Arch Capital Group Ltd. Depositary Shares, each Representing a 1/1,000th Interest in a 4.550% Non-Cumulative Preferred Share, Series G Q2 2026 Earnings Call

Good day, ladies and gentlemen, and welcome to the 2Q 2026 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 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 2025 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 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 hosts for today's conference, Mr. Nicolas Papadopoulo and Mr. François Morin. Sirs, you may begin. Good morning, welcome to Arch's second quarter earnings call.

We reported strong earnings this quarter with solid underwriting performance from each of our three segments. After-tax operating income in the quarter was $893 million, or $2.56 of earnings per share. Slowing top-line growth and strong earnings freed up capital for additional share repurchases in the quarter, bringing the total for the first half of the year to $1.95 billion. Book value per share grew by 2.8% in the quarter and has increased by 4.5% in the first half of the year. While the underwriting environment is increasingly competitive, it is important to note that we are still in the early stages of this softening market. Overall, fundamentals are attractive, with some lines experiencing increased competition while others continue to see rate increases.

Arch's diversified business model ensures that we can find opportunities to deploy capital that generate appropriate risk-adjusted returns. Our position as an industry leader in specialty insurance, reinsurance, and mortgage insurance provides us with a meaningful competitive advantage. Clients come to us not only for capacity, but also for our underwriting expertise, claim capabilities, and valuable perspectives that help them better manage risk. Our commitment to cycle management is embedded in our culture and guides our underwriting approach. This is reinforced by a compensation structure that incentivizes quality underwriting by aligning performance with long-term profitability and shareholder returns. Let us now turn to our segment performance. Starting with insurance, where results were negatively affected by catastrophe losses related to the Iran conflict. Arch is a leading writer of political violence, terrorism, and marine war in the London market.

While losses affected this quarter's results, we are seeing ongoing opportunities to support clients with assets in the region. Underwriting income of $27 million does not reflect the good underlying performance of the segment, which delivered a current accident year combined ratio, EXCAT, of 91.6%. As reported by others and consistent with our comments last quarter, competition is increasing, particularly in property and short tail lines. That said, the middle market commercial business and casualty-oriented lines continue to experience rate increases. Additionally, pricing in directors and officers is rebounding slowly, while rate declines in cyber insurance have moderated. Our gross and net premium written were negatively impacted by the non-renewal of certain program business, as discussed in prior calls. We're also impacted by reduced writing of our excess and surplus property business.

We continue to see premium growth in casualty-oriented lines in North America, including excess and surplus casualty, construction, and national accounts. We also saw positive trends in certain specialty London market lines, including war and terrorism. Looking ahead, our diversified platform provides us with the flexibility to grow in those areas where pricing supports our return objectives. Reinsurance underwriting results were excellent, aided by relatively light catastrophe losses, resulting in $410 million of underwriting income in the quarter. The current quarter accident year ex-cat combined ratio was 79.9%, a 270 basis point increase from last year due to changes in mix and lower pricing in property lines. Net premiums written were down 10% from the same quarter last year, as some of our clients opted to retain more risk. Increasing competition lowered rates, particularly in property.

We increased our cession to traditional reinsurance and third-party capital, which impacted our net-to-gross ratio. Similar to insurance, casualty reinsurance is an area where we see attractive business. Opportunities remain, though competition is elevated due to abundant reinsurance capacity. Within our reinsurance business, our focus is on maintaining our position as a leading reinsurance partner through disciplined underwriting and by consistently delivering business expertise across market cycles. The mortgage segment continued to provide strong, stable results, delivering $220 million of underwriting income in the quarter. Our mortgage portfolio performed well, driven by a resilient economy and high-quality risk in-force. Our USMI portfolio delinquency rate remained flat at 2.1%. Favorable reserve development continued, although slower than in prior quarters.

While affordability and housing supply constraints limit new mortgage origination, mortgage insurance remains a consistent contributor to earnings as the strengths of the in-force portfolio and favorable credit characteristics continue to support steady profitability. Investment contributed $417 million, or $1.20 of net investment income per share in the quarter. This is supported by our conservatively managed portfolio, which maintains an average credit quality of A. We continue to benefit from an asset base that has grown to $49.5 billion, supported by strong cash flows. Investments accounted for using the equity method, which are excluded from operating earnings, performed well, adding an additional $196 million, or $0.56 per share to net income, reflecting strong returns across the portfolio.

