Arch Capital Group Ltd
NASDAQ:ACGL
Arch Capital Group Ltd
NASDAQ:ACGL
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good day, ladies and gentlemen, and welcome to the Q4 2024 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in 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 filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2023 fiscal year.
Additionally, Certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make a reference to certain non-GAAP measures of financial performance. The reconciliation to GAAP for each non-GAAP financial measures 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.
And now I would like to introduce your host for today's conference, Mr. Nicolas Papadopoulo, and Mr. Francois Morin. Please go ahead.
Good morning, and welcome to our fourth quarter earnings call. I'll begin by offering our thought and sympathies to all of those affected by the California wildfires. This is a terrible event that will require the effort of many, including insurance companies to have the affected communities recover and rebuild. And as we will, of course, fulfill our role in these efforts. As noted in yesterday's press release, we expect the wildfires to result in a net loss between $450 million and $550 million based on an industry loss estimate of $35 billion to $45 billion.
Turning now to our results. Arch had a solid fourth quarter, writing $3.8 billion of net premium, which is a 17% increase over the same quarter last year. The $625 million of underwriting income in the quarter is down 13% from last year, primarily due to losses related to cat activities in the second half of 2024. Our full year results were excellent, with $3.5 billion of after-tax operating income and an operating return on average common equity of 18.9% despite an increased level of natural catastrophes.
Book value per share, our preferred measure of value creation, ended 2024 at $53.11, representing a 13% increase for the year and nearly 24% increase after adjusting for the impact of the $5 per share special dividend we paid in December. The decision to pay a special dividend was the result of Arch's strong financial performance and excellent capital position and represented an effective means of returning excess capital to our shareholders.
We also repurchased shares worth $24 million in the fourth quarter. Both the dividend and the share repurchase reflect our ongoing commitment to effective and active capital management. Market conditions within our segments remain favorable with a number of select growth opportunities ahead of us. As you may have heard from our peers this quarter, rate and loss trends vary by line of business and broadly offset each other. All hands do not point to the same hour on the underwriting block. For example, we are selectively deploying capital to the area producing attractive risk-adjusted return, such as insurance and reinsurance liability lines, specialty business at Lloyd's and property cat reinsurance.
Alternatively, in lines of business where competitive pressures have awarded margin to level below adequate, our underwriting teams are focused on improving our business mix within each of those lines to ensure our minimum profitability targets are met. Effective cycle management, the key to our strategy requires empowering underwriters to execute on both sourcing and retaining attractive business without the constraints of production targets. In classes and subclasses where returns do not meet our minimum threshold, we have the agility and the incentives to reallocate capital to more profitable opportunities across our diversified platform. And as we have demonstrated throughout our history, we will not hesitate to return excess capital to our shareholders when appropriate.
Now I will offer a few highlights about the performance of our underwriting segments, starting with reinsurance, which finished the year with a strong fourth quarter, delivering $328 million of underwriting income. The full year result for the reinsurance group were excellent. The segment delivered a record $1.2 billion of underwriting income while writing over $7.7 billion of net premium. At the January 1 renewal, we grew the reinsurance business by selectively increasing our writings in property, liability and specialty lines. Arch's status as a leading global reinsurer, is a result of its focus on addressing broker and clients' needs, combined with its underwriting vigilance and high degree of scrutiny on the performance of its business.
Throughout the hard market, our teams has had the conviction to increase its support and relevance with brokers and clients, making Arch a more variable collaborative partner when other reinsurers weathered and in some case, even withdrew capacity.
Now moving to insurance, which also ceased on strong growth opportunity in 2024. Overall, hurricane Helene and Milton limited fourth quarter underwriting income to $30 million. For the full year, the insurance group was $6.9 billion of net premium, a 17% increase from 2023 and delivered $345 million of underwriting income. Growth was enhanced by our acquisition of the U.S. MidCorp and Entertainment business. Although it's still early, the performance and integration of the MidCorp and Entertainment business are consistent with our expectations and objectives. Organic growth in North America came from our casualty business units, which more than offset premium decrease in professional lines. International insurance remained a bright spot, rising over $2 billion of net premium in 2024, primarily in specialty lines out of our Lloyd's platform. Overall, rent increases remained slightly above loss trend, keeping written margin relatively flat in the fourth quarter.
The outlook for both North America and international insurance growth is favorable for 2025. Looking ahead, we expect primary market conditions to remain competitive given the attractive underlying margins. However, we have experienced a slowdown in new business volumes as competition for premium volumes has increased. The mortgage segment contributed $267 million of underwriting income in the fourth quarter resulting in the third consecutive years of delivering over $1 billion of underwriting income. Fundamental remained positive, including strong persistency of our $500 billion plus insurance in force portfolio, while the overall credit quality of the book remains excellent.
