Good day, ladies and gentlemen, and welcome to the First Quarter 2025 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 its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2024 fiscal year. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The 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. Nicolas Papadopoulo and Mr. François Morin. Sir, you may begin.

Good morning and welcome to Arch's first-quarter earnings call. I'm pleased to report solid results for the quarter with $587 million of after-tax operating income, $1.54 in operating earnings per share, and an annualized operating return on equity of 11.5%. These results were achieved despite $547 million of catastrophe losses affecting our Property and Casualty segment primarily from the California wildfire. The P&C market has become increasingly competitive. However, we remain optimistic about our prospects as we continue to achieve broadly attractive rates across the sectors where we compete. At Arch, we believe that prioritizing expected profitability of our market share by allocating capital to lines of business with attractive risk-adjusted returns gives us the best opportunity to outperform for the cycle. This is what we mean by cycle management, and we stand by the historical results of this approach. While the market may be more competitive, ample growth opportunities remain. This is true despite emerging macroeconomic concerns, including the potential impact of tariffs that increase uncertainty for many of our insured across the globe and raise inflationary risks for some of our businesses. During times such as these, risk selection is critical as a growing number of our previously attractive accounts no longer meet our return criteria. We believe the acumen of our underwriting teams, the breadth of our platform, investment in data and analytics, and the depth of our financial resources have Arch well positioned to navigate the P&C cycle. Now we'll turn to our segments, starting with Reinsurance. Reinsurance results were solid despite substantial catastrophe losses in the quarter, and a 91.8 combined ratio, inclusive of 18 points of catastrophe losses demonstrates the strong underlying profitability of our diversified reinsurance portfolio. Growth in net premium written in the quarter was modest due to an increased level of competition, more risk retention by ceding companies, and reducing our participation for treaties where margin no longer meets our hurdles. In the first quarter, the reinsurance group deployed additional capacity into property catastrophe lines where opportunities remain attractive, particularly in loss-impacted accounts. Specialty premium rising declined primarily due to non-renewing a large structured transaction. Weaker margin in cyber and part of our international treaty business also led to reduced premium linings. Treaty casualty lines experienced growth in the quarter as Arch recapitalized on a handful of select opportunities. We are hopeful these lines will continue to achieve rate, and the treaty casualty market terms and conditions will continue to improve. As we look towards major renewals, particularly wind coverage in Florida and the Gulf, we expect additional demand from existing and new clients. On the supply side, it is worth noting that for many reinsurers and ILS funds, this zone represents peak exposure. As a result, significant additional capacity may be harder to come by, even if the market is more competitive on the margin. Moving to our insurance segment, where the California wildfires led to a small underwriting loss for the quarter due in part to commercial risk from the recently acquired middle market commercial and entertainment businesses. The additional premium generated from those businesses contributed to the insurance group’s $1.9 billion of net premium return in the quarter, a 25% increase from the first quarter of 2024. The integration of the middle market business is progressing well and we remain excited about the increased capabilities this team brings to the Arch Insurance platform. As we've said before, there isn't one underwriting cycle but many. In today's market, it's possible to deliver double-digit growth in some lines while experiencing similar declines in others. In the first quarter, we generated meaningful growth in casualty-led sectors, including construction, national account, and international casualty. At the same time, we experienced premium reduction in other lines of business due to rate decreases and our desire to maintain margin in lines such as E&S property and professional lines, including cyber. We have seen competition increasing in the London market specialty lines, which has made profitable growth difficult. Looking ahead, we expect continued growth in casualty lines as well as the U.S. middle market, where opportunities remain for both rate and premium growth. We are well positioned across the insurance group because of our market-leading capabilities and relevance with distribution partners that gives us first look at many opportunities. The Mortgage segment continued to provide a steady earnings stream contributing $252 million of underwriting income in the first quarter. Economic uncertainty, limited housing supply, and high relative mortgage rates continue to create headwinds for new mortgage origination which resulted in modest new insurance returns in our U.S. and international Mortgage businesses. For U.S. MI, high mortgage interest rates and home price appreciation have kept persistency around 82% and insurance in force relatively stable. The delinquency rate of our in-force portfolio remains low, ending the quarter below 2%. Our near-term outlook for the Mortgage industry is unlikely to change significantly. While recessionary trends resulting from tariffs and other economic policy could create headwinds, we still expect the Mortgage segment to continue generating attractive underwriting income given the high credit quality and embedded equity of our in-force portfolio. Turning to our Investment group, where invested assets increased by 4% from year-end to $43.1 billion, providing a large sustainable contributor to group earnings. Investment market volatility increased broadly leading us to reposition our portfolio to a more market-neutral position. To manage the cycle, it's important to understand that you cannot control the market, but you can control how your underwriting teams respond to it. At Arch, we manage a different cycle across our many lines with the ability of our underwriters to access, analyze, and ultimately select risk. Over time, our underwriting teams have built strong relationships with our distribution partners, which gives us an access advantage as they look to place risk with fewer, more relevant carriers, including Arch. Risk analysis combines experience, expertise, and deep analytical insight to understand and assess the underlying risk and match it with a technical price that reflects an adequate premium for that risk. Ultimately, risk selection is what separates the winners from the losers. If the return doesn't adequately account for the risk, you must be willing to let others take the business. The P&C market in transition is one where Arch can and has previously demonstrated its ability to find success. While premium growth may be more challenging than in recent years, plenty of profitable opportunities remain. For a company with a strong underwriting culture like Arch, this is a market where we can stand out and continue to maximize returns for our shareholders.