Over the last five years, we have enjoyed favorable market conditions in property and short tail lines, and consequently, we now face the early stages of a competitive market driven by an influx of capacity. This part of the cycle is to be expected. Importantly, a more competitive environment doesn't mean a lack of opportunity. It simply requires greater discipline in where and how capital is deployed. Our playbook is built upon our enduring strengths: a diversified platform, best-in-class cycle management, a strong brand that enhances our relationship with clients and distribution partners, as well as disciplined capital management. In sum, we remain well positioned to consistently deliver superior results for our shareholders. As Arch approaches its 25th anniversary, one thing is clear. While the company has evolved, the principle and playbook we rely upon create long-term shareholder value. With that, I will turn the call over to François. François? Thank you, Nicolas, and good morning to all.

Before I provide some additional color on our results, I wanted to walk you through our capital allocation and management actions this quarter. Capital management is an essential tool to help us to manage our business through the insurance cycle. The latest hard market provided Arch the opportunity to generate significant excess capital that, as the market transitions, cannot be fully deployed into our business. Our preferred option has first been to return excess capital to our shareholders through share repurchases and secondly, through special dividends. After considering the opportunities available to us to deploy capital in the business, both existing and new, we determined that share buybacks remain an accretive use of excess capital in enhancing shareholder returns at current prices. As a result, we repurchased 12.4 million shares at an aggregate cost of $1.2 billion in the quarter.

Through the first half of the year, we have repurchased approximately 94% of our net income in our own shares. As you know, we also accessed the debt market in May, raising $2 billion in a combination of 10-year and 30-year senior notes. The proceeds from this issuance will be used to, one, redeem the $500 million of 10-year senior notes maturing later this year. Two, purchase $418 million of our 2043 and 2046 senior notes through a recently completed tender offer, with the remainder for general corporate purposes. The tender offer was designed to replace debt that no longer meets updated regulatory capital requirements with fully compliant capital instruments. As a result of the debt raise, we expect our interest expense to be approximately $60 million-$63 million for each of the next two quarters.

As of the end of the second quarter, our debt plus preferred to capital leverage ratio stands at a conservative 18.1%. Turning back 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 82.5%, up 160 basis points from the same quarter last year. Our underwriting income included $165 million of favorable prior year development on a pre-tax basis in the quarter or 4.1 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 strong cure activity. Current year catastrophe losses were $201 million, net of reinsurance and reinstatement premiums, and were a combination of losses from the Iran conflict and severe convective storms in the U.S.

The insurance segment's net premiums written declined 5.1% year-over-year, due in part to the non-renewal of certain program business. The ex-CAT accident year loss ratio, net of reinstatement premiums, improved by 90 basis points to 56.4% compared to the same quarter one year ago, due primarily to strong performance in our international operations. The acquisition expense ratio for the current accident year increased by 30 basis points, as the benefit we observed from the write-off of deferred acquisition costs for the MCE acquired business rolled off. Our operating expense ratio was higher this quarter due to the transition of our middle market business to Arch Systems. As mentioned last quarter, we would expect our operating expense ratio to revert back to historical levels during the second half of the year.

Turning to the reinsurance segment, net premiums written were down 10.4% from the same quarter one year ago, reflecting reduced writings from lower rates and a higher level of retrocession purchases, primarily in the specialty and property catastrophe lines. Overall, our ex-catastrophe accident year combined ratio of 79.9% is up from last year due to the shift in line of business mix and a more competitive rate environment for certain sub-segments. Our mortgage segment produced another very strong quarter with underwriting income of $220 million. Net premiums earned were flat from last quarter, with a reduction in our USMI business mostly offset by higher levels of earned premium in Australia. On the investment front, we earned a combined $613 million from net investment income and income from funds accounted for using the equity method, for $1.76 per share pre-tax, up from the $1.57 per share we earned last quarter.

