Arch Capital Group Ltd. Q2 FY2025 Earnings Call

Good day, ladies and gentlemen, and welcome to the Second Quarter 2025 Arch Capital Earnings Conference Call. 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 call, Mr. Nicolas Papadopoulo and Mr. Francois Morin.

Good morning, and welcome to Arch's second quarter earnings call. We are pleased to report another solid quarter with after-tax operating income of $979 million, resulting in an operating earnings per share of $2.58. On a year-to-date basis, we have grown book value per share by 11.4%, a strong outcome that reflects our focus on execution and long-term value creation for our shareholders. We achieved this result by staying true to our core principle of cycle management, where we actively grow our writings in lines of business that offer attractive returns while selectively reducing exposure in areas where risk-adjusted returns fall short of our targets. This disciplined underwriting approach paired with proactive capital management positions us to consistently generate superior returns across market cycles. P&C market conditions were largely consistent with the first quarter. Some sectors are seeing increased price competition, while others continue to achieve rate improvements. In the current environment, much of our growth is because of the strength of our relationship with distribution partners and insurers. This not only reflects Arch's increased scale, but also the increased relevance of our platform, one built on a broad and flexible set of capabilities. Our underwriting expertise, supported by our advanced data and analytics capabilities enables us to deliver valuable insight and innovative solutions that help our customers achieve their ambitions. Ultimately, the strength of our relationships, our commitment to consistently deliver meaningful customer value and our ability to respond quickly to changing market conditions are significant differentiators in today's environment. As we've discussed on previous calls, there isn't one underwriting cycle, but many. This principle was reinforced last month where Paul Ingrey, Arch's former Chairman and one of its founders, spoke to a gathering of our top leaders. It was a unique opportunity for our newer team members to hear directly from someone whose vision continues to influence our culture and operations. In addition to sharing stories from Arch's early days, Paul reminded us of the enduring value of a diversified platform, a core part of Arch's original vision. He explained that the insurance market is comprised of 1,000 points of light, each representing a potential opportunity. While the intensity and location of some of those lights may have shifted in today's underwriting environment, many continue to shine. Our role, as always, is to find those with the greatest potential. Our message is this: The P&C industry still presents meaningful opportunities for disciplined underwriters to generate attractive risk-adjusted return on capital. Now I will briefly walk through segment performance, starting with our Property and Casualty Insurance group. Underwriting income for the quarter was $129 million and net premium written surpassed $2 billion, up 30.7% from the second quarter of 2024. This growth was largely driven by our acquisition of the U.S. middle market and entertainment businesses, which contributed $451 million in net premium written. Organic growth outside the acquisition was modest. We remain focused on integrating the new unit with client retention and portfolio optimization progressing in line with expectations. Growing our presence in the small and midsized market is central to our strategy. Elsewhere in North America, rate increases broadly offset loss trends. We saw selective growth in casualty lines, particularly in alternative market, E&S casualty and large account casualty, where pricing continued to outpace loss trends. However, competitive pressure persists in E&S property, excess D&O and cyber. While pricing in excess D&O and cyber appears to be stabilizing, we are maintaining a cautious stance and prioritizing margin over volume in these lines. Internationally, our Lloyd's and London market business are experiencing increased but rational competition. Our long-term investment in establishing a leadership position at Lloyd's continued to yield strong results, reflected in favorable signing and our ability to attract top-tier underwriting talent. The Reinsurance segment delivered strong second quarter results, generating $451 million in underwriting income and over $2 billion in net premium written. The underlying business is attractive with gross written premium increasing 8.7% compared to the second quarter of 2024. We grew our casualty reinsurance premium year-over-year, supported by selective new business and rate improvements. We also expanded our property catastrophe writings, particularly in Florida, where we identified attractive risk-adjusted returns and responded to increased client demand for additional limits. Specialty lines remained a strategic focus and our teams found several new opportunities this quarter. That said, our property portfolio, other than cat excess of loss, contracted. As cedents retain more risk, margin on certain portions of the portfolio fell below our target. We are actively managing our exposure in these areas to maintain underwriting discipline and long-term profitability. We were generally pleased with the state of the midyear catastrophe excess of loss renewals. Pricing was slightly down, but terms and conditions were stable with primary insurers maintaining high retentions. Overall, catastrophe excess of loss margin remained attractive. The broader reinsurance market continued to exhibit discipline. We are growing selectively, focusing on areas where margins are attractive. We are committed to pursuing the brightest opportunities, those offering the strongest risk-adjusted return. Our Mortgage segment delivered $238 million of underwriting income in the second quarter. Mortgage originations remained relatively low, reflecting the impact of higher mortgage rates and affordability. Still, the strength of our global in-force portfolio and high persistency allows the mortgage group to provide steady profitability and valuable earnings diversification even with lower volumes of new insurance written in recent years. Despite ongoing economic uncertainty and low origination activity, we remain confident in the quality and durability of our in-force portfolio, which is the core driver of our mortgage earnings. Investable assets grew 4.4% in the second quarter, benefiting from our strong premium growth and cash flow. Net investment income rose 7% from the first quarter to $405 million, with overall yields remaining elevated. Arch's ability to dynamically adapt to multiple underwriting cycles continues to set us apart. This is a function of both our founding principle and a culture that prioritizes and rewards underwriting profit over premium volume. Even in a competitive environment, our global diversified platform offers many points of light for our underwriting teams to pursue. For a company with a strong underwriting culture like Arch, this remains a market where we can deliver differentiated performance and maximize long-term shareholder return. I will now turn the call over to Francois, who will provide more details on the financial results before we open the line for your questions.