Thank you, Nicolas, and good morning to all. Last night, we reported our first-quarter results with after-tax operating income of $1.54 per share resulting in an annualized operating return on average common equity of 11.5% and growth in book value per share of 3.8% for the quarter. At a high level, our three business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 81%. And importantly, each of our segments showed an improvement for that metric over the same quarter one year ago. Our underwriting income included $167 million of favorable prior year development on a pre-tax basis in the quarter, or 4 points on the overall combined ratio. We recognized favorable development across all three of our segments and in many of our lines of business, but the effect was most notable in short tail lines in our Reinsurance segment and in Mortgage due to strong cure activity. The acquisition of the MidCorp and Entertainment Insurance Businesses continues to roll through our financial metrics within the Insurance segment. This quarter, the net premiums written coming from the acquired businesses was $373 million, contributing 24.2 points to the reported year-over-year premium growth for the segment and generally consistent with last quarter. Also, the inclusion of the acquired business in the segment's results lowered the current accident year ex-cat combined ratio by 1.1 points. This can be further broken down to include the current quarter acquisition expense ratio that was lowered by 0.9 points due to the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP. The other operating expense ratio that was lowered by 0.9 points, and the accident year ex-cat loss ratio that ended up being 0.7 points higher, reflecting the underlying results of the acquired business. The quarter-over-quarter comparison of net premiums written for the reinsurance segment showing growth of 2.2% was also impacted by a few items. Of note, this quarter's net premiums written includes approximately $70 million of reinstatement premiums, mostly related to the California wildfires. Offsetting this benefit was the non-renewal of large structured transactions in the specialty line of business, which reduced our top line by $147 million in the quarter. There were also some timing differences in the recognition of certain treaty renewals which resulted in lower net premiums written in the quarter of approximately $103 million. Our mortgage segment delivered yet again another very strong quarter with underwriting income of $252 million. Even though the origination environment remains challenged, the underlying fundamentals of the business are excellent, as exhibited by most of our key metrics, including a very low delinquency rate for our U.S. MI business which currently stands at 1.96%. On the investment front, we earned a combined $431 million pre-tax from net investment income and income from funds accounting using the equity method, or $1.13 per share pre-tax. The reduction in net investment income relative to last quarter is attributable to a few items, including the impact of paying a $1.9 billion special dividend in December, the timing of incentive compensation expenses, slightly lower interest rates in the quarter, and the repositioning of our portfolio to a lower risk posture in light of the current macroeconomic uncertainty. Income from operating affiliates was down this quarter, mostly due to a lower level of affiliate income at Somers Re, in part as a result of California wildfires. Cash flow from operations remained strong; it was approximately $1.5 billion for the quarter. Our effective tax rate on pre-tax operating income was an expense of 11.7% for the quarter and reflects a one-time discrete benefit of 4.6% related to differences in the expensing of non-cash compensation. Also, it is worth mentioning that we started to amortize this quarter the deferred tax asset we established at the end of 2023 related to the introduction of the Bermuda corporate income tax. This benefit does not impact our operating or net income effective tax rates in the period. But as we mentioned previously, it will flow through our financials as a reduction to tax payments. As of January 1, our peak zone natural cap probable maximum loss for a single event, 1 in 250-year return level on a net basis, increased slightly and now stands at 9% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased $196 million worth of our common shares in the first quarter and an additional $100 million in April demonstrating our ongoing disciplined approach to managing our capital to enhance shareholder returns. In closing, our balance sheet remains extremely strong with common shareholders' equity of $20.7 billion and a debt plus preferred to capital ratio remains low at 14.7%. With these introductory comments, we are now prepared to take your questions.

