Arch Capital Group Ltd. (ACGL) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary indicates strong financial performance with a notable increase in net premium and investment income. The company is effectively managing capital with significant buybacks, and the Q&A reveals optimism about opportunities in casualty lines and property catastrophe renewals. While there are headwinds in short-tail lines and uncertainties in the MGA marketplace, the overall sentiment is positive, driven by strategic growth areas and a strong balance sheet.

Key Financial Performance

After-tax operating income Over $1 billion, up 37% year-over-year. This increase is attributed to the strength of the diversified platform and contributions from all three segments combined with solid investment returns.

Net income Over $1.3 billion, up 37% year-over-year. This reflects strong performance across the enterprise.

After-tax operating earnings per share $2.77, representing an 18.5% annualized operating return on average common equity. This is a record figure, driven by strong operational performance.

Book value per share growth 17.3% year-to-date, driven by meaningful contributions from all segments and solid investment returns.

Quarterly consolidated combined ratio 79.8%, reflecting excellent underwriting and low catastrophe activity in the quarter.

9 months combined ratio 83.6%, including the impact of California wildfires and severe convective storms, highlighting strong underwriting performance.

Property and Casualty Insurance Group underwriting income $129 million, up 8% year-over-year, driven by strong underlying margins and growth in specialty lines.

Net premium written in North America other liability occurrence Grew by 17%, supported by growth in middle market and double-digit rate increases in E&S casualty.

Net premium written in North America property and short-tail book Increased by 15%, with growth in middle market and middle property offsetting declines in excess and surplus property.

Reinsurance underwriting income $482 million, a record figure, with a 76.1% combined ratio, significantly improved from last year's catastrophe-heavy third quarter.

Net premium written in reinsurance $1.7 billion, down roughly 11% year-over-year, due to current pricing conditions in short-tail and property catastrophe lines and increased retention by cedents.

Mortgage underwriting income $260 million for the quarter, with the segment on pace to deliver approximately $1 billion for the year. This is supported by a high-quality in-force portfolio and disciplined underwriting.

Net investment income $408 million, a quarterly record, driven by strong earnings and cash flow, growing investable assets to $46.7 billion.

Insurance segment net premiums written Grew by 7.3% year-over-year, primarily due to the contribution of the MidCorp and Entertainment unit for a full three months this quarter compared to two months last year.

Ex-cat accident year combined ratio 80.5%, down 40 basis points from last quarter, reflecting excellent underlying results across all segments.

Current year catastrophe losses $72 million, net of reinsurance and reinstatement premiums, in what is typically the most active quarter for catastrophes.

Reinsurance segment net written premium Down by approximately 10.7% year-over-year, primarily due to two large transactions in 2024 that did not renew this quarter.

Delinquency rate of USMI business Increased to 2.04%, in line with expectations due to seasonality in the business.

Net investment income and income from funds accounted using the equity method $542 million, or $1.44 per share pre-tax, supported by strong positive cash flow from operations of $2.2 billion in the quarter.

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Operating Highlights

MidCorp and Entertainment acquisition: The acquired business provides a significant platform for building further scale in the middle market sectors. It is already driving growth and yielding tangible returns. Integration priorities such as portfolio rollover, remediation, and separation from legacy systems are on target.

North America other liability occurrence: Net written premium grew by 17%, supported by growth in middle market and double-digit rate increase in E&S casualty.

North America property and short-tail book: Net written premium increased by 15%, with growth in middle market and middle property offsetting declines in excess and surplus property.

Record results: Achieved over $1 billion of after-tax operating income and $1.3 billion of net income, both up 37% year-over-year. After-tax operating earnings per share reached $2.77, representing an 18.5% annualized operating return on average common equity.

Underwriting performance: Quarterly consolidated combined ratio of 79.8% and 9-month combined ratio of 83.6%, reflecting strong underwriting performance despite California wildfires and severe convective storms.

Reinsurance segment: Delivered a record $482 million of underwriting income with a 76.1% combined ratio, showcasing strong profitability and low catastrophe activity.

Mortgage segment: Generated $260 million of underwriting income for the quarter and is on pace to deliver approximately $1 billion for the year. High-quality in-force portfolio continues to outperform expectations.

Investment income: Net investment income reached $408 million, a quarterly record, with investable assets growing to $46.7 billion.

Capital deployment: Repurchased $732 million of shares in the quarter due to weaker market pricing and attractive stock entry point. Strong balance sheet allows simultaneous investment in business and capital return to investors.

