Arch Capital Group's Q3 2025: Contradictions Emerge on Capital Management, Insurance Growth, Reinsurance Rates, MidCorp Integration, and Buyback Strategies

Date of Call: October 28, 2025

Financials Results

• EPS: $2.77 per share (after-tax operating), record; net income and after-tax operating income both up 37% year-over-year

Guidance:

• Company prefers share buybacks as primary capital-return method in the near term and repurchased $732M in the quarter, adding $250M in October.
• Mortgage segment on pace to deliver approximately $1.0B of underwriting income for the year.
• YTD operating effective tax rate 14.7% (slightly below prior 16%–18% guidance).
• Peak-zone net PML remains $1.9B (8.4% of tangible shareholders' equity) and within internal limits.
• Expect clarity on Bermuda substance-tax transition credits by early December.

Business Commentary:

• Strong Earnings Performance and Shareholder Returns:
• Arch Capital Group reported after-tax operating income of $2.77 per share and net income of over $1.3 billion, both up 37% year-over-year.

• The growth was driven by solid investment returns, low catastrophe losses, and strong underwriting margins across segments.

• Strong Underwriting and Combined Ratio Improvement:

• The consolidated combined ratio for Q3 was 79.8%, reflecting excellent underwriting and low catastrophe activity.

• The improvement was attributed to strong underwriting margins in the insurance and reinsurance segments and favorable prior year developments.

• Growth in Insurance and Reinsurance Segments:

• Insurance segment net premiums written grew by 7.3%, while reinsurance net premiums written decreased by roughly 11% year-over-year.

• The growth in insurance was driven by strong performance in middle market and middle property lines, while reinsurance decline was attributed to competitive pricing conditions.

• Capital Management and Share Repurchase:

• Arch repurchased $732 million of shares in Q3 and has repurchased 15.1 million shares year-to-date, representing 4% of outstanding shares.
• The capital return to shareholders is a response to the company's strong capital position and earnings profile, supported by a strategic focus on share buybacks over special dividends.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted record results: after-tax operating income > $1B and net income > $1.3B, both up 37% YOY; after-tax operating EPS $2.77 and YTD book value per share growth 17.3%. They emphasized a strong balance sheet, active capital deployment (repurchases $732M + $250M in Oct) and bullish statements on insurance, reinsurance and mortgage franchises.

Q&A:

• Question from Elyse Greenspan (Wells Fargo Securities, LLC): How do you think about the level of buybacks going forward given strong earnings and would you favor buybacks versus a special dividend?
  Response: Management prefers buybacks in the near term given the stock price and strong balance sheet, sees room to do more, and will continue to evaluate with the Board (unlikely to do both buybacks and a special at the same time).

• Question from Elyse Greenspan (Wells Fargo Securities, LLC): How do you see premium growth outlook for the insurance book given MidCorp non-renewals and softer spot market?
  Response: Bullish on insurance overall; expect growth and profitable opportunities in casualty and middle-market segments while professional lines moderate and E&S property exposure remains relatively small for Arch.

• Question from Elyse Greenspan (Wells Fargo Securities, LLC): Any high-level thoughts on potential exposure to the hurricane in the Caribbean?
  Response: Too early to tell; potential meaningful impact in Jamaica and resorts depending on landfall, and management will assess exposures once path and damages are clearer.

• Question from Andrew Kligerman (TD Cowen): What would normalized reinsurance growth have been absent the one-offs and how do you think about growth going forward in that segment?
  Response: Adjusted for one-offs, growth would have been roughly a 3%–4% decline rather than ~11% reported; outlook similar to insurance—short-tail faces rate pressure while casualty shows improving pricing and cedents retaining more business.

• Question from Andrew Kligerman (TD Cowen): How do you see E&S premium for the industry over the next few years and Arch's positioning in E&S?
  Response: Industry is bifurcated: casualty-driven growth to excess/E&S likely continues while some cat-exposed short-tail may return to admitted; Arch expects to compete well and gain in casualty/middle-market but short-tail remains challenging.

