Q2 2025 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Second Quarter 2025 Arch Capital Earnings Conference Call. [Operator Instructions] 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 founder, 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 continue 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 light 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 expectation.

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 clients 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 and margin on certain portion 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 insurer 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 cycle 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 offer 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, Nicholas, 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 3 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 3 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, 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 2 Bellemeade Re securities at a onetime 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 cat 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. Jenny?

[Operator Instructions] 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. Yes, I think so the story here is that, again, we -- as I described in my opening remarks, we're pivoting where the opportunities are and kind of adding out where we think the business is less attractive. So this quarter, I think we like the casualty line. So I think we grew in the casualty lines.

And I think we grew on the international business. And we have a big book of professional lines. So as those market conditions were more competitive and more difficult to trade, that had a negative headwind on the premium for the quarter. But the good news there is that it looks like the rate decreases on both excess D&O and cyber are leveling off.

So I think as we look to the future, I think I don't have a crystal ball, but we think the favorable wind on the casualty should support additional growth, and that's what I can say.

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. Yes. I mean, as you've seen terrific results in the second quarter. So our capital position remains very strong.

I think no question that we're still working hard trying to deploy that capital in the business. That's always our top priority. We still think there's opportunities to do that, but maybe not to the full extent of which the capital generation we've been able to achieve. So no question that capital return is a focus area for us.

Something we -- no different now than it's ever been. We look at it on a regular basis with management and the Board for sure. And no question that capital return in the second half of the year, I mean, we think we will be there, not knowing again what opportunities might be in front of us, but we look at both share buybacks and potentially dividend if we need to. Those will be very much part of that.

And historically, we've kind of slowed down a little bit during the wind season. I don't think we necessarily -- we're a different company, I'd say, right now. So we're going to keep looking at the opportunity in front of us. But certainly, at current price levels, we find the stock to be attractive and we'll be more than happy to buy back 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?

Well, we don't -- I mean, no question that we had some adverse in the sense that, yes, we increased our IBNR for both on the insurance and the reinsurance side. The reality is these -- again, we're not big players in that space, but the claims have evolved, and that was basically absorbed within our IBNR through short-tail lines. So what you're seeing and what we'll disclose more of in our 10- Q is no adverse in total. We still have favorable in total.

But yes, we reflected some changes, some new developments in the Ukraine- Russia conflict.

And your next question is from Michael Zaremski BMO.

On the prepared remarks, you made comments about expanding the prop cat writings, I believe in Florida, particularly. Just maybe just macro levels, I feel like you all have been excellent underwriters and continue to be in prop cat, especially. Would you say that expected ROEs are -- I don't know if you're willing to kind of put a corridor around them in the 20s, down from the 30s? Or just -- I guess we get asked a lot about can prop cat reinsurance pricing continue to decline off excellent levels?

I feel like the consensus is yes. But just curious, given the rate of decrease over the past year, how do ROEs kind of look in terms of risk reward?

Yes. Our belief is that ROEs are still very attractive. And just to qualify, I think the price decrease, my view is not always across the board. I think, for instance, in Florida, what we've seen is most of the competition is really on the high end of layer.

And at this renewal, I think the FHCF move up their attachment points. So there was a need for capacity below the FHCF and the size of the FHCF. So I think we actually were able to write more below, above and by the side because we are able to write across the board. So I think -- and below the FHCF, I think the price decrease were they're pretty flat, I think.

So I think it's -- I think we -- if you look at where we come from probably a year ago, probably the price where we had gone to 100% rate increases. I think we've seen some rate decrease, but the business remains really attractive as -- as we see it.

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 aspiration 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. I think it's even more compelling today than it was when we did the deal.

Yes. And I'd add to that, that while -- I mean, truly small business is not an immediate action item. I mean, down the road, who knows where things go, but it's a different animal. I think the technology, the system, the distribution.

So let us focus on the middle market acquisition. There's a lot we need to do with it, a lot we want to do with it. where things are going well, but I mean, it's still early days. So I think there's a lot we can -- a lot of value we can generate from that asset, and that will be the focus for the short term.

Okay. And maybe I'll sneak one last one in. Maybe just -- I'm going to stick, I guess, high level, mortgage insurance continues just to be a gift that keeps giving. There's -- we're seeing some data points on your data, too, but maybe less so, but delinquency rates going a bit higher, but we're still seeing good -- still some levels of HPA.