We note that the returns of equity method funds contributed 340 basis points to our annualized net income return on average common equity in the quarter. Cash flow from operations remained very strong at $1.3 billion for the quarter. Income from operating affiliates was $46 million for the quarter, slightly higher than the $40 million from the same quarter one year ago. Our effective tax rate on pre-tax operating income was 15.1%, reflecting the mix of income by tax jurisdiction. As of July 1, our peak zone natural cat probable maximum loss for a single event at a 1 in 250 year return level on a net basis is down slightly to $1.8 billion and now stands at 8% of tangible shareholders' equity. With these introductory comments, we are now prepared to take your questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from the line of Elyse Greenspan with Wells Fargo. Elyse, your line is open. Please go ahead. Hi, thanks.

Good morning. My first question is on the insurance segment. I was hoping to both just get a sense of the sustainability of the underlying loss ratio you saw in the quarter. François, I think you pointed out strong international results for the second quarter in a row, just trying to get a sense of the sustainability there. Was there any change in your loss pick assumptions within your insurance book in the quarter?

Yeah, a few points on that, Elyse. First, international, as you know, it's more of a short tail book, it's been running very well. There's always potential volatility that we have to think about, hard for us to know how that's going to play out, but the business is doing extremely well, we're happy with that. On the North American side, what's also helped a little bit is the non-renewal of some of the programs that started out earlier this year. As those kind of earn in, the premium earns in, or the lack of premium, I think that has brought down the loss ratio a little bit. Where does it go from here?

I think at a high level, we think we're comfortable with the levels where we're at. I think there's a good chance or there's a possibility that we stay at levels that are around this number.

No movement in loss trends?

No movement in specific loss picks. Absent just the normal adjustment of rate over trend that we go through each of our lines of business, but we haven't systematically decided to move down the loss ratio pick for one line in particular or another. Nothing new there. Just remember, in insurance, you can actually adjust the mix of the book.

Most of our books today are split in what we call quartile or quintile, where some of the book is running at a lower loss ratio and the other side is running at a higher loss ratio. The work of the underwriter is really to get pricing or manage a higher loss ratio out. We have more propensity to keep the loss ratio where it is.

Thanks. Then my follow-up was just on capital. Obviously, buyback picked up in the quarter. I think you guys just mentioned slower growth, obviously, strong earnings and capital position. How are you guys thinking about the level of buybacks from here, recognizing, obviously, we're in the midst of wind season? Would you expect to slow down this quarter and then pick back up, or just how are you thinking about the level of capital return going forward?

Yes. We certainly don't have targets or plans to buy back a certain number or dollars of shares. We certainly thought that in the second quarter, the price of the stock was very attractive to us, so that's why we were able to certainly buy back more than we had done in the past. Does that stay this level? I don't know. In the current prices, we like the stock still. We think it's very attractive. We have capacity to buy back more. We'll see if that plays out. Wind season's always something that is a little bit in the back of our minds that we have to think about. Going forward, I think we're in a position where, again, the growth is going to be harder to come, we think, and share buybacks will remain part of the arsenal that we have to manage our returns.

Thank you. You're welcome. Your next question comes from the line of Pablo Singzon with J.P.

Morgan. Your line is open. Please go ahead. Hi, good morning.

Retention in the insurance business has ticked on over the past couple of years. Is your approach here to keep retention the same, or could you potentially increase that and internalize more of the underwriting income? I'm just not sure ceding is economically more attractive like it is in reinsurance today.

Can you repeat the question? Are you asking about retention of- In the insurance segment, your retention has been going down, right?

You've been essentially ceding less, just not overgrowing.

Underwriting. I think in the soft market, yep.

Yeah. Again, it's a function of really the market we are in. I think in reinsurance, we've ceded a little more because I think if I remember, we placed a little bit more on the shorter lines, because as the rate was going down, and we also increased our capacity. As we increase our limits, we buy more insurance. There's many factors that influence the net to gross, but the market is certainly a factor we look at as well. We're here to solve the problem for insured and for our brokers. The reinsurance is a good tool to stay in front of the clients, ultimately figure out what we want to keep after it.

Understood. In insurance, the insurance segment, what's your stance on net to gross there?