The first question comes from Mike Zaremski at BMO.

Thanks for the valuable market insights. Regarding the Reinsurance group's additional capacity in catastrophe lines, you mentioned that accounts affected by losses are particularly appealing. Should we consider adjusting our loss ratio as you plan to continue this strategy? Are there any updates to your catastrophe load guide? Last time it was between 7 to 8 points; should we anticipate that figure to increase?

I don't think so. I think the number should be relatively stable. I mean full-year cat load. Obviously, there's seasonality to it. As we look at market conditions, we certainly have thought that after the California wildfires, there might be a little bit of a more stabilization in that market which we think will happen, although as we touch on, I think Florida is its own different market, right? So a little bit early for us to know exactly how Florida is kind of ultimately going to perform or what opportunities we're going to see there. But big picture, I think what we saw at the start of the year seems to be holding up pretty well.

I agree. The outlook for Florida appears rather stable for the reasons I mentioned earlier. We appreciate the business, and while we are unsure, if our teams discover growth opportunities, we anticipate increased demand in the market for several reasons. The FHCF is raising the retention by $1.5 billion, and we are noticing more cedents seeking to raise their limits, something they haven't been able to do recently due to limited capacity. We believe there is potential for increased business if the rates remain steady.

Got it. Okay. Switching gears to market competition outside of Reinsurance. I think a common theme in recent quarters is that large account property is well priced and we're experiencing some notable downward pressure. You mentioned the London specialty market in your prepared remarks as well. Can you elaborate on what you mean by the London specialty market and clarify which particular lines may not be as desirable for growth?

In London, we are observing a twofold situation. Firstly, after several years of strong performance, there is a heightened interest in expanding into sectors like terrorism, marine, and energy, which are traditional segments that have historically generated profits for Lloyd's. Secondly, London is becoming the hub for excess and surplus lines globally. As companies in their local markets gain confidence in managing their risks, their willingness to take on more business increases. Consequently, there is a decline in the amount of business coming from regions like Australia and Asia, where companies have traditionally depended on Lloyd's due to a reduced appetite for risk locally. Overall, we are witnessing a combination of these factors. The market appears to be consolidating around prominent players, and we believe we will maintain a leading position across many of our business lines. While it is challenging to make precise predictions, we remain optimistic about our ability to leverage our positioning in this market.

The next question comes from Cave Montazeri at Deutsche Bank.