Thank you, Nicolas, and good morning to all. Last night, we reported our second quarter results with after-tax operating income of $2.58 per share, resulting in an annualized operating return on average common equity of 18.2%. These operating earnings, combined with a high level of realized gains, solid contributions from our equity method investments, and a noticeable appreciation in our fixed maturities investment portfolio resulted in our book value per share growing by 7.3% in the quarter. Similar to last quarter, our three business segments delivered excellent underlying results, with an overall ex-cat accident year combined ratio of 80.9%, down 10 basis points from last quarter. Our underwriting income included $139 million of favorable prior year development on a pretax basis in the second quarter, or 3.2 points on the overall combined ratio. We recognized favorable development across all three of our segments and in many of our lines of business. The most significant improvements were, once again, most seen in short tail lines in our Reinsurance segment and in mortgage due to strong cure activity. Current year catastrophe losses at $154 million, net of reinsurance and reinstatement premiums were slightly below last year's level for the same quarter and were primarily the result of severe convective storms in the U.S. This is the fourth and last quarter where we are separately reporting the contribution of the MidCorp and entertainment unit to the insurance segment financial results. For the quarter, net premiums written for the acquired businesses were $451 million, contributing 28.9 points to the reported year-over-year premium growth for the segment and generally consistent with last quarter. The strong premium volume this quarter reflects the seasonality of the business with the second quarter generally having the most significant renewal activity. We are now on track to write slightly more than $1.5 billion of annualized premium for the first year of owning this business, which is slightly higher than the forecast at the time of the acquisition. The inclusion of the acquired business in the segment's results increased the current accident year ex-cat combined ratio by 40 basis points. This can be further broken down to include the other operating expense ratio that was lowered by 40 basis points, and the current year acquisition expense ratio that was lowered by 20 basis points due to the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP. As expected, this benefit has become less significant as policies written before the acquisition date have rolled off, and the accident year ex-cat loss ratio that was 100 basis points higher, reflecting the underlying results of the acquired business. The Reinsurance segment produced its best quarter ever in terms of pretax underwriting income, reflecting the underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity. Of note, the 5.8% growth in net premium written in the quarter was muted due to the timing of certain ceded premium accruals. The effect of this change in timing was to reduce our net premiums written in the property catastrophe line of business by approximately $94 million this quarter. We expect to record an equivalent offsetting benefit in net premiums written next quarter. Overall, this item should not have a significant impact on net premiums earned. Once again, our Mortgage segment delivered another very strong quarter with underwriting income of $238 million. We note that these results reflect the completion of tender offers for two Bellemeade Re securities at a one-time cost of $15 million. We expect that this expense will be recouped through lower levels of ceded premium over time, mostly through the end of 2027 and will ultimately result in a net economic benefit to us. The delinquency rate for our U.S. MI business increased slightly to a very low 1.93% as new notices of default were more than offset by strong cure activity. On the investment front, we earned a combined $567 million from net investment income and income from funds accounted using the equity method for $1.50 per share pretax. Net investment income in the next few quarters should grow in line with the size of our investment portfolio as our portfolio book yield and new money yield have converged in the last few quarters. Income from operating affiliates was comparable to the amount in the same quarter last year with contributions from both Coface and Somers Re. Cash flow from operations remained strong at approximately $1.1 billion for the quarter. As of January 1, our peak zone natural catastrophe PML on a single event, 1 in 250-year return level on a net basis increased slightly to $1.9 billion and now stands at 8.6% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased $161 million of our shares in the month of July, in addition to the $360 million worth of common shares repurchased this year through the end of the second quarter. In closing, our strong balance sheet affirmed by our recent credit ratings upgrade, and our diversified platform position us well to deliver superior results in the periods ahead. With these introductory comments, we are now prepared to take your questions.

