Arch Capital (ACGL) Q1 2026 Earnings Transcript

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DATE

Wednesday, April 29, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Nicolas Alain Papadopoulo
• Executive Vice President, Chief Financial Officer, and Treasurer — François Morin

TAKEAWAYS

• After-tax operating income -- $901 million, or $2.50 per share, with an annualized net income return on average common equity of 17.8%.
• Book value per share -- Increased by 1.7% in the quarter.
• Insurance segment underwriting income -- $66 million, with gross premiums written up 2% and net premiums written down 1.4%, primarily due to nonrenewal of certain program business and business mix shift.
• Reinsurance segment underwriting income -- $441 million, with gross premiums written down 2.3% and net premiums written down 6%; combined ratio at 76%, marking a fourth consecutive quarter below 80%.
• Mortgage segment underwriting income -- $221 million, with net premiums earned at $266 million; U.S. MI delinquency rate decreased to 2.06%.
• Favorable prior year development -- $200 million pretax across all three segments, accounting for five points of improvement on the combined ratio; a commuted transaction increased favorable development in reinsurance by about 25% for the quarter.
• Catastrophe losses -- $174 million net, primarily due to U.S. winter storms and the Iran conflict; losses were slightly below seasonally adjusted expectations.
• Net investment income and equity method investments -- $568 million pretax ($1.57 per share), down from $1.60 per share in the prior quarter, with a $408 million direct net investment income contribution.
• Share repurchases -- $783 million (8.3 million shares), with a Board-approved $3 billion increase to the repurchase authorization; $311 million more repurchased so far in the second quarter.
• Expense ratios -- Insurance acquisition expense ratio increased by 160 basis points year over year due to roll-off of prior deferred acquisition cost write-offs; operating expense ratio rose from transitional costs and is expected to normalize in the second half.
• Natural catastrophe probable maximum loss -- Remained flat at $1.9 billion (8.2% of tangible shareholders’ equity) at the 1-in-250 year return level.
• Cash flow from operations -- $1.2 billion for the quarter.
• AI-driven system migration -- Middle market commercial integration from Allianz completed in 18 months, with artificial intelligence accelerating code and testing workflows.
• Casualty line portfolio management -- Opportunities remain in specialty casualty, excess and surplus lines, and London; selective withdrawal from challenged segments and large account excess towers.
• Credit quality and capital metrics -- Balance sheet remains “in excellent health” with described strong capitalization and low leverage; effective tax rate at 14.8% benefited from discrete tax items.

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RISKS

• Reinsurance headwinds cited as "huge" due to "double-digit rent decrease" and downward property catastrophe rate pressure, impacting net premiums written.
• Competitive pressures led to essentially flat top-line growth in insurance segment, as management prioritized profitability over volume.
• Continued expense pressure in insurance segment due to transitional costs; management expects normalization later in the year but highlighted that higher operating expenses had short-term impact.
• Adverse rate trends in short-tail property lines, both U.S. and international, driving “low 1-digit rate decrease of over trend” in some markets.

SUMMARY

Arch Capital Group (NASDAQ:ACGL) reported quarterly operating income of $901 million, supported by strong underwriting and disciplined portfolio management, despite a more competitive market and pronounced softness in property catastrophe reinsurance. Ex-cat accident year combined ratio rose by 130 basis points to 82.3%, reflecting the evolving competitive environment. Significant favorable prior-year reserve development was driven by a large commuted reinsurance transaction. The Board expanded share repurchase authorization by $3 billion, signaling ongoing capital flexibility amid muted internal growth opportunities. AI initiatives delivered tangible productivity gains through the rapid integration of acquired middle market commercial business systems.

• François Morin noted, "our ex catastrophe accident year combined ratio of 78.1% is comparable to last year's results for the same quarter." for reinsurance, highlighting underwriting consistency amid rate declines.
• Management described market returns on property catastrophe reinsurance as remaining "in the high teens" but reiterated a willingness to reduce participation if returns fall below internal thresholds.
• The mortgage segment benefited from a $2.2 billion non-GSE transaction, raising new insurance written by 15% for the quarter.
• AI was credited with accelerating migration processes and increasing operational efficiency, specifically by expediting code creation and scenario testing efforts.
• Exposure to man-made catastrophe losses was referenced as “ongoing,” with further claims from the Iran conflict expected to emerge in future results.
• Executive commentary confirmed a disciplined stance on expense management, especially within insurance, as margins come under pressure in softening market conditions.
• Share repurchase activity remains unconstrained by structure, “no structural limitations” cited beyond regulatory requirements, and is guided by valuation and liquidity.

INDUSTRY GLOSSARY

• Combined Ratio: Sum of incurred losses and expenses divided by earned premiums; a ratio under 100% indicates underwriting profitability.
• Non-GSE Transaction: Insurance written on mortgages not guaranteed by government-sponsored enterprises, typically referring to risk outside Fannie Mae or Freddie Mac domains.
• Sidecar: Reinsurance vehicle that allows third-party capital to participate in a specific segment of an insurer’s risk portfolio, often used to access quota share business.
• PML (Probable Maximum Loss): The largest loss expected from a single event, often quoted at a specific confidence interval, such as a 1-in-250 year event.
• E&S (Excess and Surplus): Insurance lines that cover unique or hard-to-place risks not typically written through standard admitted insurers.
• CRT (Credit Risk Transfer) business: Mortgage insurance/reinsurance solutions that share credit risk associated with pools of mortgages, often for regulatory capital relief.