The question I asked you earlier was more on the It works on both the same way, but I'll answer more on the insurance side. I'm sorry. Your line is really bad. On the insurance, I probably gave you the answer. On the reinsurance, I think we are much more active, I would say, on the buying, especially because the property cat business specifically, we think is quite stressed. We have to manage the net portfolio, and the tool we've used is relying on capacity out there that have a lower cost of capital to help, again, solve the problem for the clients or distribution partners.

Your next question comes from the line of Andrew Kligerman with TD Cowen. Your line is open. Please go ahead.

Good morning. Nicolas, I was intrigued by your early comments, prepared remarks, where you talked about an influx of capacity and that we're in the "early stages of a soft market." I'm hoping you can elaborate a little bit separately on property and casualty. Do you think property rates could come down materially more, and to what potential degree? You mentioned that casualty was decelerating. Do you think we could start to see that turn negative?

Yes. First, I truly believe that the market that we are trading in is a favorable market. There are business that our teams can, on the insurance side, and to a large extent on the reinsurance side, there's new business that we can write. We're made to trade in this type of environment. Specific to property, yeah, it's a big headwind. Rates have been coming down, there, I think we trade quite carefully, and you saw both on the insurance and reinsurance on net premium going down. We are much more optimistic on the casualty side. I think there's more competition there, the market is remaining disciplined, especially on the insurance side. We've seen management of limit, which is a critical aspect of what we track. Our competition stays very disciplined.

Yeah, I'd say, too, on property, the CAT activity will have an impact.

Yes. It's still early in the season.

Far it's been quiet, things could change depending on as we look into 2027.

Got it. In terms of casualty, and maybe this is just a two-part, when you say you're disciplined, are you keeping up with loss costs on your rate? Then the prior year development was $1.4 favorable in insurance, $5.3 favorable in reinsurance, and I know in the prepared remarks you said it was mainly short tail stuff, but could you give a little color on the amount and geography by accident year in casualty? Or maybe it was just insignificant, but I'd be curious around how casualty played out in prior year development.

I think casualty at a high level is kind of neutral. By year, by sub-line, there's some up, some down. In total, it's about neutral. Yes, the short answer is most of the favorable is in the short tail lines in the last two to three accident/underwriting years.

Your next question comes from the line of Cave Montazeri with Deutsche Bank. Your line is open. Please go ahead.

Thank you. Just want to follow up on the $1.2 billion of share repurchases you did this quarter. I think it's the first time in a while you went over 100% of offering income. And I know part of that's dictated by the stock price, but there's still a pretty meaningful gap between where you're trading and kind of the intrinsic value based on three-year forward book value. At current levels, I'm trying to get a sense of how long you can sustain share repurchases above 100% of your operating earnings you generate. You did mention you've built up a decent amount of excess capital during the hard market. There's probably a bit more debt you can issue if you wanted to. Just wondering, can you give us a sense of could you sustain above 100% payouts throughout the soft cycle?

Not knowing how long the soft cycle will last, is it like a multi-year tripod that you have?

You're asking me if we have the crystal ball, which we don't, let's just say that we are very confident in our ability to generate strong earnings through all phases of the cycle. We got three pillars to our operations, three legs of the stool. They're all performing well. We believe strongly that we have an ability to generate earnings for the, maybe not forever, but for the foreseeable future at a minimum. You're asking me, are we able to return if we're not growing, could we return all those earnings back to the shareholders? The answer is yes, we could. Could we do something else? I don't want to speculate what we're going to do in a year or two years, because is there M&A? Is there other things where we need the capital before what we deployed differently.

Again, the second quarter was, again, hopefully a good demonstration that we are active and like the stock and think it's an attractive way to return to shareholders, and we'll keep doing the same as long as, unless things change materially.

I guess linked to this, your PML went down a bit this quarter, I guess not as much as your premium on a net basis. Can you maybe give us some color, what kind of business you are sending to the retro markets? Should we expect your PML to kind of go down over time as the cycle softens? I guess because that could be an additional source of capital that will be released that you could use for share repurchases or whatever else you want to do with it.

The PML that you look at, I think, is Florida Tri-County. It's one of the 50 zones that we monitor. Florida business is our peak zone. It's a peak zone for most of the reinsurers in the field. That historically has had the highest margin. That's why. I think, the retroduction are pretty much across the board on the property cat. We would expect that the PML could reduce, but think of Florida as the highest margin business in our property cat books.

