Arch Capital Group Ltd. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance: Fourth quarter after-tax operating income was $1.1 billion (up 26% y/y), full-year $3.7 billion. Book value per share grew 22.6% in 2025. Repurchased $1.9 billion of Arch common stock in 2025.
• Segment Updates: Insurance group had solid underwriting, reinsurance had record income, mortgage continued strong, and investments provided stable income.
• Bermuda Tax Credits: Recognized full year effect of 2025 Tax Credits Act, impacting expense ratios, with expected benefits in reinsurance and corporate expenses in 2026.
• Cycle Management: Adheres to principles like diversified platform, business owner mindset, data analytics, and alignment with investors to manage the underwriting cycle.

Segment Performance

• Insurance Group: Fourth quarter underwriting income was $119 million. Underlying ex-cat combined ratio was 90.8% in the quarter, similar to the prior year. Gross premium return increased 2% from 2024. North America grew in specialty casualty lines, while international units saw a year-over-year decline in net premium return.
• Reinsurance: Delivered a record $1.6 billion of underwriting income for the year. Fourth quarter combined ratio ex-cat and prior year development was 74.9%. Gross premium return was flat vs 2024, net premium return declined due to timing of retrocession purchases. Property cat renewals were competitive with rates down 10-20%, and ceding commission increased in proportional reinsurance.
• Mortgage: Produced $1 billion of underwriting income for the year, fourth consecutive year over $1 billion. USMI new insurance return was modest, insurance in force was stable, with favorable credit quality and low delinquency rates.
• Investments: Generated $434 million net investment income in the quarter, with equity method investments adding $155 million. Assets surpassed $47 billion at year-end.

Guidance

• 2026 Outlook: Current estimate of full year catastrophe losses within 7%-8% of net earned premium. Share buybacks expected to be active throughout 2026 depending on market conditions.
• Reinsurance Market: Expectations of continued competition in property cat reinsurance but opportunities in other specialty lines.
• Capital Management: Will continue to return capital to shareholders through buybacks, with pace dependent on market conditions and stock price.

Risks

• Market Competition: Increasing competition in several lines of business, especially in reinsurance with supply outpacing demand and ceding commission increases.
• Catastrophe Losses: Uncertainty in catastrophe losses impacting underwriting results, especially in property cat reinsurance.
• Tax Law Changes: Uncertainty around Bermuda tax credits and their long-term impact on expenses and effective tax rate.

Q: Expand on opportunities in property cat re during 2026 A: Nicolas Papadopoulo mentioned opportunities are in other geographies and specialty lines, not property cat specifically.

Q: Capital buyback trend A: François Morin said share buybacks will be active throughout 2026 depending on market conditions and stock price.

Q: Reinsurance loss ratio sensitivity to rate pressure A: Nicolas Papadopoulo noted margins under pressure from pricing and ceding commission increases but still like the business, evaluating on a case-by-case basis.

Q: AI impact on business model A: Nicolas Papadopoulo sees AI as an opportunity for efficiency rather than a threat, with specialty market being complex and less commoditized.

Q: Casualty reinsurance market conditions A: Nicolas Papadopoulo said rates still ahead of loss cost on primary side, but reinsurance market has excess supply and stable to down demand.

Q: Capital management and excess capital A: François Morin said excess capital will be returned to shareholders when appropriate, depending on market conditions and ability to deploy capital profitably.

Q: MCE reunderwriting premium and margin consequences A: François Morin said non-renewals should improve margins, but market conditions could affect, with some programs being cat exposed and better deployed elsewhere.

Q: Bermuda tax credits and investments A: François Morin said tax credits are an offset to Bermuda expenses, but no direct opportunistic investments from them, rather based on need.

Q: Deferred tax asset carrying value A: Nicolas Papadopoulo and François Morin discussed amortization of deferred tax asset, with uncertainty around Bermuda law changes affecting its recognition.

Q: M&A view A: Nicolas Papadopoulo said they like strategic assets but will pursue M&A only if it's an amazing deal, unlikely in current market conditions.