Arch Capital Group Ltd 2026 Q3 Earnings Call

Sirs, you may begin. Good morning, and welcome to Arch's third quarter earnings call.

Arch delivered very strong results this quarter, reflecting excellent underwriting performance across each of our businesses and a relatively low level of catastrophe activity. After-tax operating income was $910 million, or $2.67 per share, resulting in an annualized operating return on average common equity of 16%. Strong returns from our equity method investment contributed to an annualized net income return on average common equity of 18.1%. Despite increasingly competitive market conditions, we continue to generate strong returns, reflecting our ability to proactively shift capital to optimize long-term returns. This is the essence of cycle management, and given this dynamic, we were able to return approximately $1.4 billion to our common shareholders through buybacks in the quarter. Book value per share was essentially flat in the quarter.

However, it's worth noting that tangible book value per share, excluding AOCI, increased approximately 15% from a year ago. Arch's brand, underwriting expertise, and relationships, combined with our diversified platform, give us broad access to business across insurance and reinsurance. In addition, continuing investments in data and analytics enhance our risk selection and provide deeper insight into our portfolios. Each of these elements allows us to be highly selective about where and how we deploy capital. Importantly, we are led by returns. Therefore, premium growth is not the ultimate objective. We continue to act on what we see, growing where returns remain attractive and exercising restraint where they do not. Let me now turn to our segment performance, starting with insurance. Insurance generated $108 million of underwriting income in the quarter with a combined ratio of 94.4% and a current accident year combined ratio excluding catastrophes of 89.2%.

Gross premiums written increased 7.8%, and net premiums written increased 2.7% compared to the same quarter last year. Premium growth in the quarter benefited from a new captive program in alternative markets and increased writings of marine war risk coverage related to the Iran conflict. The premium growth we saw this quarter was stronger than the underlying trend for the year. Year to date, adjusting for the planned reduction in middle market commercial program business, gross premiums written increased 4.2% and net premiums written increased 1.6% compared to the first nine months of last year. This low single-digit underlying growth is consistent with our expectation given current market condition. In North America, we continue to see opportunities across excess and surplus casualty, construction, and national account casualty, where rate and market conditions remain attractive.

Internationally, we continue to benefit from our position as a lead market across many classes at Lloyd's. At the same time, property and short-tail markets remain more competitive, while rate increases have moderated in some of our casualty lines. We continue to believe that adverse development emerging across the industry from more recent accident years reinforces the need for casualty pricing to remain at or above loss cost trend. Moving to reinsurance, which delivered $393 million of underwriting income in the quarter, with a combined ratio of 78.3%, aided by light catastrophe activity. Gross premiums written declined approximately 8% compared with the same quarter last year, reflecting abundant reinsurance capacity, particularly in property and short-tail lines. Consistent with our cycle management approach, we are reducing participation where returns no longer meet our objectives and increasingly leveraging third-party capital to manage net exposure and optimize returns on our own capital.

While casualty generally remains attractive, additional capacity continues to enter the market. We will not chase growth for the sake of growth. We will remain patient and deploy capital where pricing and terms and conditions appropriately reflect the underlying risk. Our objective is not to become an index of the overall market. Our global reach, underwriting expertise, and third-party capital platform allow us to take advantage of opportunities as they emerge and to construct a portfolio that delivers our required risk-adjusted returns. Our mortgage segment generated $201 million of underwriting income in the quarter and continues to be a valuable contributor to our results. New origination volume remains constrained, primarily due to mortgage interest rates currently above 7%, limiting near-term growth opportunities. Importantly, the underlying quality of our in-force portfolio remains strong.

In USMI, favorable reserve development has moderated from prior years, while positive homeowner credit conditions continue to support a low delinquency rate of 2.2% at September 30. Higher mortgage rates also support persistency by reducing voluntary refinancing activity. Our business outside of primary U.S. mortgage insurance wrote $66 million of net premium in the quarter, and we continue to see opportunities in these businesses, providing diversification from our USMI business. As always, the mortgage team remains focused on disciplined execution, optimizing the platform, and managing expenses in line with the market environment. Finally, investment contributed $451 million of pre-tax net investment income in the quarter. Our equity method investment also performed very well, contributing $224 million to pre-tax net income. With $49.2 billion of investable assets, investment income is expected to remain an important contributor to Arch's overall earnings. Last Friday, Arch celebrated its 25th anniversary.

I want to recognize this milestone and thank our employees for what we have built together, a global franchise, a strong brand, and perhaps most importantly, a unique culture anchored in our values. I also want to thank our investors for the confidence they have placed in Arch over the past 25 years. As I reflect on my 25 years at Arch, one thing has remained consistent, our ability to adapt and generate attractive returns across very different market environments. That has been our legacy for our first 25 years, and it remains our focus for the next 25. Today, we are operating in a transitioning market where conditions are becoming increasingly uneven. As this quarter's results demonstrate, we are prepared for that environment and we welcome the challenge. The market will continue to evolve, but our core principles will not.

We will remain a disciplined underwriter and thoughtful stewards of capital, always focused on producing superior risk-adjusted returns over the long term. That gives me confidence in Arch's position today and the opportunities ahead over the next 25 years. With that, I will turn the call over to François.

Thank you, Nicolas, and good morning to all. As you saw last night, our third quarter results were highlighted by strong underwriting performance and solid investment results. Capital management and capital returns also remain very much at the forefront of our initiatives this quarter as we took advantage of an attractive share price to repurchase 14.8 million of our common shares at an aggregate cost of $1.4 billion in the quarter. Through nine months of 2026, we have repurchased approximately 109% of our net income in our own shares. While our first choice will always be to invest our capital in the business, a transitioning business environment presents an avenue to return excess capital to our shareholders.

Turning to our operating performance for the quarter, our three business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 81.2%, up 70 basis points from the same quarter last year. Our underwriting income included $179 million of favorable prior year development on a pre-tax basis in the third quarter or 4.5 points on the overall combined ratio. We recognized favorable development in all three of our segments and in many of our lines of business, but mainly in short-tail lines in our P&C segments and in mortgage due to ongoing strong cure activity. Current year catastrophe losses were $234 million in the quarter, net of reinsurance and reinstatement premiums. These catastrophe losses originated from a variety of events across the globe and include losses associated with the Iran conflict.