Full Conference Call Transcript

Nicolas Alain Papadopoulo: Good morning, and welcome to Archer's First Quarter 2026 Earnings Call. We delivered a strong quarter, reflecting both attractive underwriting margin and the disciplined execution of our underwriting and capital management strategies. After-tax operating income for the quarter was $901 million or $2.50 per share, producing an annualized net income return on average common equity of 17.8%. Today's market is clearly more competitive than in recent years. That said, rates and terms and conditions in aggregate still support strong returns. Capturing those returns requires the ability and willingness to actively manage the portfolio across and within lines of business.

This is embedded in Arch's operating principles and among our differentiating traits to dynamically add to areas where returns are attractive while declining those risks that no longer provide an adequate margin of safety. Regardless of where we are in the cycle, Arch is committed to generating superior returns for our shareholders. I'll now provide updates across our reporting segments, beginning with insurance, which generated $66 million of underwriting income in the first quarter. It compares favorably to the first quarter in 2025 that was impacted by the California wildfires. Overall, market conditions remained favorable. However, top line growth in the segment was essentially flat in the quarter, reflecting our focus on profitability over volume as competitive pressures increase.

Growth opportunities remain across most casualty focused businesses, including excess and surplus line casualty, construction, alternative market as well as a number of our London market businesses. Growth was offset by softening rates in a few areas, including large account and excess and surplus lines property as well as in some short-term lines in London. We also chose not to renew certain program business acquired in the middle market commercial transaction that did not align with our risk appetite or meet our profitability requirements. As we have discussed on prior calls, these nonrenewals are expected to reduce net premium return by approximately $250 million throughout 2026.

I also want to note a significant operational milestone achieved in our middle market commercial business. Earlier this month, our team successfully completed the data and system migration of the acquired businesses from Allianz to Arch on systems. The ability to complete this effort in just 18 months speaks not only to the dedication of our teams but also represents a strong use case for artificial intelligence in accelerating systems and platform transformation. With a significant step completed, the business can now pursue its objective of creating a scalable best-in-class experience for clients and distribution partners.

Our reinsurance segment delivered an excellent $441 million of underwriting income in the quarter, a significant increase from the $167 million in the first quarter of 2025 which was heavily impacted by the California wildfires. Rate reductions and increased retention by our students contributed to a 6% decline in net premiums written versus the same quarter last year. shorter lines, including other property, property catastrophe and marine were the primary driver of these declines.

Strong industry results over the past few years and attracted significant new capacity from traditional markets and third-party capital, resulting in a broadly competitive environment, its additional supply continues to put downward pressure on property catastrophe in short-term rates while also moderating the push for needed rate increases in some casualty lines. However, underwriting performance remains excellent. Our focus and disciplined underwriting led to the reinsurance group's 76% combined ratio marking the fourth straight quarter of sub 80% combined ratios. Consistent with our cycle management philosophy, our reinsurance team actively manages the portfolio mix by continuing to write new business, admits a risk-adjusted return target and by reducing our share of business that falls below our minimum return thresholds.

The mortgage segment delivered another strong quarter with $221 million of underwriting income to go along with $266 million of net premiums return. Mortgage originations picked up modestly in the first quarter, no affordability challenges tied to high mortgage rates and home prices continue to constrain demand. Credit quality across the mortgage insurance portfolio remains excellent with delinquencies normalizing from seasonally higher levels in the fourth quarter of 2025. Competition remains disciplined and we continue to pursue growth through innovation and new product introductions across our global footprint. Overall, mortgage performance continues to exceed expectations and provide shareholders with a differentiated and diversifying source of earnings that support long-term value creation.

Turning to investments, which contributed $408 million or $1.13 of net investment income per share in the quarter. The decline in net investment income from the fourth quarter of 2025 was driven in part by lower cash yields lower qualified refundable tax credit benefits and seasonal compensation payouts are nearly $48 billion in investment portfolio provides a material contribution to earnings and book value growth, effectively raising our quarterly earnings flow. In the first quarter, we repurchased $783 million worth of our common stock while still increasing book value per share by 1.7%. Our first priority remains to deploy capital into our business.

When organic opportunities do not meet our return threshold, we view repurchasing our shares as an attractive use of excess capital, reflecting our conviction in the intrinsic value of the franchise. The Board's recent $3 billion increase to our share repurchase authorization underscores its approach to capital allocation. To conclude, Arch delivered another strong quarter, I think true to our principles of disciplined cycle management and by leveraging the strengths of the Arch brand and our diversified platform. In today's market, underwriting discipline powered by insights from our investment in data and analytics, rewarding our underwriter for profit and volume, and prudent capital management continues to differentiate Arch and drive long-term value for our investors.

Arch's 25-year record of strong returns and compounding book value at double-digit rates is a direct result of hard work and discipline. That is Arch. That is our DNA, and that is why we believe we will continue to deliver best-in-class results across market cycles and into the future. I will now turn the call over to Francois, who will talk through the financials in more detail. Francois?

François Morin: Thank you, Nicholas, and good morning to all. Last night, we reported our first quarter results with after-tax operating income of $2.50 per share in an annualized operating income return on average common equity of 15.4%. Book value per share grew by 1.7% in the quarter. Our 3 business segments once again delivered excellent underlying results with an overall ex-cat accident year combined ratio of 82.3% up 130 basis points from the same quarter last year and consistent with the more competitive environment we are facing. I will provide more color on trends in each of our segments shortly.

