Arch Capital [ACGL] Conference call transcript for 2023 q4
2024-02-15 16:59:06
Fiscal: 2023 q4
Operator: Good day, ladies and gentlemen, and welcome to the Q4 2023 Arch Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with this update, management wants to first remind everyone that certain statements in today'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 filled by the company with the SEC from time to time. 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 will also make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. François Morin. Sirs, you may begin.
Marc Grandisson: Thank you, Gigi. Good morning and thank you for joining our earnings call. Our fourth quarter results conclude another record year as we continued to lean into broadly favorable underwriting conditions in the property and casualty sectors. Our full year financial performance was excellent with an annual operating return on average common equity of 21.6% and an exceptional 43.9% increase in book value per share, which remains an impressive 34.2% if we exclude the one-time benefit from the deferred tax asset we booked in the fourth quarter. The $3.2 billion of operating income reported in 2023 made it Arch's most profitable year-to-date. Growth was strong all year as we allocated capital to our property and casualty teams, we short over $17 billion of gross premium and over $12.4 billion of net premium. And while most current growth opportunities are in the P&C sector, it's important to recognize the steady quality underwriting performance of our mortgage group. Although, mortgage market conditions meant fewer opportunities for top-line MI growth, the business unit continued to generate significant profits totaling nearly $1.1 billion of underwriting income for the year. As we have mentioned on previous calls, those earnings have helped fund growth opportunities in the segments with the best risk adjusted returns, demonstrating that the disciplined underwriting approach and active capital allocation are essential throughout the cycle. Our ability to deploy capital early in the hard market cycle is paying dividends as we own the renewals, a phrase I learned from Paul Ingrey, a personal mentor and foundational leader of Arch. What Paul meant was quite simple. When markets turn hard, you should aggressively write business early in the cycle. This puts your underwriters in a strong position to fully capitalize on the market opportunity. By making decisive early moves, you won become an [indiscernible] then want to do more business with you. In some ways, the growth becomes self-sustaining, which explains part of our success throughout this hard market. At Arch, our primary focus has always been on rate adequacy, regardless of market conditions. Our underwriting culture dictates that we include a meaningful margin of safety in our pricing, especially in softer conditions. And we also take a longer view of inflation and rates. For these reasons, Arch was underweight in casualty premium from 2016 to 2019, when cumulative rates were cut by as much as 50%. I thought I'd borrow a soccer analogy to help explain the current casualty market. In soccer, players who commit a deliberate foul are often given a yellow card. Two yellow cards mean the player is ejected from the remainder of the match and their team continues with a one player disadvantage. Today's casualty market feels as though some market participants took to the field with a yellow card from a prior game. They're playing in match but cautiously, not wanting to make an error that will put their entire team at a disadvantage. So whilst Arch sometimes plays aggressively, we've remained disciplined and avoided drawing a yellow card. At a high level, we must remember that casualty lines take longer to remediate than property. So if insurers are being cautious and adding to their margin of safety, we could experience profitable underwriting opportunities in an improving casualty market for the next several years. Now, I'll provide some additional color about the performance of our operating units, starting with reinsurance. The performance of our reinsurance segment last year was nothing short of stellar. For the year, reinsurance net premium written were $6.6 billion, an increase of over $1.6 billion from 2022. Underwriting income of nearly $1.1 billion is a record for this segment and a significant improvement from the cat heavy 2022. Reinsurance underwriting results remain excellent as we ended the year with an 81.4% combined ratio overall in a 77.4% combined ratio ex-cat and prior year development both significant improvements over 2022. Turning now to our insurance segment, which continued its growth trajectory by writing nearly $5.9 billion of net premium in 2023, a 17% increase from the prior year. While the business model for primary insurance means that shifts may not appear as dramatic as our reinsurance groups, a look at where we've allocated capital year-over-year provides meaningful insight into our view of the market opportunities. In 2023, the most notable gains came in from property, marine, construction, and national accounts. The $450 million of underwriting income generated by the insurance segment in 2023 doubled our 2022 output as we continue to earn in premium from our deliberate growth during the early years of this hard market. Underwriting results remained solid on the year as the insurance segment delivered a combined ratio of 91.7% and a healthy 89.6% excluding cat and prior year development. Now on to mortgage, our industry-leading mortgage segment continued to deliver profitable results, despite a significant industry-wide reduction in mortgage originations last year. The high persistency of our insurance in-force portfolio, which carries its own unique version of owning the renewals, enables a segment to consistently serve as an earnings engine for our shareholders. The credit profile of our U.S. primary MI portfolio remains excellent and the overall MI market continues to be disciplined and returned focus. These conditions should help to ensure that our mortgage segment remains a valuable source of earnings diversification for Arch. Onto investments, net investment income grew to over $1 billion for the year due to rising interest rates that enhanced earnings from the float generated by our increasing cash flows from underwriting. The significant increases to our asset base provide a tailwind for our creative investment group to further increase its contributions to Arch's earnings. Over the past several years, Arch has leaned into both the hard market and our role as a market leader in the specialty insurance space. We have successfully deployed capital into our diversified operating segments to fuel growth, while also making substantial operational enhancements to our platform, including entering new lines, expanding into new geographies and making investments into new underwriting teams, technology and data analytics. Finally, as we bid adieu to 2023, I want to take a moment to thank our more than 6,500 employees around the world who help deliver so much value to our customers and shareholders. Our people are our competitive advantage and without their creativity, dedication and integrity, none of this would be possible. So thank you to team Arch. François?