The delinquency rates in our U.S. MI business increased modestly to just over 2% at the end of December but remain near historic lows. Increased delinquency can be attributed to expected defaults in area helped by natural catastrophes and the seasoning of the insurance in force. Overall, the U.S. mortgage insurance industry remained disciplined despite suppressed mortgage origination due to low housing supply and high mortgage rates.
Finally, to the Investment Group, which delivered nearly $1.5 billion of annual net investment income from an asset base that increased to over $40 billion after accounting for the special dividend. Rising investment yields and the growth of our investable assets from strong operating cash flows provide additional tailwinds for our earnings and book value growth.
Overall, 2024 was another excellent year for Arch. Looking ahead, our primary goal is to maintain attractive margin despite expected heightened competition. Our strong underwriting culture, proven track record of cycle management, dynamic capital management capabilities and progress to date in becoming a data-driven enterprise give me confidence in our ability to navigate ever-changing market dynamics with a clear objective of maximizing shareholder return over the long-term. As we officially turn the page to 2025, I want to recognize their hard work and dedication of Arch's nearly 7,000 employees who share in our entrepreneurial culture, the demands and rewards excellence to the benefit of our clients and stakeholders.
Now I will turn it to Francois to provide more detail on the financials before returning to answer your questions. Francois?
Thank you, Nicolas, and good morning to all. As you know by now, we closed 2024 with fourth quarter after-tax operating income of $2.26 per share for an annualized operating return on average common equity of 16.7%. For the year, our net income return on average common equity was an excellent 22.8%. Once again, our 3 business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 79% for the quarter and 78.6% for the year. Current accident year catastrophe losses were $393 million for the group in the quarter, split roughly 60% and 40% between the reinsurance and Insurance segments, respectively.
Most of our catastrophe losses this quarter are due to Hurricane Milton, a fourth quarter event, with an additional contribution from Hurricane Helene, where we saw some delayed emergence of claims, given the late occurrence date in the third quarter. As of January 1, our peak zone natural cap probable maximum loss for a single event 1 in 250-year return level on a net basis increased slightly and now stands at 9.2% of tangible shareholders' equity. Our PML remains well below our internal limits. As we look forward to 2025, with the recent addition of the MidCorp and Entertainment business and current market conditions in property we expect our cat load to represent approximately 7% to 8% of our full year group-wide net earned premium. Our underwriting income in the quarter included $146 million of favorable prior year development on a pretax basis or 3.5 points on the combined ratio across our 3 segments.
We recognized favorable development across many lines of business, but primarily in short tail lines in our Reinsurance segment and in mortgage due to strong cure activity. As we discussed last quarter, the acquisition of the MidCorp and Entertainment insurance businesses has impacted some key performance metrics for our Insurance segment. First, the net written premium coming from the acquired businesses was $393 million for the quarter, contributing 27.1 points to the reported quarter-over-quarter premium growth for our Insurance segment. Second, the acquired business lowered the Insurance segment's accident year ex cat combined ratio by 1.6 points this quarter. This result was due to the current quarter's acquisition expense ratio that was lowered by 2.1 points due to the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP and an operating expense ratio that was lowered by 0.8 points as our MidCorp operations aren't fully ramped up yet.
Partially offsetting these benefits was an increase in the accident year ex cat loss ratio of 1.2 points, reflecting the underlying results of the acquired business. On a related note, we expensed $99 million this quarter through intangible amortization, more than 75% of which was for the MidCorp and Entertainment acquisition. This expense was in line with our expectations as we communicated last quarter. On the investment front, we earned a combined $548 million pretax from net investment income and income from funds accounted using the equity method or $1.43 per share. Our net investment income this quarter was partially impacted by a $1.9 billion dividend paid in December, which entailed that we liquidate a portion of our investment portfolio. Cash flow from operations remained strong and was approximately $6.7 billion for the full year, up 16% from 2023. Our effective tax rate on pretax operating income was an expense of 6.7% for the quarter and 8.2% for the full year.
As we look ahead, we would expect our annualized effective tax rate to be in the 16% to 18% range for the full year 2025, reflecting the introduction of a 15% corporate income tax in Bermuda. On a cash basis, we will start recognizing next quarter some of the benefit we accrued with the establishment of the $1.2 billion deferred tax asset at the end of 2023. As you may have heard on other calls, the recent OECD guidance may partially impact the realizable value of this DTA. We will keep you apprised as additional information becomes available.
In closing, our balance sheet remains extremely strong with common shareholders' equity of $20 billion after recognition of the $1.9 billion common dividend that was paid in December. Our debt plus preferred to capital ratio remains low at 15.1%.
With these introductory comments, we are now prepared to take your questions. Sylvie?
[Operator Instructions]. And your first question will be from Elyse Greenspan at Wells Fargo.