Our underwriting income included $200 million of favorable prior year development on a pretax basis in the first quarter or 5 points on the overall combined ratio. Recognized favorable development across all 3 of our segments and in many of our lines of business, but mainly in short tail lines in our P&C segments and in mortgage due to strong cure activity. Of note this quarter, we commuted a large transaction, which increased the level of favorable prior year development in our reinsurance segment by approximately 25% in the quarter. Current year catastrophe losses were $174 million, net of reinsurance and reinstatement premiums and were mainly the result of winter storms in the U.S. and the Iran conflict.

All in, these losses were slightly lower than our seasonally adjusted expectations for natural catastrophes. The insurance segment's gross premiums written grew 2% while net premiums written declined 1.4% year-over-year. As Nicholas explained, the nonrenewal of certain program business acquired as part of the MCE transaction impacted our top line this quarter. In addition, net premiums written were also impacted by a shift in business mix toward lines with lower net to gross retention ratios. The ex-cat accident year loss ratio improved by 70 basis points to 56.7% compared to the same quarter 1 year ago.

The acquisition expense ratio for the current accident year increased by 160 basis points the benefit we observed in the first quarter of 2025 from the write-off of deferred acquisition costs from the MCE acquired business rolled off. We would expect the most recent acquisition expense ratio to be more representative of long-term expectations. Our operating expense ratio was higher this quarter as we incurred additional expenses related to the transition of our middle market business to Arch Systems. We would expect our operating expense ratio to revert back to a level closer to historical levels during the second half of the year. The Reinsurance segment had an excellent quarter to $441 million in pretax underwriting income.

Overall, gross premiums written were down by 2.3%, while net premiums written were down by 6% from the same quarter 1 year ago. Net premiums written were up in specialty partly due to timing differences in the recognition of certain treaty renewals that impacted our financials in the first quarter of 2025. Over 1/3 of the decrease in net premiums written in property catastrophe was attributable to a lower level of reinstatement premiums compared to a year ago, which were impacted by the California wildfires. Overall, our ex catastrophe accident year combined ratio of 78.1% is comparable to last year's results for the same quarter. Our mortgage segment produced another very strong quarter with underwriting income of $221 million.

Net premiums earned were down by approximately $6 million from last quarter, mostly driven by lower levels of cancellation premiums in our CRT business. Of note this quarter, new insurance written at USMI reflects a large non-GSE transaction of $2.2 billion in NIW. Absent this transaction, which increased our NIW by 15%, we would expect our market share of the PMI market to remain relatively unchanged from the prior quarter. The delinquency rate for our U.S. MI business decreased by -- decreased to 2.06%, consistent with our expectations and seasonal trends.

On the investment front, we earned a combined $568 million from net investment income and income from funds accounted using the equity method or $1.57 per share pretax slightly down from the $1.60 per share we earned last quarter. Cash flow from operations remained positive at $1.2 billion for the quarter. Our portfolio remains a very high quality with a short duration and in line with our asset allocation targets. Income from operating affiliates was $36 million for the quarter, up from $17 million from the same quarter 1 year ago, which was impacted by the California wildfires. As a reminder, this quarter's result reflects our lower ownership stake in Summer's Re since the start of the year.

Our effective tax rate on pretax operating income was 14.8%, reflecting the mix of income by tax jurisdiction. It was slightly below the 16% to 18% previously guided range mostly due to a 1.7% benefit from discrete items. As of January 1, our peak zone natural catastrophe probable maximum loss from a single event 1 in 250-year return level on a net basis. remained flat at $1.9 billion and now stands at 8.2% of tangible shareholders' equity. On the capital management front, we repurchased $783 million of our shares in the quarter or 8.3 million shares. We have repurchased an additional $311 million in shares so far this quarter through last night.

Our balance sheet remains in excellent health with strong capitalization and low leverage. With these introductory comments, we are now prepared to take your questions.

Operator: [Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo.

Elyse Greenspan: My first question is on property cat on the reinsurance side. I was just hoping to get some of your expectations for the midyear renewals? And then if you expect declines in the book to continue, would you expect your cat load to come down after the mid-years?

Nicolas Alain Papadopoulo: Yes. Elyse, so we don't -- as we always said, we don't have a crystal ball, but for the 6/1, I think we really expect the market to remain competitive and to adjust our underwriting stand based on the actual rate decrease that we will see at that time. So we don't really have a forecast there. On the overall trend of the catastrophic portfolio, I think we have huge headwinds because of the double-digit rent decrease and we really -- I said it in prior calls, we really monitored the property cat through a lens of 50 separate zones. So I think some I go back 2 years ago, they were all green.

So now we have a bunch of them that are still green. I think Florida is still green and -- but we have a bunch of them that are yellow and some of them that have churn rates. So I think depending on the where the business renew and our perception of the attractiveness of that zone, we -- our underwriting team, we make the decision, so.

Elyse Greenspan: Okay. And then on the casualty side, you guys were mentioning still some good opportunities, I think, on both the insurance and the reinsurance side. Can you just talk through within casualty, where you're currently seeing the best growth opportunities?