François Morin: Thank you, Marc, and good morning to all. Thanks for joining us today. As Marc mentioned, we closed the year on a high note with after-tax operating income of $2.49 per share for the quarter for an annualized operating return on average common equity of 23.7%. Book value per share was $46.94 as of December 31, up 21.5% for the quarter and 43.9% for the year aided by the establishment of a net deferred tax asset related to the recently introduced Bermuda Corporate Income Tax, which I will expand on in a moment. Our excellent performance resulted from an outstanding quarter across our three business segments highlighted by $715 million in underwriting income. We delivered strong net premium written growth across our insurance and reinsurance segments, a 22% increase over the fourth quarter of 2022 after adjusting for large non-recurring reinsurance transactions we discussed last year, and an excellent combined ratio of 78.9% for the Group. Our underwriting income reflected $135 million of favorable prior year development on a pretax basis or 4.1 points on the combined ratio across our three segments. We observed favorable development across many units, but primarily in short day lines in our property and casualty segments and in mortgage due to strong cure activity. While there were no major catastrophe industry events this quarter, a series of smaller events that occurred across the globe throughout the year resulted in current accident year catastrophe losses of $137 million for the Group in the quarter. Overall, the catastrophe losses we recognize were below our expected catastrophe load. As of January 1, our peak zone natural cat PML for a single event, one in 250-year return level on a net basis increased 11% from October 1 but has declined relative to our capital and now stands at 9.2% of tangible shareholders equity, well below our internal limits. On the investment front, we earned $415 million combined from net investment income and income from funds accounted using the equity method, up 27% from last quarter. This amount represents $1.09 per share. With an investable asset base approaching $35 billion, supported by a record $5.7 billion of cash flow from operating activities in 2023 and new money rates near 5%, we should see continued positive momentum in our investment returns. Our capital base grew to $21.1 billion with a low leverage ratio of 16.9%, represented as debt plus preferred shares to total capital. Overall, our balance sheet remains extremely strong and we retain significant financial flexibility to pursue any opportunities that arise. Moving to the recently introduced corporate -- Bermuda Corporate Income Tax. As mentioned in our earnings release and in connection with the law change, we recognized a net deferred tax asset of $1.18 billion this quarter, which we have excluded from operating income due to its non-recurring nature. This asset will amortize mostly over a 10-year period in our financials, reducing our cash tax payments in those years. All things equal, we expect our effective tax rate to be in the 9% to 11% range for 2024, with a higher expected rate starting in 2025. As regards our income from operating affiliates, it's worth mentioning that approximately 40% of this quarter's income is attributable to non-recurring items such as Coface adoption of IFRS 17 and the establishment of a deferred tax asset at summers in connection with the Bermuda Corporate Income Tax. With these introductory comments, we are now prepared to take your questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Elyse Greenspan from Wells Fargo.
Elyse Greenspan: Thanks. Marc, my first question, I wanted to expand on some of your introductory comments just on the casualty side, right? We've started to see some reserve additions this quarter, and I think you alluded to that last quarter as being what was going to drive the market turn. So how do you see it playing out from here? I know you said it should play out over the next several years. Could you just give us a little bit of a roadmap in how you think about this opportunity emerging for Arch?
Marc Grandisson: Yes. Great question. I think that we're observing our own book of business. We also look at all the information around; I think from an actuaries perspective both François and I have maybe dusting off our actuarial diplomas. You rely on data that's historically stable, or at least has some kind of predictability. I think what we've seen over the last two, three years, as a result of the pandemic, largely in the courts being closed and everything else in between all the uncertainty and then the bout of inflation, there's a lot of data that's really hard to pin down and get comfortable with to make your prediction for what you should be pricing the business. As we all know, reserving leads to the pricing, right, by virtue of reserving and having the right number for the reserving, you then feed that into your pricing. So we're in a situation where people have lesser visibility or about what the reserving will ultimately develop to. So I can totally understand our clients and our competitors having to adjust on the fly, or having to adjust a little bit progressively and cumulatively. The issue with casualty, at least as you know, is even if you have that information and you make some correction of corrective actions, it still takes a while to evaluate whether what you did was enough or whether what you needed to do. So I think right now, we have -- we already had a couple of rate increases in casualty starting in 2020. But I think that now we're realizing that maybe it's a little bit worse collectively as an industry than we thought. And there's a lot more uncertainty, a lot more inflation, certainly, as we all know, is a big factor. So what I would expect right now is people will start refining their book of business. They will try to re-underwrite away from the social inflation impact lines. They'll probably push for rates. Some of them might kick some business to E&S until such time as we have more stability in the reserving now the loss emerges as it relates to what your initial pricing assumptions was. And in casualty, that's why it takes several years and its history is any indication. If you look back at the -- even the [indiscernible] market and then the yo tutors the 90s -- 1999 or 2000 to 2003, it took three to four years from the start of that, even in the middle of it, to really get clarity. And the market got much harder, in fact, in 2004 or 2005 than it was in 2002. Just because you have to do the action and see what the actions did, what you thought. And I think that's what we're going to collectively as an industry are going through and we're seeing it with our clients and that's really what's happening.