Our first question comes from Elyse Greenspan from Wells Fargo.

My first question is just on the insurance segment. If we back out MCE, right, growth was around 2% in the quarter. It feels like based on commentary, the market was stable. So maybe that's about where you guys are running in the short term. But I know, obviously, there's a lot of business lines that triangulate into that number. So just hoping to get kind of a forward view just on premium growth within the insurance segment, unlike the exMCE piece.

Yes, it is. I believe the key takeaway is that we are adapting to where the opportunities lie and moving away from areas that are less appealing. In this quarter, we saw growth in the casualty lines and in our international business. We also have a substantial portfolio in professional lines, but the more competitive environment has negatively impacted premiums this quarter. However, the encouraging news is that the rate decreases for both excess D&O and cyber seem to be stabilizing. Looking ahead, although I don't have definitive predictions, we believe the positive momentum in casualty should support further growth.

And then my second question was just on capital. It sounds like, right, Francois, capital return, share repurchase picked up in July. Just kind of looking for current thoughts just around excess capital levels and just willingness, I guess, to lean in to buyback as we go through the third quarter and get into the peak of wind season.

Sure. As you've noticed, we had excellent results in the second quarter, which leaves our capital position very strong. We're actively working on deploying that capital in the business, as it's always our top priority. We still see opportunities to do so, though perhaps not to the full extent of our capital generation. Capital return remains a key focus for us, just as it has always been, and we review this regularly with management and the Board. Looking ahead to the second half of the year, we believe we will be able to return capital, but we are uncertain about the opportunities that may arise. We are considering both share buybacks and dividends as part of our strategy. In the past, we have typically slowed down during the wind season, but our company is different now, and we will continue to assess the opportunities available to us. At current price levels, we find our stock attractive and are prepared to buy back shares as we move forward.

And then just my last one. Was there any adverse development in the quarter from the U.K., Russia aviation ruling? And if it was even small, if you could just let us know the number?

We did experience some adverse impact in the form of an increase in our IBNR for both the insurance and reinsurance sides. While we are not major players in that area, the claims have changed and this was managed within our IBNR through short-tail lines. Overall, there is no adverse impact when considering the total, and we remain favorable overall. However, we have noted some changes related to the developments in the Ukraine-Russia conflict.

And your next question is from Michael Zaremski from BMO.

On the prepared remarks, you mentioned expanding the property catastrophe writings, particularly in Florida. At a macro level, I believe your underwriting in property catastrophe has been excellent and continues to be so. Would you say that expected returns on equity are in the 20s, down from the 30s? We often get asked if property catastrophe reinsurance pricing can continue to decline from excellent levels, and the general consensus seems to be yes. However, given the rate of decrease over the past year, how do you view the returns on equity in terms of risk versus reward?

Yes. We believe that return on equity remains quite appealing. To clarify, I think the price reductions are not uniform across the market. For example, in Florida, most competition is concentrated at the high end. During this renewal period, the Florida Hurricane Catastrophe Fund increased their attachment points, creating a greater demand for capacity below these levels. As a result, we were able to secure more business in various segments. Overall, the price decreases below the fund's attachment points have been relatively stable. Looking back a year, we had experienced significant rate increases, and while we've seen some reductions, the business still appears very attractive.

Okay. Got it. That's helpful. Maybe pivoting to the strategy about growing your presence in the SME marketplace. I know you've been doing that strategically, inorganically and organically. But just curious, maybe you'd be willing to elaborate, is there kind of a specific pocket that's really high up on the wish list like U.S. retail, traditional main market? Or is it kind of a broad appetite to just go continue going kind of down market more broadly?