My first question is on the insurance underlying loss ratio mean I recognize right, Francois, you highlighted some of the impact, right, from the Allianz deal coming in, right, a little bit over 1 point I calculated kind of Arch stand-alone running at just under 57%, which is close to the is it right way to think about it that, that's about where Arch is and then kind of blend in right this a little bit over 1 point from MidCorp so that insurance underlying is somewhere in the range of 58% on an ongoing basis, something like that?
Yes, that's about right. I think the impact of MC is, call it, on the loss ratio about 1 point, so whatever the assumption you have around the pre-MC kind of run rate loss ratio which is pretty stable -- has been pretty stable. There's some movements up and down from quarter-to-quarter, but generally speaking, it's been stable and introducing the MC maybe adds about 1 point to that.
And then my second question is on reinsurance, right? You guys pulled back a little bit at midyear '24. Now the PML went back up, right, but it's flat 1/1/'25 with 1/1/'24. Did you see conditions get incrementally better at January 1? I'm just trying to understand the thought process around bringing the PMLs back up a little bit.
No. I think what's happening is that we like the business. So I think absent the competitive nature and other people lacking the business too, I think we we're looking to write more of this business. We think the returns are quite attractive. And I think at 1/1, we had some opportunity to do so based on our positioning. So I think we were pleased by that, I think.
And then I guess the follow-up to that is, right, the California fire is a pretty big loss. Do you see that being able to impact other cat renewal seasons in '25, some of it, I guess, might lead to 1/1/'26. How do you see the market impact from the California fires? And is this something where you guys would expect your PML and cat writings to go up during the year?
So I think -- as I mentioned in my remarks, I mean, this is a significant loss for the market. I mean we pitch it between $35 and $45 billion. We believe that a significant part of that losses will go to the reinsurance market. And I think it will -- I think most reinsurer, including ourselves, will start the year with a loss ratio in the 20s or the 30s or depending of your luck, maybe higher than that. So I think it would -- it should damper the enthusiasm of many markets trying to be heroes and writing the business. So I would think that it will have an effect on the rates at -- for the rest of the year or so.
Next question will be from Mike Zaremski at BMO.
I guess first question, I'll just go back to the catastrophe load guidance, 7% to 8%. So probably just obvious, but that -- so that includes, right, it's higher than the historical 6% to 8% mostly because of the 1Q California losses. Is that correct?
A little bit, but also the MC acquisition adds on a relative basis, kind of adds a little bit of load to increase the cat load. Because it's a heavier property book than people realize it. It didn't really impact our PMLs because it's in different zones. It's more distributed. But when we think about the contribution to the cat load throughout the year, it has a meaningful impact.
Okay. Got it. I would have actually plugging in the cat losses, I actually would have thought the load have been a little bit higher, but okay, good color. Switching gears just to the -- I guess one of the elephants in the room for lots of insurers, just going back to the kind of the casualty, GL umbrella environment in some of the prepared remarks, was said that overall rate increases remained slightly above loss trend. I think that was the primary insurance marketplace. Any comments on whether what you're seeing in your GL book. I know that you guys are one of the more honest ones in my humble opinion. And at the Investor Day, you said you'd probably be adding small amounts to your GL reserves, but nothing that's really out of trend line with what you've been doing for a while now better than the industry. But any updated commentary on what you're seeing there?
Yes. I think I'll answer in 2 parts. One, on the reserve position, we didn't add to our reserves. We're very comfortable with the reserve position both in insurance and reinsurance. Our actual versus expected analysis or year-end analysis all are supporting that view that our reserves for prior accident years are very adequate. So no concern there. But as we look at second half of '24 and into '25, yes, we are seeing rate changes keeping up with loss trends. So we're not -- and even exceeding in some places. So we're comfortable with the environment there.
But we also recognize that there's a lot of uncertainty there. So we are being cautious, prudent, we are in some specific very targeted areas increased our initial loss picks, but it's not -- I think I want to make it clear here, it's not a reflection of adverse development or signals or data telling us that we missed the mark on the old years. It's very much a function of the current rate environment and how we perceive the risk around our initial loss picks. And for that reason, we're choosing to be a bit more prudent.
Okay. Got it. And just lastly, real quick things for the tax rate guidance. Is the DTA that was established, I think some peers have said that there could be tweaks to the DTA due to guidance from Bermuda. Is that something that's in flux? Or any way you could kind of handicap whether if a DTA was in flux, would it change materially or just a little bit?
Yes. I mean the guidance right now, and that's an important thing, it's guidance. It's not the law, which we do follow, obviously, Bermuda law, which allows us or instruct us really to carry the DTA. The recent guidance of the OECD suggests that we may only be able to realize up to 20% of that amount. That is still -- again, that's the latest guidance. I mean things change pretty quick in this -- when we start talking about taxes. But if I'd say, from your perspective, maybe worst case, that's kind of what may happen is that we end up only realizing 20% of this amount, then the rest we might have to write off at some point in '26 or late '26 or '27. But at the time being, Bermuda law has not changed, and that's what we're following.