Elyse Greenspan: Thanks. And then, my second question, second quarter in a row, right, we've seen the underlying loss ratio within your reinsurance business come in sub-50, and you guys are obviously earning in like cat business written at strong rates last year. How should we think about the sustainability of a sub-50 underlying loss ratio within your reinsurance book?
François Morin: Well, sustainability is a great question. I think you're absolutely right that we have more property premium that is more short tail and should have a lower loss ratio ex cat than not, right, compared to other lines. It's a good market. So obviously profitability embedded in the business should be strong. But we send you back to kind of quarterly volatility, where you are -- sometimes we have a better than, call it normal quarter, even as a function of the book and sometimes not. There's going to volatility. We said it before; we said again the 12-month kind of rolling average is to us a better way to look at it and that's how we see it. But certainly we like the profitability in the book and it should be -- it should remain strong. One thing I will tell you Elyse, by heard on the other calls is that the markets -- reinsurance market is continuing to improve somewhat into the one, one renewal. So it is still a very good marketplace. So what it means for the loss ratio, I don't know. But certainly, we're seeing improvement.
Elyse Greenspan: And then, just one last one on capital, right? I believe on there was some pushes and pulls from the S&P capital changes on your capital but should be positive relative to your mortgage business. Can you just help us think through your capital position and relative to just organic growth opportunities you see at hand over the next year.
François Morin: Well, certainly, I mean S&P is one thing that we look at. We look at many different way -- I mean, we have different looks at capital adequacy. We have our own internal view which drives really how we make our decisions. Rating agencies are an important factor but I think more importantly is how we think about it. But you're right. I mean no question that from the S&P point of view, I mean the change of their model was a net benefit and that's reduced kind, you know give us, I say a bit more excess capital. But we -- and we look at it very carefully. We want to make sure that we're able to seize the opportunities that will be in front of us and we see plenty for 2024. So right now our very -- our main focus is growing the business and kind of deploying that capital into what's in front of us and then we'll see how the rest of the year plays out.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Andrew Kligerman from TD Cowen.
Andrew Kligerman: First question -- good morning. First question would be around M&A, we've seen a lot in the media about other specialty players that could be acquired. Arch has been mentioned along with other companies. And I know you can't comment on specific transactions and that you've talked a lot about 15% return on capital over time. But when you do transactions, could you give us a little color on what the parameters might be, what's really important to Arch when you do deals?
Marc Grandisson: Yes. On the M&A front, we're very prudent and careful when we do -- if we do anything. And I think historically, our historical track record is probably the best way to look at this. We'll look for something where our opportunities to earn a return is with a proper margin of safety is fairly healthy. We're not -- there's no desire to grow for growth sake in this company. It really has to do with the return on capital. And as François mentioned, the fact that we have opportunities to above 15% opportunities in this marketplace certainly makes it a little more harder. Having said all this, we might make not exceptions, but there might be some other considerations as it relates to maybe a strategic, maybe a different kind of product, maybe a geography, or maybe -- and we prefer that, maybe a new team that can really bring the expertise on an underwriting basis. So it's a very, very disciplined approach to M&A that we take. And we have the luxury because we have plenty of organic growth available to us. So something has to be very compelling for us to engage in those and also other risks, as you all know, that we don't want to take on necessarily the number one is the culture. Now we're very, very adamant about keeping top culture the way it is, and that's really something. And that quite oftentimes the thing that makes the most, and then -- probably the one that makes the most difference in whether or not we'll entertain an M&A or not.
Andrew Kligerman: That makes a lot of sense. You mentioned on the favorable developments that short tail property was a big driver. So looking at insurance at $21 million favorable, reinsurance at seven favorable. Just trying to understand, were there any large casualty offsets that might have played in and if so, what would they be?
François Morin: Yes, well, there's no, I'd say offsets. I mean, we look at each line on its own. There's always going to be pluses and minuses on that every single quarter. We look at the data, we react to the data. I think, as you can imagine, or I mean, very much a function of the type of business that we've written the last few years we -- in reinsurance in particular, we've grown a lot in property. We've taken our usual -- used our same methodology, same approach to reserve, and that generated a little bit of redundancies or releases this quarter on the short tail side. There's always a little bit of noise on any line of business. Yes. Did we have a couple of sublines or kind of sales in casualty where we had a little bit of adverse? Absolutely, but it's not -- I wouldn't call it an offset. I mean, we booked every single line on its own. We reacted to data, and then when numbers come up is what we end up with.
Marc Grandisson: One thing I would add to this, our reserving approach at a high level is to typically recognize bad news quickly and good news over time. So again, our philosophy hasn't changed at all in all those years.
Andrew Kligerman: Maybe if I could sneak one quick one in. You mentioned during the call that one of the growth areas in insurance was national accounts. What type of limits do you write on national accounts?