I think for us, I think we really start in the mid-market that you've seen with the acquisition we've made of the Allianz portfolio; that's our sweet spot. We come from the larger accounts. So I think we had strategic aspirations to grow in the upper middle market. And I think that's why the acquisition fits strategically well. And I think the strategy thesis behind it is even more compelling today than it was when we did the deal.

Yes. I would like to mention that while focusing on small businesses is not a primary objective right now, it could change in the future. However, small businesses present different challenges. Therefore, we need to concentrate on our middle market acquisition, which offers significant opportunities for growth. There is still a lot we can accomplish and derive value from that asset, and that will be our primary focus in the short term.

Okay. I’ll ask one final question. At a high level, mortgage insurance continues to be a consistent benefit. We are observing some data points on your end, although perhaps less pronounced, with delinquency rates rising slightly, but we still see healthy levels of home price appreciation. More broadly, has anything changed in the mortgage outlook over the past couple of quarters, aside from the known fact that the top line in the U.S. will likely remain negative? Are there any macro data points that are altering Arch's medium-term perspective?

I wouldn't say anything has changed our viewpoint. The housing market data has evolved slightly, aligning with our expectations regarding home prices in the future. For instance, we have been cautious about specific geographical areas that currently face pressure on home prices, which may even be declining in some locations. This strategy influences how we manage our production and new insurance written, with a focus on ensuring home prices remain sustainable and less risky. While the data confirms our business approach, we have constructed our portfolio to avoid high-risk areas and types of loans, such as those with high loan-to-value ratios or high debt-to-income ratios. So far, this strategy seems to be beneficial for us.

Your next question is from Cave Montazeri from Deutsche Bank.

My first question is on the Florida market. Can you give us a bit more color? Is it mainly like the tort reform from 2 years ago that is feeding through that's making the market a bit more attractive now? Can you like maybe break down a bit more what's making Florida a lot more attractive now?

I believe the tort reform has had an effect on the signed benefits. We've observed that local companies' attritional loss ratio has decreased from the 50s to the 20s. What works in our favor is that we primarily operate in excess of loss coverage in Florida. This situation allows these companies to generate the funds necessary to purchase the reinsurance required to safeguard the capital that investors have committed. When they seek to buy closer to the 100 or 200 return, they have to invest more money. This dynamic, along with the various storms that have impacted Florida, has made the market more appealing for excess of loss coverage.

Helpful. And my follow-up, sticking with reinsurance. The 5.8% growth you said had a bit of negative impact from a timing point of view of some business that you said it was $94 million negative impact. So does that mean that your premium growth in reinsurance in the quarter would have been double digits this quarter, adjusting for that? And if so, what are the pockets of growth that you were able to just lean on for reinsurance? I mean, Florida is one of them. Was there anything else that you want to flag?

No, I mean yes, you're right. I mean, again, it's a timing issue. So it's really something that typically would happen in Q3, it happened in Q2 in terms of ceded premium. If you adjust for the $94 million, it's correct, the net written premium growth for the segment would have been double digits, slightly higher than the gross written premium growth of 8% or so, right? So in line, and we bought a little bit less reinsurance in some pockets. So I mean, that's part of the strategy along the way. So I think those two numbers in terms of written premium are aligned. And if you convert more specifically the growth to property cat, you see property cat premium growth, call it, higher than the segment, right? So 20% range. And that was really the story I'd say this quarter. I think we saw some attractive opportunities in property cat. And the rest, as you know, there's offsetting in other property and other specialty, but a good part of the story would have been in prop cat.

There was actually more demand in the marketplace, which allowed us to secure what we considered attractive pricing. This growth is not only about gaining market share but also about meeting the needs of our major clients as they purchase more limits. This is a significant reason for our growth.

And your next question is from Andrew Kligerman from TD Cowen.

So in reinsurance, you mentioned that you're growing in casualty. And I'm kind of curious, on a lot of the calls that we've heard so far, casualty rates in general, I'll and point them at around 10%. But I'm hearing reinsurance pricing in the casualty area has come down a bit. So I'm wondering if you could give a little more color on what you're seeing on the primary level in various casualty lines and what's happening in reinsurance, particularly for Arch?