Next question will be from Jimmy Bhullar at JPMorgan.
So I just had a question on a different topic. On MI reserve releases, can you go through the details on what's driving those? And how much of that is from the last 1 to 2 years versus maybe a few years back? And just your overall expectations for margins in that business?
Yes. I mean the reserve releases come from both -- I mean, from all 3 of our segments, right, there's a meaningful amount from U.S. MI. Again, that's a little bit of the same story that we've been talking about in the last few quarters where -- we -- based on conditions at the time, I want to say in '22 and '23, we had set up initial reserves on the delinquencies that were reported at the time, and it turns out that people have been curing in and severity has not been to the level that we thought. So that's just a normal, I'd say, kind of process that the reserving we go through with our reserves at USMI, I'd say for the other pieces, a little bit of the same, I'd say, in the CRT business where it's a slightly different methodology, but we have initial loss picks on that business and that has proven out to be a little bit kind of in excess of what we need today. So there's been some releases there.
And finally, the international book, a little bit of the same to where there's different methodologies in place, but the long story or the short of it maybe is that all 3 books or all 3 pieces of our mortgage segments are performing really, really well. So we like the margins. We think the margins are healthy. We don't see any deterioration in how we think about the business and the returns we're writing today. So we're very, very excited about it.
And then on share buybacks, I'm assuming part of the reason you did a little bit of buybacks this quarter versus none before was just the decline in the stock price. So assuming the stock stays around here, reasonable to assume that you'd be active throughout '25 as well.
For sure. I mean it's something we look at regularly. I mean, every time -- all the time. I mean, in this particular situation, yes, there's a little kind of opportunity late in the fourth quarter. But our capital position remains strong even with the California wildfires. I mean that's part of the volatility we may see from time to time, but whether -- again, we will not sit on level of excess capital that we don't think we can deploy in the business. So if we don't -- we still think we can grow. We are bullish about 2025.
The market conditions are still really good. But can we deploy all the capital we have or that we generate, maybe not. And at that point, we'll return it. And if the price is right, we think share buybacks are a great way to do that.
Yes. I think the order of play is that we want to look at where we can deploy capital attractively in the business. So I think that we do that all the time, I think. And yes, after a while, periodically, we assess our capital position and if we see that the opportunities may not be there to deploy all the excess capital, that's when we consider the most effective way, I would say, at the time to return capital to our shareholders.
Next question will be from Wes Carmichael at Autonomous.
A question on unfavorable development in the quarter, particularly in reinsurance. Can you just give us a little bit of color on what drove most of that release? And maybe if you had any strengthening, I think you mentioned short tail lines in prepared remarks, but any more color would be helpful.
Yes. The vast, vast majority is on property cat and property other than cat. So that's what we consider to be short line -- short tail. We were flat on casualty. So across the reinsurance segment. So no development on casualty and a couple of moves up and down marine, other small lines, all they're small items, but that's the bulk of it. It's really property. Some is -- I'd say, prior cats, meaning kind of large events that we had reserved for that are developing a bit favorably. Some of it is just the IBNR we hold for miscellaneous kind of attritional losses that has proven out to be in excess of what we needed. So that's kind of how we recognize it this quarter through those lines of business.
Got it. And in prepared remarks, I think maybe a broader comment, but you mentioned some competitive pressure where that's eroded margins in certain lines of business. Can you just talk a little bit about where that might be more pronounced?
Yes. So I think I was thinking this question is going to come up. So I think it's mainly in 2 areas. I would say the most visible 1 is, I would say, public D&O, where I think we've seen significant decrease in the last 2 years and double digits. That seems to be tempering, but it reached a level that you really have to ask yourself, account-by-account, is the overall line still profitable.
And the second area that we are watching is the cyber area where also on the excess side, we've seen double-digit decreases and the supply of capacity in both public D&O and cyber that don't seem to be wanting to reduce, I think.
Did you have any further questions, Mr. Carmichael?
Yes. I guess I'll follow up with 1 more, but just on MI and the delinquency tick-up. I think you mentioned that can be impacted by cat exposed areas, and you obviously had a couple of sizable storms last year. But just hoping you could unpack a little bit with what you saw in the tick-up there.
Yes. I mean it's very much part of the natural process. As you'd expect, some people were affected by these events. And once they missed 2 consecutive mortgage payments. They turn delinquent and that's what we fully expected would happen in the fourth quarter. About half of the increase in the delinquency rate is directly attributable to these cat affected area, I mean it's -- that's our best estimate at this point.