Marc Grandisson: Well, it's statutory, right? So -- and it's on an excessive loss basis. And these are loss. There's a lot of sharing of experience, plus or minus business with clients. They tend to be larger clients. The national account is 95% plus workers comp. It's really a self-insured sort of structure that of sort, we provide the paper and actually the document to allow people to operate in their state because you need the required thing to be able to demonstrate the workers comp insurance as a protection. This is statutory, so it's unlimited by definition. We have some reinsurance that protect some of the capping. That's really what it is.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Jimmy Bhullar from JPMorgan.
Jimmy Bhullar: Hey, good morning. So, first, just a question on the casualty business. We've seen significant growth in your property exposures with the hard -- since the hardening of the market, or significant hardening the market since early last year. What are your views on just overall market trends on the casualty side, and are you comfortable enough with pricing in terms to increase volumes in that area?
Marc Grandisson: Yes, I think our comfort -- great question. Our comfort on the casualty, on liability in general, more general liability, right, if you exclude professional lines, I think we're -- the market is turning or has more pressure on the primary side. So I think that our focus right now is really on the primary, as you can see on our reinsurance, what we did in reinsurance for the last year, we think the reinsurance market is a little bit delayed in reacting to what happened, as in some of the development that we see and some of the increase in inflation. And of course, for your point that we mentioned. So I think that we'll probably see first an insurance market that really takes it to hard, like I mentioned, all the remediation that they need to do. And I think the reinsurance market will probably follow suit with their own -- possibly their own way to look at this, if the prior hard markets are any indication. On the reinsurance side, one thing that's a little bit beneficial at this point in time, and there's a reason why reinsurers are not reacting possibly as abruptly as they probably should as in regards to city and commission is that we collectively understand as an industry that our clients are trying to make those changes, so we're trying to go along with them and help them, support them in their efforts. We'll see whether that's enough. Our team is a little bit waiting to see whether that develops, but I do expect this to also come around and also provide another opportunity for us to grow.
Jimmy Bhullar: And then on mortgage insurance, I would have assumed that reserve releases would moderate over time, and they've actually become even more favorable. And I think there's a shift in what's driving that. It used to be COVID reserves last year, and now it's stuff written post-COVID. As you think about, just want to get an idea on what are you assuming in your reserves that you're putting on the book right now? Are you assuming experience commensurate with what you're seeing in the market or is it reasonable to assume that if the environment stays the way it is, there's more room to go in terms of reserve releases?
Marc Grandisson: Great question. I say reserve releases this year in general were somewhat driven by our -- the views we had on the housing market at the start of the year, right? So if you rolled back the tape a year, we were more concerned about home prices dropping fairly rapidly, recession, no soft landing, et cetera. So those reserves we set, call it a year ago were very much a function of those assumptions, and they just didn't materialize throughout the year. So throughout the year, we saw very strong or very well performing housing market. People are hearing their delinquencies much higher than we'd actually forecasted. Home prices are holding up. Unemployment remains relatively low. So you put it all together, I mean it's really, what transpired in 2023 is very much a function of the reserve releases reflect kind of how things -- how much better they played out relative to what we thought a year ago. Where we are today at the start of 2024 is certainly a bit more, I wouldn't call it optimistic in the sense that we see good home prices and a solid housing market for 2024. So on a relative basis, the reserves that we're holding today are not as high as they were a year ago. So if you extrapolate from that, is there room for as much in reserve releases going forward? Probably not, but we just don't know. I mean, the data will again play out as it does and we'll react to it, but hopefully that helps you kind of compare and understand how, where we sit today versus a year ago.
Jimmy Bhullar: Okay. Thanks. And just lastly, your comfort with the reserves in your casualty book, despite all the industry-wide issues, does that apply to the business that came over from Watford as well? Because that company obviously had a decent amount of exposure to casualty.
Marc Grandisson: That's an easy one. Watford, really the underwriting is managed by our team here. So the reserving and approach [Technical Difficulty] okay.
Jimmy Bhullar: Thanks.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO.
Michael Zaremski: Hey, good morning. First question for François on capital in regards to mortgage specifically. So my understanding of the mortgage reserving rules is that after a decade or so, you can start releasing a material amount of reserves. And mortgage obviously isn't growing now, so -- but you also have a Bermuda, I think some captives there too. So just curious, is there a material amount of capital coming or expected to come from releasing from the legacy mortgage or old mortgage business?
François Morin: Well, I'd say the short answer is yes, in the sense that the contingency reserves. You're right, we will start releasing a bit more progressively, starting in 2024 and 2025. That will be -- and we already had some of that in the fourth quarter this year. So if you look at our PMI's ratio, why it dropped in the quarter, the fourth quarter was very much a function of a dividend that we were able to extract from our regulated USMI Company to the Group. So that we think, well, should the plan and is scheduled to keep, we should keep having dividends in 2024 and beyond. But the one point I want to touch on is, and we touched on it in the past is while on a regulatory basis, yes, it's released, we would argue that capital is already somewhat being deployed in the business. So it's not -- that it's just sitting there not being deployed in the business. It's already been used to other sources because the regulators and the rating agencies look at the aggregate Arch Cap Group kind of level of capital. So yes, on the statutory basis, the goal here is to put the capital in the better location. But overall, it's somewhat not as big an impact as you might imagine.