I guess just more broadly, has anything changed over the last couple of quarters in terms of the mortgage outlook other than I think we clearly know the top line in the U.S. is going to continue to be negative. But any macro data points that are kind of changing Arch's kind of viewpoint on a medium-term basis?

I wouldn't say anything has changed our viewpoint. Certainly, the housing market data has itself evolved a little bit, which is maybe in line with how we thought about home prices moving forward. For example, we have shied away or we've been, I think, underweight in certain geographical areas that seem to be currently under pressure in terms of home prices maybe even coming down in some of those places. So that's been part of our, I'd say, approach is to manage our production or manage our new insurance written strategically with having a focus on where we thought home prices would be more sustainable and less risky, I'd say.

So that's maybe one data point. Again, I mean, what's happening, what seems to happen and the data seems to be in line with how we approach the business going in. But bottom line is, yes, we -- our portfolio has been constructed to be a little bit kind of -- again, staying away from the high-risk areas, high risk, not only geographical areas, but types of loans, so high LTV, high DTI. So that's been kind of a little bit how we constructed the portfolio.

And so far, that seems to be paying off well 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 are 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?

So I think the tort reform had an impact, I think, on the signed benefits. So we've seen the local companies attritional loss ratio dropping from the 50s plus to now in the 20s. So the nice thing for us, I think we mostly write excess of loss in Florida. The nice thing for us is that it affords them the money to buy the reinsurance they need to protect the capital investors have put in those companies.

So -- and pay a price that if you buy a limited amount of capacity, you pay one price. But as they're looking to buy closer to the 100 or 200 return, they have to spend more money. So I think that is what has made the -- and the storm, it is a number of storms that have hit Florida have made the market attractive on an excess of loss basis.

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 digit 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 is 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 2 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 -- in fact, there was more demand in the marketplace. So I think we were able to secure what we thought was attractive pricing. So it's not only gaining market share. It's mostly being able to go along with the need or support the needs of our major clients as they buy more limits. So that's really a big reason for the 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. So the story -- the casualty business, I think it's mostly quota share. So I think the story on the primary side and the reinsurance side as far as the underlying business is very similar. And there, I think we've seen rates, as you said, probably exceeding trends.

So I think it makes it -- and we are selectively growing both on the insurance and trying to grow on the reinsurance. I think where you see the difference in market behavior, I think there is a lot of supply on the reinsurance side. And it's difficult for many of the market to expand their writings because there's a lot of the competition is also looking to expand. So that translates in terms and conditions and ceding commissions not changing because if you look at the experience of those portfolios and based on the prior year development, you would want probably some of those treaties to have lower ceding commissions.

I see. And then just shifting over to MidCorp. Could you give an update on where you are in the process of incorporating data and analytics? Is the performance -- the underwriting performance where you've -- is it where you expected it? And when do you think MidCorp could kind of pivot to growth?

Yes. So I would say that it's a process. It's a long process. So the integration is actually pretty much on track.

I think the -- we've almost entirely rolled over the book over to Arch. And so that's almost done. I think I want to remind you that we're still a year away from the full separation with Allianz. So that's hanging there.

But we feel good about the rollover of the book. We feel good about the team and the underlying business that we've acquired. I mean -- and again, as I said earlier, the strategic thesis, I think, is even more compelling in our views.

And I add to that the middle market book as part of the overall acquisition, I think, has -- the pricing environment is good, is attractive. So that's, I'd say, exciting for us. I think that's an opportunity for us as we move forward in a -- gives us another opportunity set to get into and kind of pursue aggressively. So I'd say we're excited about that.

I mean the platform is there. The distribution is there and the team and then the rate environment, we think, will support it. So that's a positive sign.

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 2Q '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 think your question is other property? I just want to make sure I answer that.

I look at both. I mean the premium volumes are down fairly dramatically from where they were a year ago, but you're leaning in and you like the line, there's a disconnect there. So I'm trying to bridge that.

On the cat side, I think I'll let Francois explain because I think we talked about it earlier, so we can go over there. On the other property, I think the comment I would like to make is that it's really -- you guys have to understand it's really a mixed bag of line of business, a bit of homeowner, a bit of commercial, it's geographically diverse, U.S., Canada, international, you have fact and treaty. So I think the reduction in other property this quarter is really driven by, as I said in my prepared remarks, I mean some cedents deciding not to buy some revision in certain of the subsegment of the book based on the companies not meeting their targets because, for instance, in E&S, we've seen some drastic reduction and also a couple of decisions that our team made and one of them is a big deal, not to renew a contract.