The historical cure rate on these types of delinquencies driven by natural events is extremely high. So that's why we think the financial impact ultimately will be minimal. But currently, that's how the process works. They show up in the delinquency rate and we reserve for those. But typically, those to get resolved or cured at a high level over time.
And just quickly, I'll add. I mean just I'll add quickly on the California wildfires, slightly different type of exposures. We expect minimal, again, very early, too early to know. But given the types of mortgages that exist in these areas, we would not expect to be impacted at all or very -- I mean certainly not significantly at all in -- due to the California wildfires.
Next question will be from David Motemaden at Evercore.
I had a question, and I saw the solid casualty reinsurance growth in the fourth quarter as well as 2024. And it sounded like that continued at 1//1/'25. I guess I'm wondering if you could just talk a little bit about the rate adequacy, specifically within the casualty reinsurance line. I know that's a broad line but a little surprising to see you guys lean in there. It sounds like others have been more critical on just the rate adequacy there. So I wonder if you could elaborate a little bit on that.
Yes. I think the -- we started from a position that we were already, I think, underweight on the casualty treaty reinsurance. And I think our -- our view, and it's true, by the way, on the insurance side is that we've tried over the years to get into program that are more, I would say, specialty casualty, think of it as more with an E&S flavor. So similar to what we would be writing or growing on the insurance side. So I think it's been a while, but I think based on the additional cloud that -- or the value of the brand on the reinsurance side, I think we've been -- and our ceding companies forecasting some weathering from maybe some of the reinsurance or less appetite for the casualty, I think we've been able to finally get onto programs or reinsurance programs that we think are backing the right people to take advantage of the opportunity.
So that has been really the engine behind the growth. It's not we're not underwriting the market. We're just underwriting selective underwriters that we think have the know-how and the expertise to be able to deliver attractive returns for us.
Great. Yes, understood. Definitely, you guys are underweight there. So that makes sense. And so maybe just switching gears to the Insurance segment. And just wanted to get a little bit more color on the current accident year loss pick increases that you noted. It sounded like it was minor but wanted to just get a little bit more detail on what lines it was. And it didn't sound like that had any impact on the prior year reserve -- any prior year reserve impact. But just wanted to understand how that happened?
Yes. I mean, again, roughly, if we break it down, call it, 1/3 of the increase is due to the MidCorp and Entertainment inclusion or addition to the segment. There's another 1/3 -- I'd say it's lines of business where we just are reacting to the rate environment. An example of that would be professional lines, like both cyber and D&O, where -- you guys have seen it. We've seen it. You've heard it. I mean rates have been coming down over the last couple of years pretty significantly, and that's a big part of our book. So naturally, I think you'd expect us, and we are booking a higher loss ratio this year than we did a year ago, and that's just a function of the rate environment. So that's an example.
Another example is some of our auto warranty product, our GAAP product where due to the different market conditions, different economic realities with the value of used cars and what we insure and what we cover, loss ratio inched up a little bit there. So nothing that was surprising to us. But again, we're reflecting or reacting to the data and that's -- and obviously, there's always mix a little bit at the end, but those I'd say are some examples of kind of minor kind of small adjustments that contributed to the overall increase.
Got it. Okay. Yes. So it doesn't sound like that was any GL or umbrella related pick increases. It was more in other lines?
Correct.
Next question will be from Andrew Kligerman at TD Securities.
First question, maybe you could drill down a little more into the casualty lines, the E&S areas of casualty, where you'd like to grow or where you are growing in both insurance and reinsurance, respectively. And then with that, could you give us a sense of the rate changes in those areas in both reinsurance and insurance, respectively.
Yes. So those are, I would say, for the large part, similar book of business. So it's really E&S, what I would call E&S liability, and it's more middle to high access layers, where we've seen the market reacting to the propensity of larger losses in the last few years. So what's happening in that market is people used to have on the retail side, first, big limits.
So once the admitted market decides that they're not going to be able to offer those limits anymore -- by definition, if you had a $200 million program with maybe 5 or 7 players. Now that the admitted players decide to reduce their limit to $10 million, you're going to need 20 people to. And so the way the market works is -- and that has been going on for a while. A lot of that business now is getting repriced into the E&S market, not only on the pricing side, but also on the terms and conditions. You are able to get exclusion that you will not be able to get on the admitted retail side.
So we like that business. We've been writing that business. We've been underweight in that business for years and we have experience. We've been writing the business for over 20 years, and we have with a specific line of business, I'm not going to go over it over the call, but that we actually have experience in it. We have -- we know the venues where to write it. We know the type of severity of claims we know, we know the exposure to commercial auto that's embedded in those risks.