Nicolas Alain Papadopoulo: Yes. I think we still optimistic on the casualty. And we think that the pain is not gone through yet. As you may have seen I think we're still seeing some little development from the year 2016 and '17, but the most recent years, '21, '22, '23, '24, we've seen additional adverse development. And so that should, in our view, continue to sustain price increases above trend. So in terms of our risk appetite on the insurance and insurance, I think it hasn't changed. I think we like the specialty casualty, the excess sensor plus line, casualty, primary position on the large accounts.

So that's where we play. we are not -- we stay away from the commercial auto and also the larger account excess towers, which we think are still very challenging despite some of the rate increases that we've seen.

Operator: Our next question comes from David Motemaden from Evercore ISI.

David Motemaden: I was hoping maybe just to get an update on the insurance book where we stand just on rate versus trend in both the U.S. and internationally.

Nicolas Alain Papadopoulo: So starting with the U.S., I think on the U.S., I think we are broadly getting rate at trend. And I think so, as I mentioned earlier, we are getting rate above trend on the casualty lines of business. And we are getting -- as the tractor on the trend is really the short-tail property lines of business where we've seen a rapid rate decrease. But when you sum it up for North America, I think we're seeing rate slightly below trend. If you go to international, I think we have more short-tail lines on the international book of business. So we're seeing some rate pressure on the short-tail lines. So overall, low 1-digit rate decrease of over trend overall.

But we started there with pretty high margins. So we feel very good about the business there.

David Motemaden: Got it. And then I believe you mentioned just in reinsurance, some of the supply there and good returns in short tail lines, trickling into casualty re, just wondering, does that change sort of how you're thinking about the growth opportunity there as an offset to the headwinds on the property side?

Nicolas Alain Papadopoulo: So on the casualty on the reinsurance side, I think we are mainly talking about quota shares. I think that as I mentioned earlier, I think we like the fundamental of the specialty casualty business. The difficulty there, it's really the sealing commissions. I think based on the past experience of the casualty market, ceding commission should have gone down, but we get we get excess supply. I think there's a lot of other competitors wanting to get on that business or increase share on that business. So that allows for the sealing commission to stay flat and on the best account to continue to go up.

So the side cars, the latest flavor of the day with the casualty side car is just going to add to that dynamic.

Operator: Our next question comes from Tracy Benguigui from Wolfe Research.

Tracy Benguigui: One of the largest primary insurers had said on the earnings call some pretty pessimistic views of property pricing, particularly shared and layered in North America and in London and the culprit is cheaper forms of capital coming in from MGAs reinsurers and alternative capital. So from your vantage point, is this a real structural shift in the market? And how does that influence your underwriting appetite?

Nicolas Alain Papadopoulo: Yes, for us is more business as usual. So the advantage that we have is that we are not a retail large account players. We don't play in that space. So that has been -- that has gone up, it has coming rapidly going down. So we don't play in that space. We play in the excess and surplus line property business. And so that space is getting competitive, and we are taking a very careful approach to that line of business right now.

Tracy Benguigui: Excellent. And there was also a recent settlement development early in the second quarter around Francis Scott bridge collapse. Are you currently sizing industry loss? And has that pushed your loss estimate upward?

Nicolas Alain Papadopoulo: So in that particular case, I think we were holding much more conservative estimate than loss estimates in the market. So no real change for us.

Operator: Our next question comes from Mike Zaremski from BMO.

Michael Zaremski: In the insurance segment, the underlying loss ratio continues to show some healthy improvement. Is that -- if you can kind of talk about some of the drivers, I believe, right, some of the nonrenewals on some programs is, I think, helping that, but if you can kind of talk around the dynamics we should consider.

François Morin: Yes. This quarter, in particular, as we benefited from a relatively benign amount of activity in attritional losses in London, in particular. So our international segment book did very well this quarter. So that explains most of the favorable or a reduction in the kind of ex cat loss ratio compared to a year ago. Again, as a reminder, we'd encourage you all to look at trailing 12-month kind of rolling numbers to kind of get a view on performance of the book. And the impact of the MCE and non renewals is yet to be seen, right? I think it's -- we're -- as the business earns out, it's -- it will show up in the numbers.

But at this time, we don't think it will be material. I think it's still a relatively small part of the book you think of an $8 billion insurance segment book of business, the impact of nonrenewing some of these programs will be somewhat immaterial or limited. So hopefully, that explains that really the quarter was all about kind of really good performance out of London.

Michael Zaremski: Got it. And Francois my follow-up, I think you mentioned on the catastrophe side that this quarter's losses were I think you said a bit lower than "normal". And you also added a bit on the Iran conflict. Maybe you can kind of just elaborate on the Iran conflict, how you guys are thinking about that? Is it all IBNR, are there real losses or...

François Morin: Yes. I mean there's nothing paid, but it's certainly -- there are some real losses, specialty book out of London, like terror, political violence. I mean those are the some of the lines that are exposed, will be exposed. It's ongoing. So we took a first stab at it this quarter based on what had happened and, call it, in the month of March. But we will expect -- we do expect more losses to come through in the second quarter. And we'll keep reporting on it. But it's -- yes, it's ongoing.

And the point in my comments was really to communicate that we have been able to absorb those losses in the first quarter as part of our overall cat load, even though technically, the cat load is only on the natural catastrophe side. So it's a man-made. We call that man-made cat, but we still report it as part of our cat losses to the street, and that's kind of included in the overall number.