My first question is about net premium growth in Reinsurance. It seems clear that the era of over 30% growth in net premium written is behind us as you adopt a more selective approach. I also believe that expecting 2.2% growth might be too low moving forward. Could you elaborate on some of the key factors contributing to the deceleration observed in the quarter? Additionally, could you provide more details on the impact of structured yields? This would help us understand how to approach premium growth in Reinsurance in the future.

Yes, I mentioned this in my earlier comments. There are a couple of points to consider. If you adjust for what we've discussed, we aren't trying to adjust everything, but if you take those two factors into account, you still arrive at a growth rate of around 6% to 7%, which might be more in line with what we expect in the near future. However, I would say there is a noticeable difference: we've seen good growth in property, excluding property cat and property cap, while casualty has shown some declines in specialty lines, aside from structured lines and the timing of accruals on written premium. This is largely due to increased competition in some of the smaller specialty lines we participate in, with cyber being a notable example. We are experiencing a slight decrease in rates along with ceding companies retaining more risk. So, midterm, you're correct that the 30% growth is likely behind us for now, but these factors may help you better align your expectations from the 2.2% growth to what could be a more realistic growth outlook for the remainder of the year.

Yes. I think in the specialty book, you have a mix of lines of business. I mean it goes from credit to cyber to agriculture and a few others. So our teams are really scouting the world to find opportunities. We had a great opportunity in Brazil last year on the agriculture side. And this year, the cedent is winning more of the business. So, I think you have to be opportunistic in those lines of business to make money. So yes, if we have a big book, the ups and downs offset each other in the last few years it grew together because it was what the hard market does. I think we should be prepared to see more ups and downs quarter-by-quarter going forward in that particular book. That's what we want them to do.

My second question is on casualty. Last year, a big theme was just the strengthening in the casualty reserves at the industry level. We haven't seen much of that so far in 2025. I think some people are thinking maybe we might be past the point of maximum fear with regard to social inflation. Just wondering what your thoughts are? Do you agree with that? What do you think we're just in the eye of the storm and there's more pain to come in the second half of 2025?

My prediction is that I can't say exactly when the challenges will arise, but I believe they will. There is more difficulty ahead. That would be my perspective on how individuals cope with these challenges, and I cannot specify how that will unfold. We think the situation regarding social inflation in casualty is not yet fully resolved. That’s our belief. We are currently seeing rates above the usual trend for our casualty line, and where we feel secure about the exposure, jurisdiction, and the terms and conditions we receive, we are open to being proactive. However, I don't believe we are at a point where the market allows for taking a share and guaranteeing an adequate return. Therefore, I think more challenges are on the horizon. That would be our overall underwriting perspective.

The next question comes from Elyse Greenspan at Wells Fargo.

My first one, I think, is a quick one. François, the 7% adjusted growth in Reinsurance that you were talking about in the quarter. Is that excluding reinstatements and the structured deals? I just want to make sure I understand what you're backing out.

No, I'm just putting back in the two items I mentioned. That's all. So I'm not backing out the reinstatements, I'm just handing back the non-renewed deals and the timing of the accruals on some business.

Okay. Got it. And then my second question is on the commentary around the midyear. It sounds like you're expecting perhaps some opportunity on the demand side, what about pricing? I guess, are you guys expecting that prices are probably down but that there could be some growth opportunities just with demand? Can you help me think through those two pieces?

The data point at April 1 indicates a slight decline in most areas, with possibly a larger drop in Japan due to one of the players reducing purchases, which has affected the market. However, the situation in Florida is somewhat different, as it is a significant area for both markets. People tend to prefer the top players, but there are not many of them, and there is less appeal for the lower end of the program. Historically, we have observed that the lower tier programs, which were impacted by last year's hurricane, may see price increases. It remains uncertain if this will be balanced by price drops at the top end. If our projections hold true, which they often do not, we anticipate a relatively stable market in Florida. Based on our strategic positioning, we should be able to maintain our share in the sectors that are gaining traction, potentially allowing us to invest more capital.