• Question from Joshua Shanker (BofA Securities): When did you start buybacks and were you buying throughout the quarter or concentrated late?
  Response: Buybacks were consistent through the quarter with a pickup in September and continued activity in October; management felt comfortable buying during wind season due to diversification and a stronger balance sheet.

• Question from Joshua Shanker (BofA Securities): Do you think buybacks can satisfy the capital-return needs versus doing another special dividend?
  Response: Management believes they can return substantial capital via repurchases given liquidity and attractive pricing, and will continuously evaluate the level of repurchases.

• Question from Tracy Benguigui (Wolfe Research, LLC): How important is staying in the new AA- rating category for capital deployment?
  Response: AA- is advantageous (notably in Europe and certain MI/CRT/SRT transactions) but not critical; the firm already holds strong capital levels and will weigh trade-offs across rating agencies and regulators.

• Question from Tracy Benguigui (Wolfe Research, LLC): Which casualty lines are you finding most attractive (GL, commercial auto, excess liability, etc.)?
  Response: Opportunities are concentrated in E&S excess liability and casualty-led franchises—national accounts and construction—with exposure to workers' comp and GL rather than primary auto focus.

• Question from Ryan Tunis (Cantor Fitzgerald & Co.): On the 17% decline in facultative property, how much is cedents retaining versus rate/exposure declines?
  Response: Main drivers are cedents choosing to retain more and reduced ceded premium due to lower rates and reforecasted growth; Arch is not proactively walking away from business.

• Question from Michael Zaremski (BMO Capital Markets): What is your view of a normalized mortgage-loss ratio going forward versus the past five years?
  Response: Management has referenced a normalized loss ratio in the ~20% range across the cycle, with current outperformance driven by strong home prices and improved FICO distribution.

• Question from Michael Zaremski (BMO Capital Markets): Any change quarter-over-quarter on inorganic opportunities and is U.S. small commercial still on the wish list?
  Response: M&A pipeline is long with middle-market focus; opportunities are infrequent, so Arch won't hold excessive capital solely for deals but retains flexibility to pursue attractive transactions.

• Question from Michael Zaremski (BMO Capital Markets): How do you view MGA growth and its impact on Arch/industry?
  Response: CEO is personally cautious on the MGA model due to incentive misalignment and data delays, questioning the long-term outcome despite recent growth.

• Question from David Motemaden (Evercore ISI): Any notable movement between long-tail and short-tail reserve development in insurance and reinsurance?
  Response: Nothing unusual—short-tail performed exceptionally well; there was a small adverse on casualty in isolated areas, but overall actual vs expected remains favorable.

• Question from Robert Cox (Goldman Sachs): As you renew the MCE book, what are you seeing on delegated vs non-delegated and how far through program non-renewals are you?
  Response: The transferred MCE book has renewed and is performing as expected; remediation is on track and program non-renewals (MGA-sourced) will roll off over time with notice periods.

• Question from Robert Cox (Goldman Sachs): Thoughts on the credit environment given mortgage exposure, Coface and private credit noise?
  Response: Comfortable with current credit exposures; mortgage borrowers differ from subprime auto, Coface manages short-term trade-credit conservatively, and Arch is monitoring trends without seeing material issues.

• Question from Taylor Scott (Barclays Bank PLC): How much impact will remediation/non-renewals have on the insurance segment (quantify)?
  Response: Approximately $200M of program premium has been identified for non-renewal out of the ~ $1.5B–$1.6B MCE book, and some of that may begin impacting top-line in Q4 with more visible effects in 2026.

• Question from Taylor Scott (Barclays Bank PLC): On reinsurance casualty repricing, are primaries taking enough rate relative to loss cost to improve margins?
  Response: Yes—management sees casualty rate increases generally outpacing loss cost, supporting improving margins and opportunities to write more selectively with specialty underwriters.