Operator: Our next question comes from Andrew Kligerman from TD Cowen.

Andrew Kligerman: So I know you've gotten a lot of questions about property. And I'm kind of -- just to kind of gauge a sense of where we are in the cycle, which you are very good at. I'm wondering if you could share -- and again, this is blunt. Where are you seeing risk-adjusted returns in property catastrophe reinsurance. And I know there are different layers and risk online, et cetera. But like if you had to gauge a risk-adjusted return range, what are we seeing today? And maybe the same question with the E&S property that you've been writing.

Nicolas Alain Papadopoulo: And so the way you actually understand is that -- as I explained, we -- property cat, we managed very dynamically based on the actual underlying profitability we see in 50 zones. So we said earlier that 2 or 3 years ago, we were in the 30s. I think the business we have on the book today is still in our mind very attractive because, again, we're not writing some of the business that we think has fallen below the threshold for us to ride the business. So we think the business -- it's a different mix than it was probably 3 years ago. The mix has shifted, but the business that we have today remains attractive on our book.

So -- and we are still in the high teens, I think.

Andrew Kligerman: I see, I see. But it's sounds Nicolas...

Nicolas Alain Papadopoulo: And on E&S -- yes. Go ahead.

Andrew Kligerman: Just following up on that, Nicolas. It sounds like that there is business out there that Arch Capital won't write that is well below your upper teens return threshold. Is that fair?

Nicolas Alain Papadopoulo: That's fair.

Operator: Our next question comes from Cave Montazeri from Deutsche Bank.

Cave Montazeri: First question is on share repurchases. It was nice to see a little uptick. I think this quarter, it was 87% of your operating income versus roughly 70% over each of the past 2 quarters. Then my question is, if the current pricing trends continue, you don't really need any capital to grow and you're starting from a pretty healthy capital position. So without any obvious mine targets, is there any reason why you couldn't pay out of income, potentially even more, given that you're releasing capital when you're shrinking. I guess I don't want to sound greedy, but like I'm wondering what held you back from doing more this quarter?

François Morin: I mean, there's nothing -- I mean, nothing is stopping us. We don't set targets and how much we're going to buy back. So we go at it, we look at what's in front of us. We look at both in terms of the stock price and also liquidity in the stock, which is still very liquid. So that means so far hasn't been a problem. But in terms of like could we buy back 100% of our income for the year, we could. I mean we -- but that's not how we think about it.

It's more, I'd say, an outcome if things work out in a certain way in terms of kind of, again, the stock price and the volume, et cetera. So you saw the reauthorization by the Board. I think, hopefully, that gives you a little bit of a some direction in terms of how we think about the opportunity there and how much capital we think we can buy back or are looking to buy back. But whether it happens this quarter or next quarter or next year, I think that's nothing set in stone. So we'll react to what's in front of us.

But to answer your question, there's really no structural limitations in beyond, again, the regulations around buying back stock that we have to deal with.

Cave Montazeri: That's great to hear. My second question, just want to pivot to cyber insurance. And maybe if you can help us separate the cyclical versus structural pieces for us. So I guess first question, where are we in the underwriting clock today for cyber? And then structurally, like given the recent developments in AI and the potential for cyber attacks to become more frequent and more destructive, does that change your view of tail risk, aggregation risk or even the long-term insurability of the product?

Nicolas Alain Papadopoulo: Yes. I think in terms of [ Ingrid Clark ], I would think cyber is probably around 3:00 p.m., I think is still okay, but it's getting to that point. So in terms of the recent AI, Anthropic Mythos, we see it as a real current threat. But we don't really see it's changing the cyber product. I think we see the cyber product as more of a the cyber market as more of an arm race between attacker and defender. And certainly, Mythos is accelerating that trend. But Mythos can help the attacker, but the defender can also reinforce in deference using the same model.

So we think it's really an acceleration of the speed at which maybe cyber attacks can be conducted. And it's -- and to your point, it's also an acceleration of the scale. So I would think because the scale would be larger I would think we see it more as an increased systemic risk. So we are taking a very careful approach to that in our RDS scenarios, so.

Operator: Our next question comes from Josh Shanker from Bank of America.

Joshua Shanker: Yes. I know you don't give guidance certainly on margins, but it's an interesting time. Obviously, property declines and prices are well noted. Broadly speaking, Arch and other companies, loss ratios are generally in the same sort of range they were a year ago, but growth is about I guess maybe it's a clock question, but as you sort of give an outlook to internally for the next year, do you expect arches and the industry's loss ratios to begin to deteriorate from here? Or do you think the current levels are supportable.

Nicolas Alain Papadopoulo: So I don't know about the industry, to be honest. It's hard to predict because as far as we are concerned, we are confident in our ability to manage the cycle. That's what we do. So I think we I think that's our first line of defense. If things fall below our threshold, we reduce. And we are confident in our ability to continue to find attractive opportunities to be able to expand. And I think we have -- certainly, the property market is coming down. So everybody can see that. But we still think we have a good opportunity on the casualty side.

So overall, I think -- again, as I said, based on our own mix of business, we think that we see rates just below trend. So that would support a thesis that margins are sustainable at this for the near future.

Joshua Shanker: And then in terms of SME commercial business, the mid-core acquisition was in part to be less cyclical. Are you seeing fruits of that play out in 2026 that you're able to capture some incremental share in less cyclical ostomy business.