Okay. And then one last one. In insurance, if I kind of exclude MidCorp, is that I think, around like a 56.7% underlying loss ratio that was slightly below the Q4. Is that about right as run rate-ish, I guess, on core Arch, right? And then we think about bringing in MidCorp on top? Or anything else we need to think about just with pricing and loss trend and dynamics on the margin as we go through the year?

Yes. For the legacy Arch book, our margins are stable, with rates trending positively. However, it's important to note that the mix is shifting. As we focus more on casualty lines, we may see an increase in the underlying loss ratio due to heightened competition in property. Much of our growth has come from casualty-led business segments, which could impact our overall performance. Nonetheless, we believe that the loss ratio from this quarter should remain consistent moving forward.

The next question comes from Andrew Kligerman at TD Securities.

First question is around the reserving. It looked like you had some nice favorable developments, particularly in Reinsurance. But could you call out anything around commercial auto and other liability, net plus or minus in both Insurance and Reinsurance, how did that perform? And how do you feel about the reserving in those lines going forward?

Great question. We review our reserves every quarter, and the actual versus expected figures that we monitor closely are looking positive. However, it's still a bit early to declare a victory. We're keeping a close eye on everything, and while there will always be some nuances when examining the details, we've seen some areas where we experienced minor adverse impacts, which were balanced out by other areas with favorable developments. Overall, I would say we're generally stable. Specifically, in the casualty long tail sectors like auto and the more challenging lines such as umbrella, we remain confident in the indications provided by our reserves.

Okay, it's great to hear. I have a two-part question. Given your expertise as a cycle manager, can you provide some insights on two cycles, specifically casualty and property? I'm curious about how these cycles are progressing right now. How much longer do you expect property pricing to decline, and how much longer can casualty pricing sustain itself? I realize that's a challenging question, but I would really appreciate your thoughts on it. Additionally, what’s the current situation with MGAs? Are they still growing and remaining competitive? I'll pause there; that was quite a lot of questions. Sorry about that.

The two are closely connected. I'll begin with the property aspect and then address reinsurance. In my opinion, the market is exhibiting more discipline. While we have seen rate reductions, the market remains appealing compared to its peak. There haven't been any irrational behaviors from participants. New entrants are emerging, but they are relatively small. Thus, we remain very optimistic about property catastrophe and the overall industry conduct in this area. When considering the overall property market, particularly in excess and surplus lines and North American net properties, there are two distinct scenarios. In the middle market, particularly in admitted retail, natural events such as convective storms and recent catastrophes, including wildfires, continue to pressure companies, compelling them to increase rates to accommodate the heightened catastrophe loads of recent years. Conversely, in the excess and surplus market dealing with coastal and earthquake risks, managing general agents (MGAs) take on a more significant role. Surprisingly, the market has reacted quickly, moving away from the double-digit rate increases we previously experienced. The substantial losses from high limits were not well received, leading the market in 2023 to become much more disciplined, resulting in reduced limits. When capacity diminished, we witnessed a corresponding rise in rates. This led to considerable re-underwriting and adjustments in terms and conditions. About a year or 1.5 years later, MGAs, which had seen their capacity restricted, are returning with much larger limits. For a typical $200 million risk requiring at least 20 markets to cover, if one market, like Arch, provides the first $100 million, and then an MGA steps in to offer an additional $40 million, it creates significant pressure on our ability to place the remaining $10 million elsewhere in the program. This scenario has generated acute rate pressure. This year, the capacity of MGAs has increased, and I believe they play a crucial role in rapidly making the market more competitive. That's my perspective.

And same thing on casualty?