The percentage of shareholder's equity, we were at 8%. We've been in the soft market, the last soft market, we were at 4%. We're a different animal. We're much more relevant. We're much more a bigger partner to many of our clients and brokers. Yes, could our PML come down? Absolutely. Does it go down to the same level back that we said? We don't know. Yeah. Your next question comes from the line of Rob Cox with Goldman Sachs.

Your line is open. Please go ahead.

Hey, thanks. Yeah, first question was just on casualty reinsurance. I think you all had taken a maybe somewhat differentiated view on casualty re versus peers in 2025 by leaning in with some of these selective cedents. As we think about the deceleration in casualty reinsurance growth year to date, is that reflective of those outperforming cedents choosing to retain more risk, or has Arch changed its view on casualty re returns?

No, I don't think we've changed our view. I think, as I mentioned in my prepared remark, we think it's an attractive line of business. We like the fundamental of the underlying business in the specialty casualty area. The issue, it's not new, it's too much capacity, reinsurance capacity chasing too little business. The way we see it is hit or miss on the terms and conditions. There's certain terms and condition that works, and for others, we think that sometimes mostly quota share contract, the same commission is too high. I think we're still looking for the right opportunity to add reinsurance casualty to our books in the right lines of business and with the right ceding companies.

Okay. Thank you. I just want to follow up on the Middle East, some losses this quarter from a cat perspective, it also seems like there's some incremental opportunities to write new business. Could you just give us some sense of what the strategy is to write new business and how you go about managing that and determining what's a good risk?

Yeah. Obviously, following the losses in the Iran regions, as we're all aware about, prices have adjusted. For us, prices at some point were a multiple of what they were before the conflict. We decided to deploy a bit of capacity and stay with our insured. Some of our insured, we made you a one-liner business. Now they suddenly figure out that the war, which was excluded from their property policy, they'd like to buy some coverage. Selectively, we've deployed more capacity in the region, making sure that we avoid concentration. We have a careful approach to continuing to service our distribution partner and our clients in the region.

Your next question comes from the line of David Motemaden with Evercore. Your line is open. Please go ahead.

Hey, thanks. Good morning. I'm wondering if you guys could just quantify the Hurricane Ian losses this quarter that impacted the insurance segment, maybe just elaborate on how you're thinking about them and the cat load within insurance going forward. I'm interested also in any sort of IBNR versus actual loss detail you could share.

Well, the majority of the insurance cat losses come from Hurricane Ian.

Yeah. Cat load going forward, we quoted the 68% on an annual basis for the group.

That hasn't changed. The Hurricane Ian conflict is more, is actual refineries, it's actual claims. Case reserves have been set up. It's not a hypothetical IBNR, we'll put it up in case something happens. Those are large refineries, et cetera, that people are well aware of. They've been hit and there's damage associated with them. There's always questions around business interruption we don't know the- Magnitude the full, the magnitude of the outcome, the claims are real.

Yeah and tangible. That's how we think about it.

Again, Nicolas mentioned it, we are out of London at Lloyd's. We are leaders in the political violence, terrorism market.

That's the losses when they happen. We expect them and we think the pricing supports it, and that's why we've been in that space in a more meaningful way the last few years. We're still in it. Got it.

Thanks. That makes sense. Maybe just on the reinsurance segment, the accident year loss ratio, ex cat deteriorated 370 basis points year-on-year. Sounds like that's well within expectations that you guys have had, just given the mix shift away from property. Also just the pricing pressure there on that line. Is that the same sort of deterioration we should expect as we head throughout the rest of this year or Yeah, sort of wondering how you guys are thinking about that.

Yeah. Yeah. As we said before, David, our view is we look at trailing 12 months as first of all, like the lens we like to put at our results specifically on reinsurance, because there's going to be a little bit more volatility in the ex cat loss ratio no matter what.

That's the first thing we'd say. Two, you're right. I think the mix has changed a little bit less short tail, which is reflected in that increase in the loss ratio. Three, yeah, the market, a little bit more kind of competition, the rates are down a little bit more that hasn't fully earned in, so that may earn in over time.