Yes. The casualty business is primarily driven by quota share, and the situation on both the primary and reinsurance sides is quite similar regarding the underlying business. We've observed that rates are likely surpassing trends, which allows us to grow selectively in both insurance and reinsurance. However, the reinsurance market is facing a lot of supply, making it challenging for many players to expand their writings due to heightened competition. This situation affects the terms and conditions as well as ceding commissions, which haven't altered much. Based on the experience of these portfolios and previous year developments, it's likely that some of these treaties would benefit from lower ceding commissions.

And your next question is from Ethan Wadleigh from New York Life.

Could you provide an update on your progress in integrating data and analytics? Is the underwriting performance meeting your expectations? Additionally, when do you anticipate MidCorp will shift towards growth?

Yes, I would say it's a process and a lengthy one at that. The integration is progressing well and we're nearly finished transitioning the book to Arch. However, it's important to note that we are still about a year away from fully separating from Allianz. Despite this, we are confident in the transition of the book and our team, as well as the underlying business we have acquired. As I mentioned earlier, our strategic vision appears to be even more compelling from our perspective.

I want to highlight that the middle market book, as part of the overall acquisition, has a favorable pricing environment, which is encouraging for us. This presents an exciting opportunity as we move forward, allowing us to pursue it aggressively. We are enthusiastic about this development. The platform and distribution are in place, and we believe the current rate environment will support our efforts, which is a positive indication.

And your next question is from Josh Shanker from Bank of America.

So looking at your commentary about Florida and the general traction of the property cat market, you can't help, but look at the underwriting and see how they've declined. There were some one-off transactions in Q2 '24. Can you square how much of the business a year ago was just a few unique things that really boosted the numbers and what a normalized year-over-year growth rate might be for the property cat line and the property other line reinsurance?

Yes, I believe your question pertains to other property. I want to make sure I address that. On the cat side, I'll let Francois explain further since we touched on it earlier. Regarding other property, it's important to understand that it's quite a mixed bag of business lines, including some homeowner and commercial segments, as well as a diverse geographical presence in the U.S., Canada, and internationally, covering both fact and treaty. The reduction in other property this quarter is mainly due to some cedants deciding against purchasing revisions in certain subsegments of the book because the companies weren't meeting their targets. For example, in Excess and Surplus lines, we've seen significant reductions, alongside some decisions made by our team, including a major choice not to renew a contract. Overall, I find the business remains appealing, but it requires careful management. I would compare the other property experience to our experience in specialty, which is also a mixed bag of lines. There, we've faced challenges, particularly with cyber, but we managed to secure several large transactions internationally this quarter, leading to a significant increase. In reinsurance, as we enter large deals, it's important to accept the quarter-to-quarter volatility; while sometimes we see increases that we welcome, there are also instances where it decreases. This reflects what we've experienced in other property this quarter.

Yes. To conclude on property cat, Josh, when you account for the timing issue with retro, property cat increased approximately 20% year-over-year this quarter. This indicates a positive trend. Overall, we have a favorable view of both property cat and other property lines, which remain attractive. However, as Nicolas mentioned, there are transactions that may not always revert or alter in their nature or substance. That has been the situation this quarter. Unfortunately, I cannot provide insight into the outlook for the third and fourth quarters, but we believe the market remains appealing.

And just in terms of the impact on acquisition cost ratios, did that cause a one-time unusual item that we should feature and think about going forward for normalization?

Not significantly. In reinsurance acquisitions, the variability is often more related to profit commission. The underlying performance of the book may have a larger impact. Therefore, the nonrenewal and growth factors, in general, should not independently have a major effect.

And your next question is from David Motemaden from Evercore ISI.

On the Reinsurance segment, the press release mentioned some attritional losses, noting higher attritional losses within the underlying loss ratio. Could you provide more details on the nature of those losses? Which lines are affected, or is it just typical volatility that can swing from one quarter to another?

Yes. There's no doubt that last year was one of our best quarters ever when compared year-over-year. There wasn't much activity in the larger attritional space. This quarter, we experienced some impacts from the Air India crash and a couple of refinery explosions. While these events make headlines, we're not going to delve into all the specifics, but they do account for some of the volatility. That's just the nature of our business. The key takeaway is that there’s nothing concerning; it’s part of the usual volatility we experience. We prefer to analyze our performance on a trailing 12-month basis to mitigate the effects of any specific shocks or events that may occur in a single quarter. This quarter, we had a few large claims that weren't present a year ago.