Michael Zaremski: Okay. That's helpful. And sticking with capital, when Elyse asked about you mentioned the S&P Capital model, but I don't think you actually gave any quantitative or answers on the benefit, because when we -- on paper we see that Arch appears to be one of if not the most diversified. Any help there on how much of a benefit or how to think about how much of a benefit the model offers Arch?
François Morin: Yes, you're right. I didn't put a number, and we're not going to start putting a number, but it's a net positive. No question that, yes, mortgage charges, diversification benefit were reductions in capital requirements, but we also -- the final rulings on debt was not as favorable, right? So S&P and their new rules, they no longer treat $1.75 billion of our debt as being capital. So that's a significant offset. But all things considered, all in, it's a positive. But again, what I want to remind everyone is it's not the only thing we look at, it's just one thing among many and other rating agencies matter. And more importantly, again, is how we think about the capital we need to run the business.
Michael Zaremski: Okay. And lastly, since everyone else is sneaking in a lot more questions, based on the remarks you've made it, unless I'm understanding it incorrectly, it sounds like the growth might be you're more excited about the primary insurance segment. Can primary insurance potentially grow just as much in 2024 as it did in 2023?
Marc Grandisson: It's a great question. I mean, again, the way we talk, we don't provide guidance because I don't know, we don't know what the market conditions will be this year. But in terms of capabilities and capital and talent and everything else in between, absolutely, we have -- we could do more. Yes, we could. If the opportunities are there, we'll do more, both on insurance or reinsurance for that matter.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Josh Shanker from Bank of America.
Josh Shanker: Hey, everyone, I think there might be a problem with the phones. We heard Jimmy and Mike just fine, but we couldn't hear your answers to the questions. I don't know. So -- and I hear you. I don't know if anyone can hear me. Let me ask my team. Can you guys hear me on the phone? They hear me. So somehow it's been corrected. Okay, so I don't know what --
Marc Grandisson: Yes, Josh, we can hear you. So hopefully, it's been recorded. I don't know if it's been recorded.
Josh Shanker: Okay, very good.
Marc Grandisson: Yes.
Josh Shanker: So yes, I’ve got a couple of quick ones. So it's the lowest quarter of new insurance written in the mortgage insurance business since acquiring UGC. And yet it looks like the capital utilization went up, at least the risk to capital, and the premiers capital ratio went up. Can you sort of talk about the moving pieces that are driving that?
Marc Grandisson: Well, our PMIers, -- well, very much a function of a Bellemeade transactions that we called Josh, I think there's significant amounts of capital protection that we exercised on and no longer give us capital credit.
Josh Shanker: Yes, that's obviously what it is. Yes, definitely that makes sense.
Marc Grandisson: Yes.
Josh Shanker: And another easy one, it looks to me from quarter end 2000, September 30 to year-end, Coface stock was about flat, although it round tripped through the quarter. And yet you had very strong other income in the quarter. There's some summers in that. There's other things in there. Can you talk about the moving pieces?
François Morin: Well, Coface, I mean, the stock price is one thing, but obviously for us, we booked the income, right. And they declared pretty much. I don't know the exact numbers, but their dividend, their annual dividend has been close to their full net income, 100% kind of payout ratio. So that ends up being what we book in our financials. So yes, the stock price is going to move up and down over the year, but it doesn't directly, I'd say factor in or end up in their financials.
Josh Shanker: Okay. And just so I'm getting a lot of inbound call volume or e-mails from people right now. Nobody can hear these answers that you're giving me. It may be being recorded. They hear me, but they don't hear you.
Marc Grandisson: Hold on a second, Josh. Are we being recorded? Let's work a little bit through this quickly. Maybe we can fix it.
François Morin: What's happening now?
Marc Grandisson: Yes.
Josh Shanker: Okay. So just so that I don't know. Anyway, they're addressing it. People can't hear the Arch team. But for people who are emailing you right now saying they can't hear the Arch team, they're working on addressing it.
Operator: Thank you. One moment for our next question. Please note everyone that this call has been recorded and it will be available after the call is over. Our next question comes from the line of Yaron Kinar from Jefferies.
Yaron Kinar: Hey, good morning, everybody. Should I ask the questions or should we wait till this issue is fixed?
Marc Grandisson: I think we should continue on. Just ask your question. It's recorded. Hopefully people can --
François Morin: There will be a replay.
Marc Grandisson: Yes, it'll be a replay for everyone, hopefully. We apologize for this, but we'll try to figure it out afterwards. Let's go for it in line, yes.
Yaron Kinar: Yes. No problem. So I guess first question, when you set loss fix into a year, do you update those other than for bad news or frequency? And what I'm trying to get at here is when we look at the reinsurance loss ratios, are they already incorporating the step change in the reinsurance market that we saw in 2023, or were those losses or the loss ratio essentially a reflection of your expectations heading into 2023 and we should therefore see another step up in margins over the course of 2024?