You put it all together, like the last quarter, if you focus on the quarter, we'd say it's probably a little bit higher than we would think the run rate is, or kind of reflecting all these moving parts. We're not surprised by it. We think it's, again, to your point, that's very much within our expectations, but we'll see how things play out going forward.

Your next question comes from the line of Tracy Benguigui with Wolfe Research. Your line is open. Please go ahead.

Can you quantify the prop cat rate decreases you saw at mid-year renewals and share your view of rate adequacy? Looking at one broker survey, looks like pricing is back to 2021 levels, but a competitor had said it looked more like 2023. Where in the spectrum is your view?

I think, I concur with what other people have said on other calls. I think the rate reductions were in the mid-teens. That's what we saw, and I think in terms of rate index, I think we are not back to the pre Hurricane Ian. I think 2022, I think we think the market trades above that. Are we in 2023? Maybe, but it really depends on the region. I think that's what, as I said earlier, we have 50 zones. Some zones are green still, above and provide adequate return. Some zones are now red and some zones are in orange. I think that's why we actively manage a portfolio. In terms of index, I think our view is that we're still above the prior Hurricane Ian rate index.

Great. Can you touch on your appetite to reinsure MGAs? I realize you're the lead reinsurer in at least one of the fronting companies. What structural safeguards do you have in place?

Our involvement on the reinsurance regarding MGAs has been mostly on the property side, so short tail. I think we've been a significant player, and supported by the pricing on the primary side. It was one way our insurance team were able to access business that otherwise they could not access. Again, the fact that it's short tail maybe limits some of the risk we see with working with MGA, which is down the road, who's going to pay the claims and who's going to be there if the MGA is no longer there. I think as far as a reinsurer, you don't have as much of an issue. The issue is more, I think, with the insurer, the insurance company, sorry, the insured, I'm sorry.

The insured or the broker, if you deal with an MGA, especially as it relates to long tail lines, five years, six years from now. You don't have visibility if the MGA no longer exists, who is going to pay your claims? Will the reinsurance capacity still be there? I think it's more of an issue on the insured broker, E&O, than it is for the reinsurer, in my mind.

Your next question comes from the line of Yoram Canar with Mizuho. Your line is open. Please go ahead.

Thank you. Good morning. Two questions on the reinsurance segment and opportunities there. First, it sounds like you are still seeing an attractive environment for casualty there. That does sound a little bit different than what we've heard from other executives this earnings season. I understand from your earlier comments that it is a lot about partnering with the right underlying risk, but maybe you can offer some additional color as to what really makes this a more attractive opportunity for you when you look at this market.

What makes the opportunity interesting to us is the underlying insurance casualty, which we think in certain specialty areas is profitable. I think we are trying to, through reinsurance, access those companies that we think are good underwriter and do business in those specialty casualty areas.

Okay. On the property side, maybe following up on Tracy's question. I think we heard from another broker yesterday talking about how Southern Florida is back to 2017 property cat levels. I think one of your reinsurance competitors talked about lighting up the load a bit in Florida. Curious as to what you're seeing in Florida. I realize there are a lot of zones there, but maybe you can give us a little more color and detail on Southern Florida versus Northern Florida, West versus East.

What I can tell you, what we saw at Six One is the reductions of the rates were across the board. Historically, there were higher reduction at the top end of the program and lower reduction in the frequency layer. This time around, I think the appetite has been more across the board. The Tri-County area is a big zone, so I would say usually it attract the higher pricing. I think if you are in the Galveston area, Orlando area, the pricing would be less because it's probably not the big zone of everyone. The market is efficient. The pricing reflect more the abundance of capacity and the new entrant capacity that is chasing the business. The differentiation in the pricing between zone, I think, is efficient. People are using models. We don't see a huge red flag there, I think.

Your next question comes from the line of Roland Mayer with RBC Capital Markets. Your line is open. Please go ahead.

Hi, good morning. Do you expect continued benefits from higher investment yields to add pressures to casualty competition over time? I guess, do you guys embed some view of investment yields in your rate adequate decision on long tail lines?

We don't. We're very clear on that. We ask our casualty underwriter to write for an underwriting profit, and we credit them with the risk-free rate. We require an underwriting profit. I think that that's very clear for us.