On the casualty side, there are fewer managing general agents. What we've observed is that in certain markets, capacity is increasing, but it's not a drastic jump; for example, moving from 10 to 15 rather than 10 to 40. Whether it's excess and surplus lines or another area, the trend is similar. We've noticed that the response to typical losses has involved reducing limits. It's important to apply prices to various risk types to achieve diversification, and having fewer limits seems to work better. This reduction in capacity and the typical limit decreasing from 50 to 25 and then to 15 has opened up opportunities, especially in the excess segment, for rates to rise. We haven't seen many people increasing their limits; in fact, many continue to reduce them. This suggests that the path to a more competitive marketplace will take longer.

The next question comes from David Motemaden at Evercore ISI.

Good morning. I had a question on the $147 million of structured deals that were non-renewed. Just so I'm thinking about it correctly. Were there any other chunkier quarters in 2024 that we should think about where like there were chunky structured deals that might not renew as we go through the rest of 2025?

We have some significant deals that we secure throughout the year. However, it’s uncertain whether these will recur or if they will renew at the same level and structure for another year. It's difficult to predict the potential impact for the remainder of the year. We aim to provide you with additional insights on the premium fluctuations, whether they increase or decrease. Sometimes, we benefit from new significant deals that enhance reported growth, but in this situation, it was different. These deals are relatively large, and it's unusual for us to have so many deals with a high premium involved.

And then on the insurance underlying loss ratio, I think last quarter, you spoke about it running at around the 58% level going forward. It obviously came in nicely below that this quarter. I'm wondering was there anything that drove that? It sounded like you split it out between the legacy Arch and MCE, was there more improvement on the MCE side? Is that something we can expect to continue? So maybe some color around that would be helpful.

Yes, it's difficult to make a definitive statement. The quarterly results are important, but we don't place too much emphasis on them. We aim to maintain a long-term perspective on the underlying profitability of our business. Therefore, I do not anticipate any significant fluctuations, either up or down, for the MCE or the legacy operations. As you may recall, last year we had the Baltimore Bridge, which elevated the loss ratio; however, that was not the case this quarter. There will always be random factors involving a few large clients that could ultimately affect the quarterly loss ratio. Overall, we consider it a fairly stable environment, and we do expect some degree of volatility from quarter to quarter based on various developments.

The next question comes from Alex Scott at Barclays.

I thought I'd see if you could provide a little more commentary on what you're seeing in the property cat reinsurance market. I guess, specifically, what's your view of the impact of ILS? Is the pricing pressure more at the top of the tower? Any commentary on sort of the way it's affecting these towers and where you play in them?

We have observed ongoing pressure at the top of the insurance market, particularly with the cat bond market being repriced at lower margins. This situation also affects the layers below the cat bond market. While there have been no losses in those lower layers, there have been some losses related to events like the California wildfires and various storms. The decreases in pricing seem to be concentrated at the top of the program. In Florida, the environment is more complex due to limited supply in the marketplace, which might lead to less pronounced declines compared to the Northeast region, where there have been no losses among the leading players for quite some time. Overall, I expect continued pressure at the top of the program, with potentially more moderate pressure on the lower levels.

Got it. That's helpful. Next one on capital management. I mean, you had very strong capitalization and growth slowing a little bit, just given the environment. How do you think about priorities there? And how quickly do I ramp up capital return if you don't get the opportunity to grow in the midyear?

Yes, we continually monitor this as it's part of our ongoing strategy. We have always acknowledged that if growth begins to slow, which it is, and we continue to see strong earnings, we will likely accumulate more excess capital and aim to return most of it to our shareholders. While there might be some small mergers and acquisitions or other opportunities that arise, it is reasonable to expect that we will return a significant amount of capital moving forward. We issued a special dividend late last year and we are very much in favor of share buybacks. If the pricing and metrics align with our strategy, we are more than willing to proceed with that.

The next question comes from Wes Carmichael at Autonomous Research.

In Reinsurance, I think you mentioned a couple of times of primary companies retaining more risk. Just hoping you could provide a little more color on what you're seeing from primaries and maybe where that's most pronounced?