Marc Grandisson: Yes, I think our tendency when we do loss ratio of fixed; you're on, especially on the long tail line. Remember François mentioned that earlier, we're much more of a short tail player than we were in proportion, right? So property is a bit easier to understand, right? It is what it is. You get the loss, you don't get the loss. So you do pick the loss ratio at the end of the year for what you think the attritional will be and there's no cap, then you can't really book the cap, right? There's a couple of things you need to address. On the liability and then we'll see over the next 12 months how it develops. And there are cadences of releasing or decreasing the IDNR on property, that's a bit shorter tail as you can appreciate. On the liability side, our tendency as an insurance or reinsurer on both sides of the equation of the aisle is to actually pick a loss ratio that has a little bit of a margin of safety at the beginning, not 100%, recognizing all potential benefits that we've seen, and we let it season for a while before we go in and make a change to them. And what we look at is obviously how the emergence, which I mentioned about, you may not have heard this one, but I mentioned about the emergence of the losses, how they are emerging versus what we expected. And you do this throughout the lifecycle of the deal, but that's a longer-term phenomenon.
Yaron Kinar: Got it. And then my second question Marc, I think in your prepared comments you'd said that casualty may be collectively worse than expected for the industry. And I'm curious that comment, is that really referencing kind of the soft market years of 2013 through 2018 or 2019? Or do you think there could also be some of that emerging for the more recent accident years, where market conditions were clearly good, but maybe the expectations of inflationary trends were still a bit lower than what they ended up being?
Marc Grandisson: It's a really good question, Yaron. My -- our -- we look at the actual as expected and we see it much more in the softer years, to be honest with you. The recent ones, it's here or there, plus or minuses as François mentioned, but it's all well, as far as we can tell, our portfolio is well within a range of reasonable expectations. It's nothing really that's surprising because your honestly, remember starting 2019, there were improvements in the marketplace, there were price increases already. So I think that those years are not as soft, clearly not as soft as 2016 to 2019 were.
Yaron Kinar: Right. But I guess the question would be, even if they weren't as soft and you were getting a lot of piece, the industry was getting a lot of rate at that point, if the expectation was for a inflationary trend of five and it ended up being seven, you could still see some deterioration of very profitable years nonetheless.
Marc Grandisson: You could, but we do reserving with the rate level in mind. So when we were writing the bids in 2021, we tend to look at a longer-term loss ratio and not the more recent years that before the stock market, for instance. So when you factor it all that in, we will tend to take higher loss ratio pick initial loss ratio, pick ourselves on the liability side. So you don't have a similar. One of the things that happened in 2016, 2019, and it was mentioned before is that people probably were more aggressive than they should have been on the loss ratio pick that they did in those years. I think by the time we get to 2021, I think already there was recognition and we saw through the rate increases that the market was trying to get to. I think the loss ratios lifted up a little bit, and I don't think we have a similar kind of deviation from initial loss ratio in those years.
Yaron Kinar: Got it. I'll just end by saying I think you disappointed a lot of swifty fans, including my daughter, by referencing rest of world football instead of U.S. football this quarter.
Marc Grandisson: We'll do better its looks like.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Bob Jian Huang from Morgan Stanley.
Bob Jian Huang: Hey, good morning. Just two quick ones. First, I think two quarters ago on the earnings call, you said when we look at the insurance underwriting cycle, we were at about 11 o'clock. That’s kind of where we were implying improved rates and also lost trend stabilization. Just curious, in your view, what time is it right now? Is it 11:30 or is it 11:59, 2:00 p.m.? Just kind of curious is it where you think.
Marc Grandisson: It’s the longest 11 o'clock I’ve ever seen in my life is what I’m going to tell you. So I think we’re still roughly around the 11 o'clock , which again, that clock is never like a one year after the other, right? You can stay 11:00. Unfortunately, you can stay into the 3 o'clock and 4 o'clock or where that you would want. So I think that it’s still roughly around that level the 11 o'clock , 11:30, perhaps in some cases, but, yes, roughly in that range.
Bob Jian Huang: Okay. That’s helpful. 11:00 to 11:30, that's very helpful. Thank you.
Marc Grandisson: Yes.
Bob Jian Huang: My second question regarding MGA and capacity in general, there has been some concern that MGAs have been increasingly aggressive. Is this something you're seeing? Is this concern rightfully placed? Does it have any impact on how you think about your underwriting cycle management? Are you becoming more cautious, especially within your reinsurance? Not sure if you answered that before, so apologies.
Marc Grandisson: That's a great question. I think I mean the MGAs emerge, as we all know, when there’s a dislocation where there's need for capacity. And I think we see it more acutely in the professional lines and some of them in property. But again, between the supply and demand on the professional lines, I think now that the capacity is probably more plentiful than. It's not more probably, it is more plentiful than it was. So I think it has some impact at the margin. Of course it does. I think the answer to your second part of the question, which is, how do we react? Well, we do it, the same way we always do it, which is if the pricing is going down and the returns are not as good. We will tend to deemphasize or pick or select the better clients that we have in our portfolio and still react the same way we would do in cycle management. On the property side, we also have similar MGAs and MGUs, right? But I think these guys, there’s an acute need for property coverage and capacity. And I think it sort of feels that we need all the capacity we can get our hands on a property at this point in time. So we're not seeing that much of as much of an impact. The property market is still very strong.