Thank you. As my follow-up, you mentioned buyback as part of the arsenal. Are we at all close to the point where special dividends make more sense than buybacks? In 2024, I think that was when you were above 1.8 times book, also would assume forward ROE expectations were higher when you made that decision.

Back in 2024, we were at 2 times book, so it was very much, to us, was very clear that buybacks did not make sense, and dividend, the special was the answer. Right now, we're trading in the kind of 1.5-1.6 range, 1.45, whatever. I think it still makes sense to do buybacks. Our preference obviously it's one or the other, and right now we're in the buybacks range, and we'll see how that, again, how things play out, but that's kind of how we think about it. Dividends, again, I said it earlier, I think we're positive and our visibility in terms of forward-looking earnings is very positive. To us, that supports value creation and strong returns for the next three years, and that's a big part of how we look at the economics of the share buybacks.

Your next question comes from the line of Brian Meredith with UBS. Your line is open. Please go ahead.

Thanks. Nicolas, first question, I just want to focus a little bit on MidCorp. If we think about that business, ex the program business that I know you're intentionally running off. How has the growth been? How's retention been? Has it been more challenging maybe to keep the business you thought, given the competitive market? How do we think about it going forward?

I think we've been positively surprised. I think that our first goal was to move the business over to Arch. We did this a year ago, and the second goal was to move the policy admission systems from Allianz to us. So that created some disruptions for underwriters. It made their life much more difficult, but I think the value of the brand and the relationship worked out for us. I think we are in a good place. I think looking ahead, I think we have now the underwriting team and the policy admission system on Arch, using Arch paper. We actively moving to the phase where we can provide them with better tool, better analytics, triage, improve the claims. I think there is a lot of things we want to do that will lead to more growth in the future.

Just do you see better, call it market dynamics in that segment where MidCorp is than some of the other areas?

Yeah. I think it's muted compared to the large property and E&S. I think we still see overall, on the package, rate increase that are positive in the mid-single digits. I think the property itself is flattish. It used to be 5% up. We don't see the double-digit decrease that we see elsewhere on the excess and surplus property or large account property.

Your next question comes from the line of Chris Hartwell with Autonomous Research. Your line is open. Please go ahead.

Good morning, gentlemen. Quick question, first of all, just on the mid-year renewal conversations you're having with your seeding clients over the last few months. I guess what I'm trying to understand, and to some extent also looking forward into January, obviously there's a lot of focus on price. I'm trying to sort of understand what the clients are really sort of pushing for in terms of rate versus risk transfer from their reinsurance protection. I wonder if you could comment on that, please.

Yeah. The primary message that we got from our brokers and seed hunt is price. Right now, I think we have a little bit of a slippage in terms and conditions or clients, because they save significant money looking to see if they could at the margin buy an underlying layer. We're starting to see this, but it's really at the margin right now. It's mostly price. Okay. Thank you.

I guess, if I may, can I ask just on the mortgage business, it so far hasn't had any attention today, I'll give it a go. There's a decent bit of growth quarter-on-quarter in terms of new insurance written. I was wondering if you can help just provide some color on what's driving that. I guess a part B to the question also is, profitability has obviously been very strong for the last few years, but growth has not really been apparent. I guess as we look forward and as that back book matures, how should I sort of see the trade-off between, I guess, margin versus growth opportunity? How should that develop as we look forward?

On the mortgage side, this quarter, I think we signed up a new client in Australia, that benefited that new premium influx help our growth. The second factor was, I think we reduced some amount of quota share insurance that we bought. That really helped the net as well. I think those are the two elements, I believe. In terms of the profitability effect, I think it's steady as you go. My view is that this is an interesting market where we talked about rate decrease of 15% in property CAT, or in mortgage, it's 1% and the market reacts. I think people react very quickly to maintain their market share, and I think the six actors have been maintaining the pricing where it is. I think the valuation there are much smaller.

Your next question comes from the line of Meyer Shields with KBW. Your line is open. Please go ahead.

Great. Thank you very much. I want to talk about casualty loss trends, but from a different perspective. I know obviously, we're well into social inflation as an external issue, but I'm wondering whether you can talk about how Arch and maybe the company that you're reinsuring on the casualty side, are they getting any better at pushing back to the extent that what I would call net loss trends aren't as bad?