I think it's most pronounced in the other property where we see it, some of the other lines of business, like maybe energy, where results have been good, ceding commissions are good but companies feel more comfortable with their results. So that's a normal trend that you see as you go through the whole market and you go through the clock is that people tend to retain more of the risk. They bought the reinsurance because they either wanted the volatility and they were a portion of the business, they were unsure of the performance as they have re-underwritten their book. It's not unusual for people to feel more comfortable. I know Arch Insurance, that's what we do. And we are more comfortable with the risk. We definitely buy more insurance. So we move the reinsurance that we would buy to an excess of loss, where we retain more of the premium. So, I think we haven't seen a ton of quota share going through excessive loss, but we've definitely seen companies, as they feel more comfortable with the risk or feel better about their financial situation, retaining more of the risk. And certainly, on the structure, if you're related to the structure on the structure side, structured deals are usually capital relief deals. So I think those deals last as long as the company needs the surplus relief. If you go into a situation where they don't need the surplus relief anymore, then the deal goes away.

That's helpful. And I think in mortgage, prepared remarks touched on headwinds of origination. Can you maybe just talk about what behavior you're seeing in that business? And are you seeing any potential leading indicators of recessionary activity at this point?

It's too early to make definitive statements. While we can speculate and analyze the situation, we recognize that if a severe recession occurs, it could affect unemployment and cause home prices to decline somewhat, potentially impacting our performance. However, we remain focused on the strong fundamentals and high credit quality of our borrowers. Homeowners have built up considerable equity in their homes, creating a vastly different scenario compared to 2008. Although we do have concerns, we feel much more secure in our position. For a stress scenario to significantly affect Arch, it would require an extremely severe situation. Right now, we believe we are in a very good place.

The next question comes from Josh Shanker of Bank of America.

Good morning, everybody. Back in the fourth quarter, you paid a big special dividend, you bought back a little stock. You bought back more stock this quarter. I tend to find it difficult to parse paying special dividends and buyback stock at the same time, either the return on the stock is attractive or you need to give money back to shareholders promptly because it's not so attractive. A couple of things there. One, can you talk about, a little about your philosophy, which is about 3-year ahead book value. But I've done a little bit of the math. And if the 3-year ahead book value rule of thumb applies, the market is very much underestimating your earnings power for the next couple of years. Can you talk about the philosophy of buybacks versus dividends and what that means for this year and what you think about the attractiveness of the stock at this point?

We have confidence in the stock. However, the main challenge is the pace at which we can carry out share buybacks due to limitations on daily trading volume and other factors. Even if we find the price appealing, dividends allow for a quicker return of capital compared to the prolonged process of buybacks. Buying back $1.9 billion of stock at our current rate would take a considerable amount of time, during which we might accumulate more excess capital, making it hard to keep up. It's crucial to understand that there are limitations on our share buyback capabilities. Regarding the three-year payback period, we consider it a useful benchmark. Our perspective on future book value could differ from yours, but we still anticipate substantial growth in book value over the next few years. This reassures us that buying back stock at the current price is an effective way to return capital to our shareholders.

If you started now, do you think you could execute $2 billion in buybacks before year-end and preclude the need for a special dividend?

It would be challenging. There are ways to create some programs, but we prefer to maintain flexibility and optionality, so we avoid committing to buying back a specific amount at a fixed price. We like to be opportunistic, and we continually assess opportunities to optimize our approach as best we can.

The next question comes from Andrew Anderson at Jefferies.

Just on the income from operating affiliates, I think it was $17 million in the quarter. It was down a bit year-over-year. I think that Somers is in Coface. Can you maybe just talk about the moving pieces there and perhaps how you're thinking about full year?