Nicolas Alain Papadopoulo: So again, we just -- as I mentioned in my remarks, we just finished the cutover. So the main focus on the -- for us has been to roll over the portfolio and to get to create an entirely workbench with which we can underwrite the business on Arch paper. So those have been the primary goal. So now that this is done, it opens our abilities to try to enhance the value proposition of that business and be at scale.

So I think we -- I would doubt I think it's more of a 2027 game than it is in 2026 because after you do the cutover, you have to stabilize, then we have to start to -- we are focusing on building new tools to really help our underwriters with battery selection, triage and so on that will make them more productive.

Operator: Our next question comes from Rob Cox with Goldman Sachs.

Robert Cox: Just a question on premium leverage. So on the one hand, the business is shifting away from property and property cat, which should allow for an increase to premium leverage. But in the past, we've noticed it's been hard to rightsize leverage in a softening market like this due to the lack of growth opportunities I guess the question is, do you foresee premium leverage would continue to fall like this as we get further into the soft market? And how does that impact your view on the future ROEs?

François Morin: Well, certainly, we're managing the equity side of the leverage. So if we can't grow, we can't deploy the capital in the business as we've been doing like the last few quarters, we'll be returning more of the capital to the shareholders. So that's certainly a tool we have that we have been using. We'll keep using and make sure that our ROEs remain attractive. So I'd say, for sure, like if the mix goes more long tail than short tail, it helps on the leverage. And again, the equity part of it is something we're watching careful.

Robert Cox: That's helpful. And then just a follow-up on terms and conditions. Just curious, if any negotiations on terms and conditions started to change in the quarter and like which terms you think could start to get further negotiated as we move deeper into the soft market.

Nicolas Alain Papadopoulo: Which lines of business are you talking about property cat or the...

Robert Cox: Yes, particularly property cat reinsurance.

Nicolas Alain Papadopoulo: So we've talked to our team. And we are seeing a bit more, but it remains a very small portion of some of the aggregates, a bit more aggregate a bit more top end drops, which -- but it's at the margin so far. So -- but as the market gets more competitive, we'd expect more of those structures that are much more difficult to price to come back to the market.

Operator: Our next question comes from Ryan Tunis with Cantor.

Ryan Tunis: Well, the company is obviously a much larger company a day than it was 7 years ago, both from a premium side, but also from an OpEx side. And I imagine a lot of that increase in OpEx is in support of hard market growth. So my question is, no longer being in a hard market. To what extent are you looking at managing the OpEx side of things as a potential source of boosting margins?

Nicolas Alain Papadopoulo: I think the answer is yes. We -- that's something that's in our mind, I think the loss ratio part is probably more important as the market gets softer, but yes, I think I would say especially in the insurance group, I mean, the expense side is important, and we are actually paying attention to it.

Ryan Tunis: Okay. And then just a follow-up for Francois. Underlying loss ratio and the mortgage insurance segment looked a little elevated. Nothing really stood out to me, maybe a little bit higher reserve for default. I'm not sure if that's seasonal, but how should we interpret that loss ratio result this quarter in mind?

François Morin: Yes. Definitely, some of it is a result of the change or the growth in the average mortgage that goes into NOD. So if you think of the loans that are currently going in NOD this quarter are more -- from more recent vintage years and post-COVID effectively, right? And that's when mortgage loans were up in size. So as you look at the -- frequency assumptions have not changed. They've been flat for us the last couple of years, I want to say.

But the math behind the reserve levels is such that we apply the frequency with the severity per loan and the severity has -- remains stable, but it's the average size of the loan that's hitting the loss ratio. So I think it's a little bit kind of like an evolving kind of thing within the loss ratios. I think it's -- for mortgage, it's gone up a little bit, but still very much within what we would expect it to be.

Operator: Our next question comes from Alex Scott with Barclays.

Taylor Scott: I guess I wanted to follow up on the excess capital and less about just asking how much you buy back. But thinking more broadly, I mean, you don't have the business that you can really lean into growth. And right now, like you have in sort of most environments in the past has been -- 1 of your 3 businesses has been attractive to really leg into. So does it create any need to sort of look at potentially diversifying transaction? And then is lagging into an artificial intelligence investment and doing it that way to try to achieve growth something that you think is achievable?

Just trying to understand how you're thinking about the different ways to get invested.

François Morin: Yes. I mean I'll take the first part. I mean, certainly, the business are all doing well. I mean, yes, I mean, you're right. I think the growth opportunities in all 3 of our segments are somewhat limited. We're working hard trying to find new opportunities internationally and et cetera, like mortgage and insurance for sure. But at this point, it's harder to see how the market will support massive or outsized growth in any of our segments. So yes, I mean, the share buybacks, again, like as we generate -- we keep generating meaningful earnings, I think that we don't want to accumulate excess capital beyond what we think is prudent.

So we're certainly looking to return it or do something with it. M&A is -- we look at a lot of things, but we want for us to do something, given our scale, we truly think it has to be something that is additive. We're not interested in doing deals just for the sake of doing deals. It has to make us better. It has to make us more competitive, increase our presence or our scale in a market, et cetera. So we're very selective there. But we're trying to think outside the box, too. I mean if there's things that we don't do currently that can make us better, we'll explore those.