So I think overall, I think the business remains very attractive, but it has to be managed. So I think this -- and I would contrast the experience of the other property with a similar experience we have in specialty, where there -- it's also a mixed bag of lines of business. And there, I think headwinds have been cyber, but this quarter, on the international side, we were able to land a few large transactions. And so we are up significantly there.

So I think you have to -- in reinsurance, as we deploy, we do large deals, I think you have to be able to accept the volatility quarter-over-quarter some of it is going up, you love it when it goes up, but sometimes it goes the other way. I think that's what happened in other property this quarter.

Yes. And just to finish up again on property cat, I mean, Josh, once you adjust for this timing issue on the retro, prop cat, again, up, call it, 20% year-over-year in the quarter. So that's -- I think that's a reflection. Big picture, again, we like both prop cat and property other than property cat, still very attractive business.

But to Nicolas' point, specifically, there's -- the reality, there are some transactions that don't always kind of come back or change in their form or their substance and the seeds by us, et cetera. So that's been -- that's truly what happened this quarter. And unfortunately, I can't help you on how the third and fourth quarters are going to look like, but we think there's -- it's still a very attractive market.

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

Not in a big way. Acquisition for reinsurance, where you see the variability sometimes is more on the profit commission. So I mean, the underlying performance of the book will end up having maybe a more -- a bigger impact. So the fact that these nonrenewal and/or growth, I think, generally speaking, should not have in and of itself a significant impact.

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

On -- sticking with the Reinsurance segment, the press release had called out some attritional losses, higher attritional losses within the underlying loss ratio there. I'm wondering if you could just elaborate on the nature of those, what lines? Or was it just kind of things swing one way or the other in any given quarter, just sort of normal volatility?

Yes. I mean there's no question that when we compare year-over-year, last year was maybe one of our best quarters ever. There's literally not much that went on in the, call it, large attritional space. This quarter, we had, I mean, a little bit of a hit with the Air India crash.

We had a couple of refineries that exploded. I mean those make the news, and we don't -- we're not here to -- we're not going to get into all the details of each one of them, but that explains a little bit the volatility. I mean that's the business we're in, right? So I think the takeaway is that there's nothing alarming.

It's part of the normal volatility in the book. Again, we go back to our preferred way of looking at it on a trailing 12-month basis to -- I mean, at least temper some of these kind of shocks or kind of events that may or may not happen in a given quarter, but that's really the story. So a couple of large claims that just happened to take place this quarter, and we didn't have those a year ago.

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?

So on specialty, I think the headwinds have been really cyber. We had a decent sized book of cyber. So that has been under pricing pressure. So I think that probably -- as we not allocated as much capital to the line than we did probably a year ago.

But I think again, it's a mixed bag of lines of business. And a lot of those lines of business, we would like to grow. So the question is our teams doing the work they need to do to generate those opportunities. So we landed a couple this quarter.

I think we want to do more. I mean, but in a competitive market, it's sometimes hard to find new opportunities. New business is hard. So I think I'm positive on the outlook, but whether we find those opportunities or not, I can't tell.

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 -- as I explained earlier, we're going through the integration. I think we feel good about where we are today. I think the only area, I think, that I would highlight in terms of performance is probably on the program side. I think we've taken some action -- underwriting action on the program side that should lead to some performance improvement spread over the next 12 to 18 months.

So that's the only thing that I think you'll be able to see. But we're doing a lot of work, but that work will be -- it will take time. But the action on the program over the next 12, 18 months, you'll be able to see some of the impacts of that.

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. Follow-up I have on insurance. Are you seeing any changes in just the dynamics with admitted versus E&S in terms of volume? I mean, if I kind of go back to the, I guess, part of the rationale to buy MidCorp, you guys sort of bought [indiscernible].

And at some point, having more of a presence in admitted may be very helpful if volume and appetite kind of returns to admitted in a way you could use that growth opportunity. I mean is that -- are we closer to that? Are you seeing that kind of opportunity to take some of what was going into the E&S market?

I think the MidCorp business, I think, is very different from the E&S business. We write today -- I think the E&S business we write today, I think, is very distressed. I think the MidCorp business is mostly property-led, low severity. So that business doesn't lend itself to be in the E&S market.

And I think the attractiveness of the MidCorp business is it's difficult to access. It's limited access. I think we had to buy a platform to become a player in the space. So I think we've been trying to be a bigger player in that space for probably the last 5 or 6 years, but scale matters and the ability to have decent sized property limits in the hundreds of millions to solve the problem of the agency network, I think, is key.