Coface has performed very well for us, and we are very pleased with its performance. While we may face some challenges with trade credit in the future, we are monitoring the situation closely. We lack clear visibility on that front. The decline in operating income from our affiliates was primarily due to Somers, which serves as a complementary entity to Arch Re. This quarter, we experienced impacts from wildfires affecting both our results and those of Somers. Additionally, there was a one-time tax issue in Bermuda reflected in Somers' financials for the first quarter of 2024 that may make the income drop appear larger than it actually is. Typically, we would expect a higher run rate from our operating affiliates, but this quarter was lower than usual. Regarding our returns, we anticipate earning around 10% on these investments, if not more, and we have over $1 billion in assets.

That's helpful. And then just insurance expense ratio and there was improvement in OpEx but is full year '24 still a good way to think about the rest of the year for the OpEx? Or is there still some headcount costs coming on?

It's a good situation for us. As we consider our growth and how to manage our expenses, we're being very careful and deliberate about replacing employees who leave or retire, among other factors. We expect to benefit from the MCE acquisition, as it provides us with some leverage and allows for better scaling. However, we are still looking to hire on the MCE side, specifically for data scientists and additional actuaries. Overall, we are closely monitoring our expenses, which will remain a priority as we move forward.

The next question comes from Meyer Shields at KBW.

I think I have the same question in two contexts. I think Nicolas started for comments talking about the preference of brokers to work with fewer bigger insurers. And I'm wondering if you could talk about the volume versus profitability implications of that to companies like Arch?

I don't believe the two are necessarily connected. In my opinion, the London market is the best place to discuss this. There, the main three brokers control significant access to the business we engage with. It's important to support them where needed and to play a role that aligns with their strategy. As they organize the market with their own facilities, they require leaders to make things work. They also have follow facilities, and then there's the open market. You need to establish a strategy that doesn’t focus on just one area; if you do, you might struggle. Your distribution strategy is crucial for our future success, and we've dedicated a lot of time to ensure we align better and add value for our distributors. This can differ based on the size of the distributor—larger ones may need one type of support while smaller or mid-market ones might rely more on our expertise. For future success, it's vital to question the value we add in transactions; we can't solely focus on underwriting business. We need to navigate the underwriting cycle thoughtfully and understand our position in the industry and the value we provide. Our extensive efforts have been about how we can best serve our customers, as without them, we wouldn't exist. This dynamic is evident both in London and North America. We can't just wait passively for business to come our way because we might not get offers that are in our best interest. If there are others ahead of you taking the best opportunities, what you get left with may not be as desirable. Therefore, working hard is necessary, along with maintaining strong relationships and having clarity on the businesses we aim to target. This is why our distribution strategy is so important.

Okay, perfect. That's very helpful. Second, on reinsurance, when cedents retain more business, how do you address the risk of adverse selection when a more informed cedent decides what to keep and what to reinsure?

Much of our business revolves around adverse selection. I look for insights into why people are purchasing, and whether it makes sense for us and meets their needs. We dedicate significant effort to understanding these needs, deciding what we are willing to insure or reinsure. There are areas we avoid because they don't meet our criteria; we're interested in risks where the potential gains significantly exceed the losses. Risks with solely downside potential are generally ones we want to avoid. It’s crucial to consider this dynamic nature of the market and the prevalence of anti-selection in our risk assessments. When you're aligned on the right risks, much of what is presented to underwriters can seem unrealistic. If one prefers to believe in these unrealistic scenarios, it won't lead to successful underwriting. Our job involves having the insight to ask the right questions and build relationships with clients, so they approach us with genuine concerns where we can provide real value through insurance or reinsurance. On the insurance side, we encourage our team to make prudent choices. If a risk appears favorable, we advise them to retain it confidently. Initially, if there’s uncertainty, they can rely on reinsurance. Over time, as they gain confidence that their underwriting practices and pricing are effective, they can retain the risk entirely. This is a valuable role that reinsurance provides.

I'm not showing any further questions. Would you like to proceed with any further remarks?

No, thank you. I believe we had another good quarter, even in a more challenging and competitive market, and I remain optimistic about our ability to stand out. I look forward to seeing you all next quarter.

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