In terms of AI, I mean, I don't -- I mean, it's certainly something that is coming at us really quickly, really fast. We're trying to think of ways where we can kind of, again, automate things, and we're doing some of that, but I think there's -- it's still very early innings, very early days of that. So I think we'll -- that will evolve, and we'll see where it goes.

Nicolas Alain Papadopoulo: Yes. [indiscernible] we've been investing in AI for the last 10 years, both in mortgage and P&C. So we've deployed a bunch of AI and machine learning models and -- but it's changing really fast. I think the industry in our struggle is really to really show results while at the same time, working on our data strategy and our integration of our system to really support AI at scale. And third, really figure out what AI would look like 3 years from now because it's changing so quickly. If you look at the Entropic model, they open huge opportunities to do certain things, but what's next.

So I think you really have to take -- and it's a lot of investment. At the same time, you're trying to create productivity and the insight for your underwriters to be able to compete. So I think it's...

Taylor Scott: Yes, all helpful. And as a follow-up, I wanted to see if you could talk a little bit about exposure to private credit. I know I think in the past, you've talked about the alternatives portfolio allocation and private credit, so we have a rough idea of that. But I wanted to see if you could tell us about anything that would be sort of considered private credit within the fixed maturity part of the book?

François Morin: Yes. We have some, but limited, right? So we have it both in our, again, call it, public markets and private markets. the general thinking that the strategy with our investment guys has been to go more on the high-quality loan. So kind of low loan to value and kind of very good collateral supporting the investments. So yes, it's something we're watching like everybody else. But at this point, there's no red flags, nothing that really is rising to a level where we have to take action.

Operator: Our next question comes from Matthew Heimermann with Citi.

Matthew Heimermann: I just wanted to follow up on your call related to using AI in the technology rollover of mid-corp. And just curious how that experience has been different than past. I recognize that you're not a significant acquirer. So universe of past might be smaller, but just thought that was provocative comment.

Nicolas Alain Papadopoulo: Yes. So I think the -- I mean, the way it really help us and speed up the process is to write some of the codes. I think we old didn't do it out there. But when we did, it was really helpful. And the big help was on the testing. A lot of the testing was done by AI, and that really accelerated the time to market. So those are the 2 aspects that we -- when we talk to the teams, the really highlight as the impact of AI on this shift, on this [indiscernible].

François Morin: Because again -- right, Matt, just quickly, I mean, again, it was a build-out of a brand-new effectively platform infrastructure, right? So it's unusual in that sense that we bought the business. But without the systems, we had to create this infrastructure or this platform, brand new that we ourselves at Arch did not have. So it's -- that's where I think to Nicolas' point, the AI kind of capabilities really came through and helped speed up the process.

Matthew Heimermann: That's helpful. I just want to make sure I understand the using -- use of the word testing correctly. Is that -- should I think about that as auditing output of...

Nicolas Alain Papadopoulo: Running scenario to make -- is running scenarios to make sure that every time you create -- we created a new platform to a good point, Francois for context. And so every time you create a new software you have a lot of testing that to make sure that the software is doing what it's supposed to do. And a lot of it today can be done through AI as opposed to individuals going in and asking the underwriter to test, the guys that collect the cash to test that -- what they answers get to the right places and so on.

Operator: Our next question comes from Meyer Shields with KBW.

Meyer Shields: Francois, starting question for you. I guess I expected operating expense and reinsurance to go down because you should have more Bermuda tax credits. And I guess I didn't see that. I was hoping you could talk us through the moving parts.

François Morin: Down relative to last year or last quarter?

Meyer Shields: Last year. For sure up from last quarter.

François Morin: Yes, they're certainly up from last quarter. From last year, I mean, yes, there is some -- no question that there's some QRTCs this quarter in reinsurance. I mean, what explains the increase is more investments in staffing and building out further the insurance -- the reinsurance group. So I think there's -- well, I know that there's been kind of hiring around like technology and improving systems, so that's certainly a big part of it. And then a little bit of noise around some of our structured deals that we wrote a year ago. I mean they were actually beneficial to the expense ratio, the OpEx ratio a year ago.

So if you adjust for that, that explains a little bit of the difference as well. But nothing -- I'd say -- nothing, I'd say structural that we -- was a surprise to us.

Meyer Shields: Okay. That's very helpful. And then shifting gears, there are some reports of very significant rate increases for product lines exposed to the Iron conflict. And I was wondering whether Arch is trying to write more of that business or being more cautious because of the risk.

Nicolas Alain Papadopoulo: So we do that. I would be with our London office, where we write some political variants and were on line. So we've been cautious, but we -- the rates have spiked up. So we actually run a little bit more business but in a very cautious way.

Operator: Our next question comes from Rowland Mayor from RBC Capital Markets.

Rowland Mayor: I just wanted to ask on your PML disclosure because I'm kind of curious, do you think that the catastrophe models are fully capturing the improved loss environment in Florida from AOB benefit perform?

François Morin: The P&L that we report?

Rowland Mayor: Yes, I'm just curious on when you model the cat losses out in the state if it's fully capturing how the personal line side of the business has seen significant reports in the loss environment.

François Morin: It's been reflected. I think we -- historically, we have -- as we do our modeling, we have loads for certain features of the -- specific to the Florida market that with the reforms, I think, have changed. So we changed how we model those things on fraud and additional expenses around kind of claim handling, et cetera. So that's all captured right now. So yes, our thinking has changed and what we report to you is how we see the business, how we expect the environment to respond given what we know about the latest reports.