So I think those are 2 different business and the attractiveness of the MidCorp business is really that it's less subject to cycle and it's more -- you have a higher -- the value proposition, the thing you do for the reason is more with the agents and the insurer because you provide multiline and there is one agent. So I think it's -- my view is it's a different business.

I mean, a little bit related to that, Alex, I think there's still -- we still see business flowing into the E&S market. I mean, slightly different again than what would be middle market to us at least. But yes, E&S markets are growing, maybe not as fast as they were the last few years. There's some maybe moderation in how much of the business is shifting over because, again, as you know, like [indiscernible] markets, you need to get rates approved, et cetera.

So that takes time and some of that work has taken place. So admitted carriers are maybe in a slightly better position in some areas to retain that business. But E&S market is still big picture doing well.

Yes. I think one comment on the E&S side. I think we see -- as long as we have this issue with social inflation and I think we see more of the casualty business flowing into the E&S market because you can write it at your own price with your flexible set of exclusion that is not always available in every market. So I think that trend view 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 digit 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. I think, as you know, I mean, economic forecasts are going to get updated. We still see at least for the next little while, mortgage rates kind of staying where they're at. That's certainly -- that's not ideal in the sense of creating housing -- more housing demand.

But we'll see. I mean, into '26, maybe things will change a little bit. Maybe interest rates come down at that point and mortgage rates follow. But yes, I mean, that's something we look at very carefully.

But I mean, too early to really have a clear view of that at this time.

And your next question is from Brian Meredith from UBS.

Just 2 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. So I think of the total, it's probably 1/3, I would say, 1/3 was program. And that's not why we bought -- I want to be clear. So we bought the portfolio for the other 2/3. So that we've been able to scrutinize.

And as you know, Brian, it takes time. You have to go to the end. So I think we we've mostly taken underwriting actions and looked at the list of program we could renew when the time comes and talking to the NGS to give them enough notice. So I think that's where we are.

So I think I expect most of the effect to start in 2026.

And Brian, on that, just to be clear, on an earned basis, right? So on a written basis, some of these actions were taken late last year, early this year. So on a written basis, you will start to see some reductions or some changes in the second half of '25. But the full 12 to 18 months on an earned basis is really why. I mean that as these -- the earnings kind of take a bit longer to come through.

All right. That makes sense. And then the second one, Francois, I'm just curious, could you give maybe an update on where we stand with Bermuda tax credits, not the DTA stuff, but the credits that I know the Bermuda Monetary Authority has been talking about providing?

Unfortunately, no official news. I mean, it's certainly being discussed and worked on. We are hopeful. I mean we're optimistic really that we'll come to a good place with the Bermuda government.

It's -- we love Bermuda. I think the Bermuda government -- I know the Bermuda government likes Arch and others being on the island. So we're a big part of the community here. And it's -- I mean, it will be -- effectively, it's a negotiation with not only the Bermuda kind of involved parties, but there's the OECD that kind of has a little bit of some oversight there.

So we're expecting more development in, call it, the third quarter, kind of late third quarter and with hopefully some kind of actionable items in the fourth quarter for us. So we'll give you an update next quarter. But right now, I mean, there's nothing official that we know of that we can really share with everybody here.

That's helpful. And just quickly, too, Francois, on that one. If indeed, these do happen to come through, are they a credit to your taxes? Or do they sit somewhere else in the P&L?

Well, what's been talked about in big picture is a job credit effectively from the Bermuda government, and that would most likely come through as a reduction to our operating expenses. So the tax rate per se would not be impacted, but it would impact -- I mean, most -- well, all places where we have operating expenses in Bermuda. So for us, it'd be in each of our segments because we have Bermuda-based expenses in each of the 3 segments. It would also impact a little bit our investment income because we -- our expenses flow through that.

We've got our investment professionals here based in Bermuda, also would impact our corporate expenses because Nicolas and I and others are based here in Bermuda. So that's where -- so it would hit a couple of different spots on the income statement, but would come through again as an offset to operating expenses.

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 mean, I would start there. I mean, the -- again, the benefits or the impact, call it, to the loss ratio as we -- as our underwriting actions on the programs business kind of materialize, we'd like to think that we can get more than that exactly when that takes place or when that again, shows up in our underlying performance, it's a little bit -- it's not that clear, right? So -- but we'd like to think that we can do better than that. If not later this year, it will be in 2026.

Okay. That's helpful. And then second, just because MidCorp, I think in the past, you've talked about having a significant property exposure. And a couple of carriers this earnings season have talked about particularly benign weather and low non-cat losses. I was wondering if you saw anything like that in the MidCorp book.

