to be around 4.5%, and currently, the book yield and the new money yields are quite similar. We continue to maintain a very short duration, high-quality fixed income portfolio, and that will not change. Additionally, we have received $2 billion in assets, and we are making efforts to effectively integrate that into our portfolio.

Our next question comes from the line of Joshua Shanker with Bank of America.

So, I get it, there's less meaty sports talk than ever. But I was wondering, in the past, we've talked about the ROIC on the different legs of the Arch stool reinsurance, insurance mortgage. Could you review right now sort of state of the union on what the return on new capital is for the various businesses?

We appreciate all of our businesses, and that hasn't changed. Currently, in the fourth quarter, we're somewhat reliant on market conditions as of January 1. The reinsurance market looks very favorable for 2024, but how it will evolve in 2025 is still uncertain. We anticipate it will remain strong, but it's unclear if we'll be able to significantly increase our capital deployment in reinsurance. We're taking a wait-and-see approach regarding market developments. Nonetheless, we find the growth prospects in casualty, in particular, very promising. We're prepared to engage in both insurance and reinsurance sectors, and I want to emphasize that the mortgage segment has been a valuable driver for us. While the origination market isn't as large as we'd prefer, we're still achieving solid earnings from our existing contracts and are exploring new opportunities beyond primary mortgage insurance in the U.S., deploying capital judiciously. Overall, we feel confident about our current mix.

Would it be wrong to paraphrase that reinsurance is better than insurance and mortgage, but that's pending what happens on 1/1?

It's not wrong. I think it's a fair statement. It's better right now. We like to think it's going to stay better, but just don't know quite yet.

Reinsurance is a larger part of our property business. You have to consider that half of the business is property, which presents high risk and high reward. I believe we achieve better returns, but the risk level is also significant, as we observed this quarter. Our insurance efforts are more focused on casualty and professional lines. This environment is more challenging, but it offers a different range of returns that need to be balanced. Sometimes, the equity in the return on equity doesn't fully capture that, in my opinion.

I'll ask a few more questions before lunch. My first question is about Hurricane Helene. You mentioned it was 45% of cats, which I calculate to be just over $200 million. This translates to approximately 1.5% to 1.7% market share based on your projections. Is that what you would expect for these types of large events? And does that share provide a good basis for considering Milton?

I mean, your math is about right, but the Helene is a bit unusual for us. I mean, it's a little bit on the elevated side in terms of market share based on some of the accounts we wrote. Again, Milton is different because it's Florida-only. So, we have a different mix of business there and a different type of accounts we write. So, I would not draw a correlation or an analogy from the Helene, call it, implied market share to what Milton could look like.

Okay. That's helpful. And then my second one, I guess, is a follow-up on reserves, right? We had another company this morning that kind of flagged they're kind of going to take an in-depth review, and there might be some movement with their fourth-quarter review. It sounds like from earlier questions that you guys really haven't seen like change in loss trends or actual versus expected in the third quarter versus later in the year. But is there anything, I guess, that you're concerned about or anything that's come up with the quarterly reviews that you guys are paying particular attention to as we go into the end of your review?

There's nothing unusual. I mean, it's something we look at all the time. The trends are relatively stable. I mean we have views going way back that the loss trends that we were seeing in the market were a bit optimistic. So, we've always taken a longer-term view of trends and we review those annually, at a minimum, sometimes twice a year. But yes, really nothing that stands out, that's, I'd say, unusual or that we're overly concerned with. I mean that's the standard kind of themes that we've been talking about for quite some time.

I have one more question. You have an upcoming Investor Day in a couple of weeks. Are you planning to use this event to outline your bigger strategy, financial targets, or any information regarding capital? Could you provide a preview of what topics you intend to discuss with us in a few weeks?

We're just missing you guys in person. So, that's why we schedule this. But no, I wouldn't expect anything really unusual from the upcoming Investor Day. You've known this for a while; the strategy remains the same. Nicolas will obviously be the focal point. So, we'll make sure everybody gets to hear a bit more from how we want to shape the company going forward, but I would not message or think that there's anything unusual or kind of new regulation that you should expect to hear from us in a couple of weeks.

I would now like to turn the conference over to Mr. Nicolas Papadopoulo for closing remarks.

Yes. So, there are not any more questions. So, this will conclude our presentation today. Thank you for your questions, and we see you next quarter.

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