And so we're able to selectively -- and good companies do that selectively pick a subset of the market, and we're still getting very distant rate increases, I think double digit. And I think it has been -- the rate increases have been going on for a while. They were back in the 20s, they were in the double digit, then they went to the single digit, then were back in the double digits of late. And so we think we're getting rates of the trend. I think we think the business underwritten properly with the right limits, I think, could be very attractive. But you have to pick and choose. It's not, again, across the board bet that we make.
And that's very, very helpful answers. I guess as I think about it, a lot of your competitors are running scared on the high layer excess of loss casualty just given the inflationary environment. So maybe just a little color on -- and you kind of gave some of it just in terms of your experience in the market. But maybe a little color why you don't fear that, that could get out of hand, and we could wake up one day and just see Arch get hit with a lot of these things kind of jumping into the high layers?
So this is not -- this is what markets do. When you have a lot of severity losses, whether it's property or whether it's liability, the reaction of the market is to cut limit. So I think if you think of it, if you have a, let's say, a $50 million limit, you're writing $100 million portfolio, 2 short loss and your loss ratio is 100%. I think what we've seen is people cutting their limit dramatically to 5 and 10. So now when we get the full tower losses, the contribution to your portfolio is $5 million or $10 million. So it makes the beauty of diversification, it makes the -- your loss ratio a lot more stable. And I think when this happens because what I said earlier, before to do like a $200 million tower for a program, you need it 5, 7 market because now you need 20, by definition, it costs a lot more. And so the price adequacy is a lot better. So that's what we're seeing.
Next question will be from Cave Montazeri at Deutsche Bank.
Another question on casualty and that's why you see good growth opportunities. We're seeing good rate increases on the primary side, which is also helping quota share reinsurance. Preceding commissions didn't change much at 1/1 despite the adverse development that carriers continue to face. My question is, was the incremental supply of casualty reinsurance at 1/1 higher than what you would have expected. And I know you're writing both, and you have some detail on the specific line, but is it currently more attractive to write new casualty business on the primary side rather than on the reinsurance side?
Yes. I suppose I'll answer the first question. I think the supply of casualty treaty reinsurance, I think we're hearing bubbles of people on the call saying that they don't think it's attractive. So hopefully, they withdraw. But right now, I think it's -- there's plenty of people willing to write the business. So I think it's -- there's a lot of the supplies and demand. I mean ceding commission will go down the day where people are putting their foot on the ground and say, listen, I'm not going to write it unless the ceding commission is down 2% or 3%. So we haven't seen that even on the business that we placed ourselves that we haven't seen that.
So I think that -- so for sure, I think the math for the reinsurer, they get the rate increase they get a lower commission. It helped justifying why you would write those business. So -- but I think for us, I think we -- yes, we -- I think we are more bullish on the primary side today on the E&S side because I think that we have a true expertise there. We underwrite the business one by one. And I think we have -- I would say that -- I put it on the list, I would say that goes #1. Being able to there's good competitors of ours before we admire or we hire underwriter from. I mean, being able to support those people on the -- through our reinsurance team, I think, makes sense to me.
So I think, yes, I think the commission may be a little high, but I think if you pick people that can outperform on the loss ratio, you may still be right.
Good. And my second question, still on growth on the primary side this time. Early days, but can you give us an update on how the integration of MidCorp is going? And if the growth prospects, how that's evolving versus your expectations prior to the deal?
Yes. I think we are pretty much on plan, to be honest. I think the integration is -- it's a big lift. But I think we are pretty comfortable so far that things are pretty much on plan. In terms of the business itself, it's early to tell, but the business is pretty much what we expected. I don't think it's -- I don't think it's better or worse. I think it's pretty much what we had planned for.
And I think on the good news for us on the MidCorp aspect is that we're seeing some double-digit rate increases on the property side. And also the liability side. So I think on the property side, it's really driven by the secondary periods that have that not only for us, but for others on the mid-market side that have been a problem in the past. So people are -- we're underwriting around it, but also getting a rate increase. And we're seeing the same -- some of the same rate increase on the total liability and the GL.
Next question will be from Alex Scott at Barclays.
First one I had is on the PML. I just wanted to understand to what degree you are of exposure to aggregate reinsurance treaties and just when we think about a pro forma for some of the wildfire losses, would that cause any upward pressure of note to the PML as we think about heading into wind season?
So we do some, but we have very limited exposure to aggregate treaties. I think it's -- as a general underwriting philosophy it's hard enough to price the severity. The frequency is really, really hard to price.
So I think we do it, but when we really feel that we have -- because of the line of business and the exposure a good -- we could have a good grab on the frequency or the -- we get enough away from the frequency that maybe providing an aggregate cover may make sense. So we have very limited exposure to aggregate covers. In terms of the PML, can you repeat the second question? I just forgot?
Well, it was along the same lines. I was just trying to understand, if you had exposure to aggregate treaties then to what extent would it potentially increase your PMLs, just thinking through for example, primary this morning announced a wildfire number that when you look at their baseline cat budget, I think it would potentially cause them to pierce the aggregate yes.