And your next question is from Ethan Wadleigh from New York Life.

Got it. Makes sense. And then just also just sticking with the reinsurance business. So I think you called out specialty lines there remaining a strategic focus and that there were some new opportunities that were bound in this quarter. Wondering if your outlook has changed at all in terms of the growth outlook there, how the pipeline is looking and if you see this sort of growth being sustained?

In the specialty segment, we've faced significant challenges in the cyber area. We had a substantial portfolio in cyber, which has been subject to pricing pressure. Consequently, we have allocated less capital to this line compared to a year ago. It's a mixed situation across different lines of business, many of which we aim to expand. The key question is whether our teams are effectively pursuing the necessary work to create new opportunities. We secured a few this quarter, and we wish to achieve more. However, in a competitive market, discovering new business can be difficult. I remain optimistic about the outlook, but I can't predict if we will identify those opportunities.

And your next question is from Alex Scott from Barclays.

I wanted to ask about the Insurance segment. And I guess I just wanted to see if you could provide an update on sort of how far you are through some of the MidCorp remediation and just maybe high-level comments on how we should think about some of the benefits from that, which would help margins and any potential offsets from just thinking through like pricing versus loss cost trend spread and whether there's deterioration.

I think we're going through the integration, and we feel good about our current position. The only area I would highlight regarding performance is on the program side. We've implemented some underwriting actions there that should result in performance improvements over the next 12 to 18 months. That's the main change you'll notice. We're engaged in a lot of work, but it will take time for those efforts to show results. However, you will start to see some impacts from the program actions over the next year and a half.

Yes, on the loss ratio. On the expense ratio, I'd say the operating expense benefit that we're getting in terms of scale, I think, are sustainable, right? So there is no question that adding, call it, $1.5 billion of premium to the insurance segment with not necessarily a corresponding amount of operating expense in terms of IT and management, et cetera. So that's a benefit that we think is here to stay.

That all makes sense. I have a follow-up on insurance. Are you noticing any changes in the dynamics between admitted and E&S regarding volume? Reflecting on the rationale for acquiring MidCorp, having a stronger presence in the admitted market could be beneficial if volume and appetite shift back towards admitted, creating a growth opportunity. Are we moving closer to that, and are you observing any potential to transition some of what was directed to the E&S market?

I believe the MidCorp business is quite distinct from the E&S business we currently operate in. The E&S business we are involved with now is under significant stress. In contrast, the MidCorp business primarily focuses on property and has low severity risks, which makes it less suitable for the E&S market. The appeal of the MidCorp business lies in its limited accessibility; we needed to acquire a platform to participate effectively in that space. Over the past 5 or 6 years, we've been working to become a more prominent player in that area. Scale is important, particularly the ability to offer substantial property limits in the hundreds of millions to address the challenges posed by the agency network. These are two distinct businesses, and the MidCorp business is particularly attractive because it's less susceptible to economic cycles. Its value proposition is stronger, as it provides multiline services through a single agent, making it a different business altogether in my opinion.

I think there's still business flowing into the E&S market, which is slightly different from what we consider the middle market. Yes, E&S markets are growing, although perhaps not as quickly as they have in recent years. There is some moderation in the shift of business because, as you know, E&S markets require rate approvals, which takes time. Some of that work has occurred, leading admitted carriers to be in a slightly better position in some areas to retain that business. Overall, the E&S market is still performing well.

Yes. I have a comment regarding the E&S side. We are seeing that as long as social inflation remains an issue, more of the casualty business is likely to move into the E&S market because it allows for pricing flexibility and a unique set of exclusions that may not be available in other markets. I believe this trend will continue.

And your next question is from Andrew Andersen from Jefferies.

You had mentioned some casualty pricing above loss trend. And I think in the past, your view of loss trend was maybe 2 to 2.5 points above CPI and for excess layers, perhaps even higher. Can you just provide us with your latest view on loss trends?

Yes. It would be unchanged. I think I would say mid-single digit on the primary and double digits on the excess. I think that's what we used. And I would say unchanged compared to a year ago.