I think this quarter was a pretty low cat quarter. So I think when we started, we got a little bit unlucky, I think, with some of the hurricanes and then the wildfire. But I think for the first time this quarter, I think we got a low cat quarter. So I agree with the sentiment.

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. So I think most of the casualty line, as I said earlier, we see price being greater than loss trends. So I think that -- and I think -- I don't think the entire -- I said this in prior calls, I don't think the entire casualty market is attractive to us, but there is selected pockets of that market, especially in the excess and surplus side of the market, the more specialty that both on the insurance and reinsurance, we have a strong appetite to grow. And I think on the insurance, our team is very specialized.

So I think we have a high confidence that they'll be able to find the right opportunity. And I think on the reinsurance, it is really backing the right underwriting teams, people that have expertise in writing the liability portion of those risks that are difficult to price. I think we also have, I think, some ability to grow of our retail casualty where we are primary because I think we -- our value proposition -- I mean, it's a competitive marketplace, but I think our value proposition resonates well with the big retailers and the mid-market retailers. So I think we like that.

I think we as I said in my prepared remarks, we have built in London, I think, a decent franchise and leading capabilities that kind of should -- or should help us continue to grow despite a more competitive marketplace. And I think MidCorp certainly is an area where we think we're still getting double-digit rate increases. And I think as we continue to integrate the platform, we think we have a decent -- based on the value proposition that we have, we have an ability to grow. I think in terms of the areas that are more challenged, I mentioned them earlier, I think D&O, cyber, that's not new.

E&S property, I think still very attractive rate levels, but I think the competition is fierce, I think. So I think it's areas that we're watching carefully.

And then on MI, like obviously, if rates decline, there would be a pickup in growth. But do you think a decline in rates overall would be a positive for the business or negative given that there's a high likelihood that if rates decline a decent amount, then persistency suffers and the in-force book, which is producing very high margins might begin to run off a lot faster. So what's sort of an ideal scenario for the MI business from a profitability standpoint? And how do you view declines in interest rates affecting that?

Yes. I think -- I mean, we do all this work, right? I mean, a function of how much rate, what it would take in terms of rate declines for in-force book to have more propensity to refinance. So if rates drop 50 bps, it's not a big deal for us.

I think we see more benefit in terms of homes being more affordable. So I think the new production would overtake that kind of negative in terms of refinancing. So -- but if there's a big refinancing boom, then yes, we pick up that share. So it's -- and obviously, we like the in-force book a lot.

I think it's high quality. It's got a lot of home equity built into those mortgages. So we wouldn't mind giving up a little bit of that in exchange for new business. But absent -- I'd say absent a significant drop in interest rates, I think the in-force book will stay with us for quite some time.

Yes, we have some room in that respect.

And your next question is from Wes Carmichael from Autonomous Research.

I know we're over time, so I'll just keep it to one. But I had a question on reinsurance. From some of our conversations with some industry participants, it sounds like there was a bit of a return of aggregate treaties with midyears. So I was just curious how you think about your exposure to aggregates and if your appetite at all has changed to write that business.

I don't think so in anything that's material. By the way, for the record, we always write aggregate treaties, but we -- it's a very small portion of what we do. And I think, yes, the flavor of the day a few years back was aggregate dropdown and all the good stuff that you see in a softer market. We haven't seen a huge comeback and our team haven't supported the few that have come to the market.

And your next question is from Elyse Greenspan from Wells Fargo.

I just had a follow-up, I guess, coming back to some of the MidCorp discussion. I guess we were talking about, right, just the programs piece of it, which I know is going to have an impact on the margin. But I know when you guys announced the deal, right, the goal was to get this business right, in line with legacy Arch, right? So obviously, the 100 basis point drag on the underlying loss ratio in the quarter.

Can you just -- and it sounds like, right, the program piece will impact next year. Can you take us through like should we start to see some improvement relative to MidCorp and serving as like a tailwind to that insurance segment underlying loss ratio next year and then it picks up more steam in '27. I just want to understand the cadence of kind of the improvement in the MidCorp margin and the trajectory to get in line with legacy Arch?

Yes. So our long-term thesis for making the acquisition and I think the targeted profitability, I think, is unchanged. I mean the timing, it's hard to predict. We're doing a ton of work around it, preparing again.

But I don't have a crystal ball as far as what the market will do around us. But I think the thing we feel good is that the assumption that we use, I think we'll be able to realize over time.

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.