Diversified platform: Focus on allocating capital to attractive opportunities across insurance, reinsurance, and mortgage segments to generate superior risk-adjusted returns.

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Risk or Challenges

Market Competition: Increasing competition in the market is noted, which could pressure pricing and profitability. The company emphasizes the need for underwriting discipline and risk-based pricing to maintain profitability.

Market Pricing Conditions: Relatively weaker market pricing is highlighted, which could impact the company's ability to generate superior risk-adjusted returns.

Supply Chain and Retention Challenges: Increased retention by cedents and current pricing conditions in short-tail and property catastrophe lines are affecting reinsurance premium volumes, which were down 11% year-over-year.

Economic Uncertainty in Mortgage Segment: Mortgage originations remain modest due to affordability challenges, which could impact the growth of the mortgage segment.

Integration Risks: The integration of the MidCorp and Entertainment acquisition is ongoing, with remediation and separation from legacy systems still in progress, posing potential operational risks.

Catastrophe Exposure: Although current catastrophe losses were low, the company remains exposed to potential future catastrophic events, which could significantly impact financial performance.

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Guidance & Outlook

Capital Deployment: The company is actively looking to deploy as much capital as possible towards attractive underwriting opportunities, focusing on risk-adjusted target returns and profitable growth.

Market Conditions: The company acknowledges increasing competition in the market but emphasizes its ability to navigate this through underwriting discipline and risk-based pricing tools.

Insurance Segment Growth: The company plans to build further scale in the middle market sectors in North America, leveraging the MidCorp and Entertainment acquisition. Integration priorities, including portfolio rollover and remediation, are on target.

Reinsurance Segment Outlook: The company expects to continue generating attractive underwriting returns despite competitive market conditions. It highlights improving conditions in casualty lines and its diversified platform as key advantages.

Mortgage Segment Performance: The segment is on pace to deliver approximately $1 billion of underwriting income for the year. The company is well-positioned to support first-time homebuyers when the U.S. housing market expands.

Investment Strategy: The company aims to maintain a conservative portfolio positioning while generating reliable and sustainable earnings and cash flows. Net investment income is expected to grow in line with the size of the investment portfolio.

Capital Management: The company repurchased $732 million of shares in the quarter and an additional $250 million in October, reflecting its strong capital position and focus on maximizing shareholder returns.

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Shareholder Return Plan

Share Repurchase: Given relatively weaker market pricing and an attractive entry point for our stock, we repurchased $732 million of shares in the quarter. Our strong balance sheet and strong capital-generating capabilities permit us to both invest in our business and return capital to investors. On the capital management front, we repurchased $732 million of our shares in the quarter and added $250 million to this number so far in October. On a year-to-date basis, we have repurchased 15.1 million shares, representing 4% of the outstanding number of common shares at the start of the year.

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Key Q&A

Q:How do we think about the level of buybacks going forward given the strong earnings this year? Is this year more focused on buybacks versus a special dividend in terms of capital return?

A:François Morin stated that buybacks are the preferred method of capital return in the current environment due to strong earnings and limited growth opportunities. The balance sheet remains strong, and there is room for more buybacks, which will be evaluated regularly with the Board.

Q:How do you see the premium growth outlook for your insurance book given the impact of non-renewals and the softening market?

A:Nicolas Alain Papadopoulo expressed optimism about the insurance business, focusing on profitable growth. He highlighted three market segments: casualty (with rate increases and growth potential), professional lines (where rate decreases are moderating), and property (where Arch has limited exposure to pressured areas). Overall, Arch expects to grow better than the market.

Q:What are your high-level thoughts on potential exposure to the hurricane currently impacting the Caribbean?

A:Nicolas Alain Papadopoulo and François Morin stated it is too early to assess the impact. Potential exposure might include insured values at resorts, but the situation remains uncertain.

Q:What would the normalized growth have been in the reinsurance segment absent the noise from two deals and reinstatement premiums? How are you thinking about growth going forward in that segment?

A:François Morin estimated normalized growth would have been a 3-4% decrease instead of the reported 10% decrease. Nicolas Alain Papadopoulo noted rate pressure on short-tail lines but opportunities in casualty lines. He also mentioned that companies retaining more business creates headwinds but presents opportunities in excess of loss positions with better margins.

Q:How do you see E&S premium for the industry playing out over the next few years? How does Arch see itself in the E&S market?