My guess is immaterial for us.
Got it. Okay. And then just as a separate follow-up on MidCorp. I just wanted to probe there. Now that you have the book, it sounds like things are going to plan. But could you talk about like what portion of those premiums that you've gotten in are going through the heavier remediation and just how we should think about the trajectory of premiums considering that there's still some remediation work going on in the background?
I think it's mainly around, I would say, the program book of business. When we bought MidCorp, again, I think there was a $500 million book of programs, and this is not why we bought MidCorp. And I think we have ourselves a significant, I think something like $800 million book of business. I think that's where we're trying to integrate their teams with our teams, and we have a very defined risk appetite for the type of underwriting manager that we do business with, the type of back-office integration that we require to get the information very quickly. So I think we are going through their book of business to make sure which one qualified and which one doesn't. So...
Yes, to answer that. I mean we have already kind of taken action on a number of programs. But given the period to notice, I mean, it will start to show more in the second half of 2025, the impact of those actions on the top line at least. And certainly, we think the bottom line, the loss ratios will follow as well.
Next question will be from Andrew Andersen at Jefferies.
You mentioned deploying capital into London specialty markets. I would have thought that's an area where perhaps a bit more competition has come in and maybe rate is decelerating but perhaps still at an adequate level. Can you just maybe talk about the growth environment there?
No, I think we -- I'm personally and I think we are bullish in the London market. I think the thing that -- yes, there is more competition. I think rates have flattened in certain of our business. But I think the -- the thing that help us in the London market is that we've grown from being a substandard -- subscale business to a business today that's write close to in the London market, probably $1.5 billion or more of premium. So we are one of the -- and the market is consolidating around a fewer number of carriers. So we are -- we are one of the beneficiary of that consolidation.
We're not the only one, but I think we're beneficiary and we've built the team has done an amazing job building leading capabilities in a number of lines of business, and that makes a huge difference. So I think we get to pick first, which in our business is a huge advantage.
And then maybe just within reinsurance, it sounds like still kind of positive on prop cat. The other specialty line, I realize there's probably a number of different businesses in here, but it declined in the quarter. Can you maybe just touch on the drivers of the decrease year-over-year?
Yes. So I think the first is the fourth quarter is really a smaller of the 4 quarters. So -- and we -- the thing I want people to understand on reinsurance, it's true in the insurance as well is that we are extremely dynamic. We don't -- if something doesn't fit or a ceding company decide to for instance, happen if a ceding company decides to change from proportional to excess premium in itself is never a target. We're not trying to replace the premium. We're actually looking for profitable premiums. Those are 2 different concepts.
So I think in the fourth quarter, what happened is I think we we're starting to have a negative bias on cyber, to be honest. I think we were a big provider of quota share in the cyber side. So a couple of our contracts, either the ceding company retain more, which I think is -- or we may have cut back on another one based on the new terms and conditions. And that explains most of it.
Next question will be from Meyer Shields at KBW.
I guess one question for 2025 on the Insurance segment, can you talk about how reinsurance purchase is -- your reinsurance outward reinsurance purchase has changed? I don't know whether that's a market question or MidCorp question or both.
So I think maybe if I understand this, how did it change? What's the outlook? I think the one change we have to do is we had to Allianz was buying reinsurance to cover the MidCorp portfolio. A lot of it being property, some of it being casualty. So I think we at 1/1, I think on the property side, I think we had to -- and they bought large limits, limits up to $700 million or $800 million. So I think we had to -- and that was one thing we bought, I mean, so we had to transfer that reinsurance onto an Arch manage framework. So outside of the Allianz ceded department, so -- and within the Arch ceded department. So that happened at 1/1. I think the team did a great job, and we kept the capacity, which is a huge part of the value proposition that the MidCorp offer is like to be able to compete in the middle market, you need the large capacity up to -- up to $1 billion on any 1 account or allocation.
So I think we -- by being able to do that, I think we secured a lot of the brand or a lot of the value that we bought. So I think that was a very satisfactory outcome for us.
Okay. Great. And then Francois, you mentioned that there's a lot of property and therefore cat risk within the MC portfolio. Right now, obviously, the underlying loss ratio is elevated. Once all of that is done, should MC have a lower attritional loss ratio than the legacy Arch side of things because of that cat exposure?
So I think the cat exposure of the MidCorp business is more around the secondary period than it is around the primary period of a hurricane and -- and so I think we -- that was something attractive for us because it was very complementary to the footprint that we had. So I think the -- going forward, I think those secondary perils, attritional catalyst ratio, they remain. That's part of the -- I mean we underwrite the flood, we underwrite the tornadoes, we underwrite the -- but ultimately, the -- so I don't -- I really don't expect the attritional loss ratio coming from the MidCorp to really change going forward.