Operator: Our next question comes from Brian Meredith with UBS.

Brian Meredith: Back on the PMLs, I noticed your PMLs did not decline. That kind of stayed the same at 4.1% versus your 1/1 disclosure, but you're declining property cut and everything. Can you help us reconcile kind of what's going on with the PMLs relative to what you're doing with property reinsurance and insurance.

François Morin: Yes. I think right, Brian, it's the 4.1 number. So not a ton -- again, think of it as the peak zone. It's -- so I would expect changes at 7.1 next quarter. There's not a ton of activity for us necessarily at the 4.1 renewal that impacts our zone. So that would be the answer being Florida Tri State -- Tri County, in particular, we'll see what 6.1, 7.1 does for us, but that's where I would expect maybe a more meaningful change.

Brian Meredith: Got you. But I mean even if I look at -- sorry, look at what happened between September and 1/1, it still was up despite the reduction in business you had at 1/1 renewals, right? So is it like -- is it simply we're just looking at changes in rate? Are you dropping exposure as well?

François Morin: Well, at 1/1 -- I mean we held on to most of this. We actually grew a little. So you have we gave up some rate, but we still found that, that business met our -- we're still attractive in terms of returns. So dollars of P&L didn't really change a whole lot. There's always -- you lose one account, you replace it with another. So it might on the margin change the P&L a little bit. But you're right. I mean the rates went down. So we gave up some returns weren't as good as they had been the year before.

But that's again, looking ahead, 6.1, 7.1, don't know how it's all going to shake out, but that's when you may want -- I mean there could be some more significant changes in the PMLs depending on kind of what we will do or not.

Nicolas Alain Papadopoulo: As we said earlier, we put Florida was green. So I think, for us, we getting the return, we're not going to let go to renewals, and we're going to try at the margin to write more. So I think that was not a zone where we decided to come back.

Operator: Our next question comes from Pablo Singzon with JPMorgan.

Pablo Singzon: This will be a quick one. Nicolas, just want to follow up on your comments regarding actually side cars. Do you think this is a blip or is there a risk of casualty or refacing the same structural hesitance that property cat experience alternative exacerbating the soft market cycle there?

Nicolas Alain Papadopoulo: I couldn't hear you which line of business?

Pablo Singzon: Just the casualty side cars? And do you think that ultimately, it will have the same effect that alternative capital had on property cat.

Nicolas Alain Papadopoulo: I mean it's hard to tell. The thing we know is that it's not helping. I think the thing that may the thing I may mitigate that is the security risk. I think the people that have used the site cars they usually use it because they want to write that business, but they don't like it. They haven't seen people that are in the market, like Arch using those tools yet.

So I think it's -- for the buyer and for the broker, I mean, they have a decision to make because those claims are going to get paid 5, 6 years, 7 years from now and with the vehicle and the cedent, which are usually not the best way of students be there to pay the claim. So I think that may be mitigation factor compared to property cat, where the loss is imminent, and we know the capital roads are high. So I think that would be the difference.

Operator: Our next question comes from Yaron Kinar with Mizuho.

Yaron Kinar: Just want to circle back to the man-made Iran-related losses. Can you break them out for us for insurance and reinsurance and then maybe what the associated premiums are as well earned premiums?

François Morin: Well, we don't break out any -- we report everything as part of cats. But again, the -- it's part of the -- it's priced, right? So when we write some of these payrolls or these lines of business, again, colic violence, tear, et cetera, which in this case, are generating cat losses to us, again, just in terms of how we report them to you, there's -- it's part of the pricing, but it's not really captured in the, call it, our cat load per se that we report to you.

Nicolas Alain Papadopoulo: Yes. I think to give you an idea, I think when we talk to our teams, we think that political balance on loss is about $3 billion, and we think the -- it's about the premium that you collect for those lines of business. So that gives you -- I mean, it's not a precise information, but that's the sense that we have $2 billion maybe.

Yaron Kinar: $2 billion. And that's across both reinsurance and insurance.

Nicolas Alain Papadopoulo: So the loss for the market today, I think, is estimated at $3 billion. We estimate an estimate the premium for those lines of business that have been impacted to be around $2 billion.

Yaron Kinar: Because I guess what I'm trying to get at here is when I look at the kind of the underlying loss ratio here, it now doesn't capture some losses, but we still have the premiums associated with that book and the attritional. So like as we think forward, I want to make sure that we're using the right base for the underlying loss ratio.

François Morin: Yes, good point. And maybe -- I mean, we can do that offline with you if you -- if that's okay. I mean, I think we can kind of walk you through what the -- yes.

Yaron Kinar: That will be perfect. And then my other question was in the insurance book, I saw that the other liability claims made line grew quite nicely in the quarter. Can you talk about what drove that?

Nicolas Alain Papadopoulo: Yes. It's really the transaction liability. I think we write transaction liability, both in North America and in our London office and it's really driven by higher pricing in that line of business as well as the M&A activity that has picked up in the last couple of quarters.

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

Nicolas Alain Papadopoulo: Yes, I want to thank you all to participate to our call. And we feel good about the business as it is a challenge with the market conditions for sure. But I think as we said, we think we are equipped and our teams are equipped and ready to compete in that market environment and generate a decent return for our shareholders. So thank you.

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

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