What do you mean net loss trend?

Sort of call it the trial attorneys are pushing for and then offset by more successful defense on the part of the insurance industry.

Yeah. We'd love to see more of that. I think there are a bit more pushback, but in the numbers, we don't see yet, or we don't see the impact of tort reform or different behavior by the defense attorneys and so on. I think it's not reflected in our loss trend because we just don't see it in the numbers yet.

I apologize if this has been covered before, but I remember a couple of years ago, there was a little bit more caution on mid-year renewals because there were very negative forecasts for hurricane activity. I'm wondering this year, the forecasts are benign. When they are below average forecasts, does that increase your appetite for property cat, obviously, given the rates that are available?

It's a factor. I think we have, like most companies, we have a meteorologist on staff that give us the outlook. We look at the correlation in the past. There are some positive correlation, but it's one of the factor we take into account, but that's not the main factor.

Your next question comes from the line of Michael Zaremski with BMO. Your line is open. Please go ahead.

Hey, thanks. Good morning. On the mortgage segment where the growth popped and you called out non-renewing some of the Bellemeade and less reinsurance, can you quantify what that impact was and if we should be run rating that for the next three quarters as well?

Yeah, I think the current quarter is a good starting point. Some of these agreements were effectively on the Bellemeade side, they're canceled, the benefit we got, because it's again, monthly pay or monthly premium. The benefit we're getting both on the Bellemeade and the quota shares. It will continue on, I would expect at this point, relatively flat kind of premium. On the USMI side, Australia, to Nicolas's point, it's a relatively large new client which just started in Q1. As we move throughout the rest of the year, we should see more and more of that business coming in. When you're doing year-over-year growth, I think I would expect to see a bit more growth out of our international book.

Got it. That's helpful. Just switching gears to the war in the Middle East. I'm not sure if you did quantify the exact cat loss to David's question, and if you don't want to, that's fine. To the extent the war endures or ebbs and flows, should we be any color on what loss industry estimate you're using? Is this very idiosyncratic to you all because it's specific to certain areas that were hit or any color you could add to how we should think about it to the extent the war endures. Thanks. Yeah, I think there could be more.

Obviously, what we saw in Q2 was a direct reflection of certain risks that we ensure that were hit. If we have the same in Q3 or Q4 as the war persists, yes, we could have more of that, but it's more case by case. It's more property by property specific and not an ongoing thing like COVID might have been, where it was more an aggregate view of the exposure. This is more case by case specific, and we'll react to it if we hear the news that, again, there's some damage.

I think our estimate for the industry loss since the last earnings call has not changed because I think the event that happened just before the earnings call. I think the industry in general is still around $3 billion for the Middle East war losses.

Your next question comes from the line of Brian Meredith with UBS. Your line is open. Please go ahead.

Hey, thanks for letting me get one more question. Look, I was just curious. You talk a lot about share buyback capital, but the one thing that I'm curious about is M&A and how you're thinking about M&A in this environment right now. Typically, we've seen as the market rolls into a soft market, M&A actually picks up. Maybe give us your perspective, are you seeing any of that in the marketplace?

Yeah, we don't think of M&A as an alternative to organic growth or buying back shares or returning capital to shareholders. We think M&A as more of a strategic way of building versus buy. If we want to be in a line of business and we don't have the scale, M&A could be a path to get us there faster. Think of the Allianz transaction is we wanted to be in the middle market, property led. We tried to get there, ultimately, this opportunity came, we paid a decent amount of money to have a franchise to be able to operate in that business. We're looking at M&A for what it adds to what we have, more so than to gain market share. My honest view on M&A in this market is it's expensive.

The price is expensive, maybe the price comes down, as the market gets more competitive, maybe the balance sheet gets weaker. I think you have to think the timing of M&A is tricky, a successful M&A, it's difficult. Historically, a lot of the M&A has created issues for companies, we are very careful in the way we approach it.

Thank you. I'm not showing any further questions.

I would now like to turn the conference over to Mr. Nicolas Papadopoulo for closing remarks.

Yeah. Thank you for the time today, and another good quarter for Arch, and we looking forward to talking to you next quarter.

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