Bob Jian Huang: Okay. So property side, not enough capacity, professional line, plentiful capacity. That's the way we should think about it. Thank you.
Marc Grandisson: Yes, that's right.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Meyer Shields from Keefe, Bruyette & Woods.
Meyer Shields: Hi, I think we're in the same situation where people can only hear the answers to their specific questions. So I'm hoping that comes through here as well. Similar question to Bob, we've seen, obviously, a number of companies report some reserve problems in the fourth quarter. And I'm wondering, when you look at the book of sedans that you have within reinsurance, is what we're seeing in the public companies a good representation of overall trends, or is it something different in the non-public world?
Marc Grandisson: Well, I think when you price -- Meyer, good question. But for the record, this will be recorded, right? So we'll be able to -- so this will be recorded. So we'll be able to share, you’ll be able to hear the other questions and the other answers. Sorry, is that okay?
Meyer Shields: Yes, that's perfect. Thank you.
Marc Grandisson: So I think the issue with casualty reserving, and you’re an actuary as well as I am, the actual number is in the high of whoever is doing the work. So I think it's like everything else. Our teams may have different views about the loss ratio pick for some of the things that we’re looking at than they would have themselves. So I wouldn't say that it's a one to one. Some of them will not renew, or some of them we may not be able to participate on because we have a different view of the ultimate loss ratio. So I think it's really each individual underwriter and each individual company or sitting company come up with their own number and you have to make your own decision and your own opinion as to where it is.
Meyer Shields: Okay. I'm sorry, go ahead.
Marc Grandisson: No, no, go ahead. I was wondering whether you were still there, so carry on, please.
Meyer Shields: Yes, no, I'm still here. Similar question, I guess, obviously what we've seen here is a lot of domestic concerns over liability lines on the international casualty side, is that concern worsening as well, or should we think of that as just a domestic concern?
Marc Grandisson: It's a similar issue. It's not to the same acuteness in some kind of level, but the world has similarly closed down in a courts. It's not as litigious internationally as you would expect, but we're still seeing some hardening in international casualty as well. We saw this for the last two, three years. So it’s a very similar hardening of the market, may not be as acute in terms of reserving potential issues. And I'm not talking now to the globals that are internationally underwriting internationally, that's a different story, right? If they write in the U.S., they will have similar issue, but there is similar issues all around, but it's not to the same level internationally we’d see in the U.S.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Elyse Greenspan from Wells Fargo.
Elyse Greenspan: Hi, thanks for taking the follow-up. I will say I think you have a lot of folks wondering who's writing the coverage for your conference call provider. But my follow-up is on casualty insurance. Can you give us a sense of the loss trend that you're booking your casualty insurance book to and what rate you're getting in casualty insurance as well?
Marc Grandisson: Well, it depends on line of business, Elyse, but I think the numbers you hear around 7, 8, 9, 10, sometimes it's 5. It depends on line of business, depends on the attachment point, it depends on the limit that you provide, depends on the size of risk. But the numbers you hear -- the numbers that are heard around the marketplaces, we see the similar phenomenon. I think we've said it historically, it's coming -- it's happening as we speak, that the insurance trend in liability generally will out pay the CPI increase. And we're seeing this coming back, so with 200, 300 basis points above. So we’re largely consistent with those kinds of pick.
Elyse Greenspan: So loss trends, you said 7, 8, 9, 10, but can vary by line and sometimes be 5%. Where would you put the price increase?
Marc Grandisson: Oh, again, depending on line of business, but we're low to mid-teens, I would say right now.
Elyse Greenspan: Okay. Low to mid-teens. I'm just also repeating. So folks listening?
Marc Grandisson: Yes, I appreciate. I appreciate, Elyse. Thank you. Yes.
Elyse Greenspan: Can't hear the answer. So low to mid-teens. Yes, I think that's one, I guess on your, one last one, your cat, you said your PML went a little bit higher, right? But the percent of equity is lower, given the equity rise in the quarter, where would you put your cat load at the start of 2024?
François Morin: Well, certainly up from 2023, right. I'd say for the year, we’re looking at somewhere loss ratio points, right? Call it 7% or so of like 6% to 8% of like our premium would be kind of like the cat load.
Elyse Greenspan: Okay. 6% to 8% cat load. Thank you for taking the follow-up.
Marc Grandisson: Thanks, Elyse.
François Morin: You're welcome.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Cave Montazeri from Deutsche Bank.
Cave Montazeri: Good morning, guys, it's Cave.
Marc Grandisson: Good morning.
Cave Montazeri: Hey, I have a question on reinsurance terms and conditions and attachment points. Does feel like overall the industry probably took on more high frequency, low severity risk than they should have over the past couple of years. And now maybe on aggregate reinsures are probably more willing to negotiate on price than on attachment points or terms and conditions. Just tell me what your view is on that topic.
François Morin: Are you talking about property?
Cave Montazeri: Yes, property.