Exactly that. I mean I think pre and post MC after call it, we fully integrated the business. I would not expect a significant change to the ex cat loss ratio.
Next question will be from Brian Meredith of UBS.
Nicolas, Francois, I'm just curious, how are you thinking about the potential impact of tariffs on your business?
Nothing significant for us at this point. As you know, I mean, the businesses are transacted locally between local carriers in each of the jurisdictions in which we operate. And so from that point of view, that's -- I don't think there's an issue there or any concern. Does it slow down trade in the broader sense maybe? I think that's -- I could see a potential impact on our Coface investment, for example. I mean you can see some reductions in world trade and how that might have an impact. But I think too early to tell would be our answer, but that's something, obviously, we're watching.
Great. And then second question, I think you've kind of answered this around that way. But what are you assuming right now in your reserving and pricing with respect to GL, call it, loss trend?
I mean it varies by self, but certainly, it's -- for the excess business, it's double digits. It's like 12% to 14% on the primary E&S kind of low limit casualty is probably around 5%.
5% or 6%.
5 or 6 in casualty. And then one other one, then quickly slip in here. You all have typically done a reasonable amount of structured transactions in your reinsurance you're good at that surplus fleet, that kind of stuff. Are you seeing much opportunity here in '25 and '26 on that?
We don't -- we don't think so. I think there has been a few. Again, it's really -- we are in that business. We need the margin to make sense for us to write it. And I think for a while, we were successful because it seems that some of the traditional players were pulling back. So we got a couple of opportunities to participate at our terms in a couple of transactions. It looks like there may be some capacities coming back. So it's hard to tell. So it's not something we target, I think we are in that business and we -- when something fits, we do it. And if it doesn't, we just don't.
Yes, we're not a typical Arch thing, but a little bit more reactive on that type of business. We don't drive the demand for it. Sometimes you have a company that may be in the -- may have some capital issues because of cats or any other or some other kind of results or could be reserve development, who knows. So that's where the -- it's hard to predict whether the demand will be there for these products, but we're open for business.
I think we benefit there again of the support we offer to some of our cedents. I think we -- today, especially in the U.S., we have -- we are a multiline reinsurer. So we just don't do the cat. We do the cat, we do the risk, we do the quota share. So when the opportunity that we got is one of the ceding company has a problem they think of us as 1 of the partners. So they -- so that's how some of those opportunities came to us is more like because of all the things we were doing for them, they're like, listen, we have this problem Arch? Could you help us doing this? And then they -- we looked at it together. So I think that probably puts a bit more tailwind in our ability to do this. But again, it has to be the right structure, it has to be the right price.
Next question will be from Elyse Greenspan at Wells Fargo.
Just a couple of follow-ups. The first one, Francois, was on the 7 to 8-point cat load. I just want to understand that correctly. That does include the fire. So then would -- would that also be the cat load for '26? Or are you assuming in that, that the fires kind of take the place of another large loss that you might have seen this year?
Yes, that -- it does not include the fires in a direct way, in the sense that this is our this is going in on January 1. This is what we thought the cat losses or cat load was for the year. Now if it turns out that the wildfires, which so far may end up being higher than what our cat load specifically for wildfires for the year would have been, then yes, there's a chance that we exceed the total -- that total of load, but by the same token, hurricanes end up -- could end up being lower. So that's truly a start of the year without any kind of additional knowledge reflected in that number.
Okay. And then my second question, on MidCorp, right, when you guys announced the transaction, and you said post-integration, right, it would run at a low 90s combined ratio. It sounds like from everything you were saying it's running in track with plan. So that would still be the target. As you guys said when like when we might see that low 90s number like what year would be considered post-integration?
We didn't say when -- it's going to take some time. I think those things take always longer. I think the goal, I think from what we know today, we -- I think I'm still very comfortable that we get there.
Again, we have to finish the integration for people, we're still operating the business on Allianz systems. So you can see that there's a limit to what we can do in terms of insight. And so we're preparing for the lift over Arch that should happen sometime next year. So I think it's going to take a bit of time.
And then just one follow-up, Francois, I think someone asked a question, and you implied that MidCorp would maybe one at the same loss ratio once integrated. Was the point meaning run at the same loss ratio as legacy Arch, is that what you were saying there?
Yes. I mean I haven't done the math recently, but my expectation would be that the -- again, the ex cat accident year loss ratio pre MC or legacy Arch and that same metric once you include MC after the integration is completed, meaning a little bit of remediation on some of the business we acquired, I don't think would be that different. So I think those would be pretty much in line.
I'm not showing any further questions. I would like to turn the conference over to Mr. Nicolas Papadopoulo, for closing remarks.
Thank you for your time today. And yes, we'll see you next quarter. Thank you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.