A:Nicolas Alain Papadopoulo expects a continued shift of casualty business to the E&S market due to flexibility in rates and forms. However, some short-tail business may return to the admitted market. Arch is optimistic about casualty opportunities but sees challenges in short-tail lines due to pricing.

Q:What is Arch's appetite for buybacks in Q4 and beyond, given the significant buybacks in Q3?

A:François Morin stated that Arch is comfortable buying back stock during the wind season due to its diversified and strong balance sheet. The company will continue buybacks as long as it perceives the stock price to be attractive.

Q:How important is it to Arch to maintain its AA- rating when considering capital deployment?

A:François Morin and Nicolas Alain Papadopoulo acknowledged the benefits of the AA- rating, particularly in Europe and for certain transactions. However, they noted that Arch's capital position is strong, and the rating does not impose a significant additional burden.

Q:Where is Arch seeing opportunities in casualty lines with attractive pricing?

A:Nicolas Alain Papadopoulo identified opportunities in E&S casualty, particularly excess liabilities, and in national accounts and construction, which include workers' comp, general liability, and some auto.

Q:What is the impact of cedents retaining more business on Arch's facultative property reinsurance?

A:Nicolas Alain Papadopoulo and François Morin explained that cedents retaining more business and revising growth forecasts downward have impacted Arch's facultative property reinsurance. The reduction in exposure is driven by cedents' decisions, not Arch's.

Q:What is Arch's view on the exponential growth of the MGA marketplace?

A:Nicolas Alain Papadopoulo expressed skepticism about the MGA model due to potential misalignment of incentives and delayed information to carriers. He questioned the long-term outcomes of this growth.

Q:What is Arch's view on the normalized loss ratio for its mortgage business?

A:François Morin stated that Arch expects a normalized loss ratio of around 20% across the cycle. Current performance has been strong due to high home prices, and Arch remains bullish on the mortgage business.

Q:Has anything changed in Arch's view of inorganic opportunities, particularly in U.S. small commercial?

A:François Morin noted that while M&A opportunities are on the wish list, Arch is not holding excess capital for potential transactions. The company has a strong balance sheet and flexibility to execute on opportunities as they arise.

Q:What is Arch's outlook for 1/1 property catastrophe renewals?

A:Nicolas Alain Papadopoulo stated that Arch remains bullish on property catastrophe renewals, with attractive margins despite expected rate pressure. Demand is expected to increase in the U.S. and internationally.

Q:What is the impact of the remediation of the MCE book on Arch's insurance segment?

A:François Morin estimated that $200 million of the $1.5-$1.6 billion MCE book will be non-renewed. The middle market business acquired through MCE has performed well, and Arch expects to offset some headwinds with growth in this area.

Q:What is Arch's view on the credit environment, particularly in relation to its mortgage book and private credit exposure?

A:François Morin and Nicolas Alain Papadopoulo stated that Arch is comfortable with its credit exposure. They noted strong underwriting in the mortgage book and effective management of short-term credit in Coface.

Q:What is the impact of the mix shift to casualty lines on Arch's underlying loss ratios?

A:Nicolas Alain Papadopoulo noted that while casualty lines have higher loss picks, the mix shift has not fundamentally changed loss ratios yet. Over time, it may have an impact.

Q:What is Arch's view on the substance-based tax credits introduced in Bermuda?

A:François Morin stated that it is too early to assess the impact. Arch is awaiting clarity on transition credits, which is expected by December, and will provide more information once the law is finalized.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer to the question about potential exposure to the hurricane in the Caribbean, stating it was too early to tell. Additionally, they provided limited detail on the impact of the substance-based tax credits in Bermuda, noting that clarity is expected by December.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call presents a mixed picture. While there is strong financial performance and a positive outlook on casualty lines, the unclear guidance and adverse developments in the U.K.-Russia aviation ruling create uncertainty. The Q&A section reveals management's reluctance to provide specific guidance, which may dampen investor sentiment. Additionally, while the company plans share repurchases, the lack of clarity on other capital return strategies tempers optimism. Overall, the sentiment is neutral due to these balancing factors.

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The earnings call highlights strong financial performance, including increased operating income, net premiums, and cash flow. The company also announced significant share repurchases, indicating confidence in financial health. However, management's vague responses during the Q&A and concerns about social inflation in casualty reserves slightly temper the positive outlook. Despite these concerns, the overall sentiment remains positive, driven by robust financial metrics and strategic capital management.

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