François Morin: Yes. I think -- well, I think what we’ve seen is we continue to see is that a lot of lower layers historically for the last four or five years turn out to be just swapping money, trading dollars back and forth. And there was a lot more activity, perhaps of frequency, as you mentioned, and the reinsurance market was willing to take on. So there was a natural tendency to try to increase a premium at those level but then at some point it breaks down in a sense that the client is buying the reinsurance protection, is paying more for things than they actually realize they should be retaining. That's why you've seen retention go up. Now in a sense, by virtue of having a higher retention, then they have to turn on and then that's what we've seen, they’re turning onto their own portfolio and try to manage and make it better and improving the aggregate loss that they have there. I'm sorry about this. I think that what we're seeing on the cat excessive loss right now is that people are buying more on top because they also are appreciating and evaluating the total level of exposure capacity needed in PML. So I think what people -- what we're seeing is people trading away the bottom layers and buying more on top. And I think we're going to see that a bit more as we go into 2024, which totally makes sense.
Cave Montazeri: Okay. My follow-up question is on mortgage insurance. Now you had been kind of pulling back even before activity came to a halt. But if the fed rate cuts, if they do come lead to a pickup in the U.S. activity in the housing market, would you be happy to grow in line with the market or should we expect you to kind of grow maybe less stuff in the market?
Marc Grandisson: Yes, mortgage, absolutely, we would be. I think that -- yes, the answer is we would be more than happy. We have capacity, capital to be able to deploy and I think we would be very, very pleased to do more. Absolutely.
François Morin: And as you know it's been a very good market, very rationale market. So obviously, the rates were able to charge for the risk will matter and where we -- how we position the book. But in terms of our ability to grow, when we get originations go up, we're absolutely capable and willing to do that.
Operator: Thank you. One more for our next question. Our next question comes from the line of David Motemaden from Evercore.
David Motemaden: Hi, thanks. Good morning, and apologies, I haven't been hearing the answers, so not sure if you've answered any of these already. But just Marc, you spoke a little bit at the beginning of the call about the need or the strategy to lean in at the early part of a hard market. I guess how do you manage that with potential false starts? It sounds like casualty market on the reinsurance side hasn't hardened as quickly as you've expected. But how do you manage that just internally between writing business that might be hardening, but not totally to where you think it should go and the potential for false starts?
Marc Grandisson: It's a very, very good question. And I think this is where the Arch comes into play; right, in experience and knowing some of the markings of a hardening market, a lot of it also has to do with things you won't hear, right, is our underwriting team sitting down with clients, potential clients, and try to understand, how do you think about the risk? I've talked about reinsurance now specifically, and we also have a very healthy database like everyone else, but we also have our own, and we have our own view of claims and how it develops. And we have, again, experience over 20 years of data and information. And this is what we use to hopefully get the compass in the right order. But if I can't be sitting here and tell you and pretend that we're going to get everything right 100%, it's a little bit more art and science. And I would think that as I'm getting older, the psychology of the market is becoming way more important, feels to me, than even the numbers. And that's probably what compelled me or what made me ask the team to lean into 2019. And you don't know for a fact until it's done, but there are markings or signs in the overall market that help you and support your decision to lean into it heavily. That's all I can tell you, because it's really not a one for one. There’s no like one number one spreadsheet I can point to that will tell you the answer.
François Morin: And the one thing I'll add quickly, David, is the reverse is true as well. When the market goes soft, sometimes you pull back and you might go back too early. But that's the game we play. That's the business we're in, and we do our best. Again, we're never going to time it perfectly, but what matters more is the direction of it. And then over the cycle, we think we should come out ahead.
David Motemaden: Yes, no, understood. That makes sense. And then Marc, you had mentioned that at 1/1 the property market continued to improve, property cat reinsurance market. I guess as we sit here today and sort of looking forward at the sustainability of that as we move through 2024, what's your view now on that and the growth opportunities in property cat?
Marc Grandisson: First, we have no growth constraints per se. We can grow. As you know, François mentioned, the value of our PML is 9.2%, so we have room to grow there. I think the question about where it's going to go is so difficult to answer because it's dependent on what happens and what kind of activity we see this year. But if I would probably point to you to the 2006 turn of the market in 2007, that's probably a better way to think about it. 2006, or 2007, 2007 was a better year than 2006. And 2008, 2009, and 2010 were really, really good years in property because the market, as we all know, goes up really, really quickly but does not go down in one fell swoop. You've got a lot of sustainability in the returns for a little while. It takes a while before things get too close to the line or below the line of what we want to adjust. So we have some runway in front of us.
David Motemaden: Got it. Understood. And I know in the past you've said alternative capital, or ILS can -- has the ability to swing the market one way or the other. What exactly are you seeing there?
Marc Grandisson: What we hear is there’s still a very high demand for returns which prevents or high demand for returns and also still some level of skepticism that might change, but we'll see where that goes. But clearly, right now, at the margin, some increases, but it's not the wave that we saw probably in 2014, 2015, 2016, nowhere near that.
Operator: Thank you. Arch Capital Group answers have been captured and will be available in the replay. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.
Marc Grandisson: First of all, I want to apologize thoroughly for the call quality and the dropping in and out. There will be a recording available for replay, and you know, our two esteemed colleagues, Don and Vinay will be available to follow-up obviously. I want to thank you for listening to our call and I'm looking forward to speak to you again in April. Thank you very much.
Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