And then just on the Mortgage segment, I think some mortgage associations are talking about originations picking up in '26. Are you kind of thinking about that as we turn to next year? Or are you still envisioning more of a softer market there?

Great question. Economic forecasts will continue to be updated. For now, we expect mortgage rates to remain stable, which is not ideal for increasing housing demand. However, we might see changes in '26, possibly with interest rates decreasing and mortgage rates following suit. We are monitoring this situation closely, but it is still too early to have a definitive outlook.

And your next question is from Brian Meredith from UBS.

Just two quick ones here. The first one, just following back up on the MCE program business. Can you scale how much business is that? And did you just start nonrenewing? I was surprised you said it's another 12 to 18 months before we're going to see the benefits there given I thought you started to get notifications when you closed the deal.

Yes. I think the total is probably one-third for the program. I want to clarify that we purchased the portfolio for the other two-thirds. We have been closely examining it, and as you know, it takes time. You need to go through the entire process. So, we have primarily taken underwriting actions and evaluated the programs we could renew when the time comes, while also communicating with the NGS to provide them adequate notice. That's our current status. I expect most of the impact to begin in 2026.

And Brian, just to clarify, on an earned basis. Some of these actions were implemented late last year and early this year. Therefore, you will start to notice some reductions or changes in the second half of 2025 on a written basis. However, the full impact of 12 to 18 months on an earned basis is what I mean, as it typically takes longer for earnings to materialize.

And your next question is from Meyer Shields from KBW.

Two quick modeling questions. First, if we add back the 20 basis points of, I guess, acquisition accounting impact for the insurance segment's acquisition expense ratio, is that a good run rate going forward? Or are the changes in the program business going to change that as well?

I would start by saying that we believe that the impact on the loss ratio from our underwriting actions in the programs business will materialize positively. However, it is not entirely clear when this improvement will be reflected in our performance. We are hopeful that we can achieve better results, and if not by the end of this year, then by 2026.

And your next question is from Jamie Bhullar from JPMorgan.

Sort of question just differentiating between pricing movements versus price adequacy. If you look across your business, where is it that you're seeing attractive growth opportunities across reinsurance and insurance versus maybe highlight some of the lines where you might have been active in the past, but you just feel like the risk reward is not that compelling.

Yes. I believe that in most of the casualty line, we are seeing pricing outpacing loss trends. While I don't consider the entire casualty market appealing, there are specific segments, particularly in the excess and surplus area, where we are keen to expand. Our team in insurance is very specialized, which gives us confidence in identifying the right opportunities. In reinsurance, our focus is on supporting skilled underwriting teams who excel at evaluating the challenging liability risks. We also see potential for growth in our retail casualty space, as our competitive value proposition resonates with both large and mid-sized retailers. Additionally, as I mentioned earlier, we have established a solid presence in London that should help us sustain growth in a competitive environment. MidCorp is another area where we continue to receive substantial rate increases. As we integrate our platform, we believe our value proposition will allow us to grow effectively. However, there are challenging areas, such as Directors and Officers (D&O) insurance and cyber coverage, which we are monitoring closely. E&S property remains attractive in terms of rates, but competition is intense.

Yes. To conclude on property cat, once you account for the timing issue related to the retro, property cat is up about 20% year-over-year this quarter. This reflects a positive trend. Overall, we have a favorable view of both property cat and the broader property segments, which remain appealing. However, to Nicolas' point, it's important to acknowledge that some transactions may not revert or change significantly, which has influenced our results this quarter. Unfortunately, I cannot predict how the third and fourth quarters will appear, but we still believe it's a very attractive market.

There was more demand in the marketplace, and we were able to secure what we believed was attractive pricing. It's not just about gaining market share; it's mainly about meeting the needs of our major clients as they purchase more limits. This has been a significant factor in our growth.

And I am not showing any further questions. I would now like to turn the conference call over to Mr. Nicolas Papadopoulo for closing remarks.

Yes. So I want to thank you all for participating in the call and wish everyone a great summer. Definitely, Francois, we need to take some a bit of time off. And I want to reiterate one more time that we think the market we trade in is very attractive and the challenge, our challenge and a lot of challenge around this market is really generating new business. I think that's really it. So again, thank you, and enjoy the summer.

Thank you, ladies and gentlemen, for participating in today's conference. This concludes the program. You may all disconnect your lines.