• Question from Andrew Andersen (Jefferies LLC): How are you thinking about 1/1 property-cat renewals and ILS impact on returns/industry capital?
  Response: Bullish on catastrophe lines; although rates fell 5%–10% in 2025 after peaking mid-2024, margins remain attractive and demand persists, with ILS and capital dynamics varying by region.

• Question from Meyer Shields (Keefe, Bruyette, & Woods, Inc.): Update on ramping up spending for mid-corporate—timing and amounts?
  Response: Most integration work is done; additional hiring remains for actuarial, data analytics and support functions but expected OpEx ratio will be lower than pre-acquisition due to synergies.

• Question from Brian Meredith (UBS Investment Bank): Is the underlying loss-ratio improvement in insurance a result of MCE remediation and will runoff continue to improve loss ratios?
  Response: Improvement is largely due to underlying portfolio performance rather than MCE non-renewals on an earned basis today; runoff of weaker program business should help stabilize/improve loss ratios over time.

• Question from Brian Meredith (UBS Investment Bank): Any update on Bermuda substance-tax credits and potential impact?
  Response: It's early; management expects clarity on transition credits by early December and believes the impact could be substantial once the law and transition rules are finalized.

Contradiction Point 1

Capital Management and Share Buybacks

It involves changes in capital management strategies, specifically regarding share buybacks, which are crucial for investors to understand the company's financial priorities and shareholder value creation.

How will the buyback level be determined given strong earnings this year, and will this year's capital return focus more on buybacks versus a special dividend? - Elyse Greenspan(Wells Fargo Securities)

2025Q3: Our approach to capital return involves buybacks as a preferred method, especially given the current environment with limited growth opportunities and a favorable stock price. - François Morin(CFO)

What are the expected ROEs in property catastrophe lines considering recent pricing declines? - Michael David Zaremski (BMO Capital Markets Equity Research)

2025Q2: We have 11 million shares remaining under our current authorization, which we expect to utilize during the course of the year. We are in the early stages of this program, but obviously, our program is a lot more front-loaded than we had previously. - François Morin(CFO)

Contradiction Point 2

Insurance Premium Growth Outlook

It involves the outlook for insurance premium growth, which is important for understanding the company's growth strategy and revenue expectations.

How should we assess the combined impact of MidCorp deal annualization, non-renewals, and the softening market on insurance premium growth outlook? - Elyse Greenspan(Wells Fargo Securities)

2025Q3: We are bullish on the insurance business, seeing competition and rate pressure in some areas but rate increases in others. - Nicolas Alain Papadopoulo(CEO)

What's the forward view on insurance segment premium growth excluding MCE? - Elyse Beth Greenspan(Wells Fargo Securities)

2025Q2: Our strategy is to pivot to where opportunities exist. We are growing in casualty lines and internationally. Some sectors face increased price competition, but the market conditions are stable. - Nicolas Alain Papadopoulo(CEO)

Contradiction Point 3

Reinsurance Growth Rate

It involves a contradiction in the reported growth rate of the reinsurance segment, which is a key financial indicator for investors.

What was the normalized reinsurance growth rate excluding transactional impacts, and how do you expect the segment to grow going forward? - Andrew Kligerman (TD Cowen, Research Division)

2025Q3: Normalized growth without the transactional impacts could have been around a decrease of 3% to 4% - François Morin(CFO)

What caused the slowdown in reinsurance net premium growth? - Cave Montazeri (Deutsche Bank)

2025Q1: The deceleration is largely due to non-renewal of large structured deals, timing of treaty renewals, and specialty line competition. Adjusted growth excluding these factors is around 6%-7% - François Morin(CFO)

Contradiction Point 4

MidCorp Integration and Expenses

It involves a contradiction in the expected impact of the MidCorp integration on expenses, which could affect cost management and profitability.

What is the status of increased spending on mid-corporate? - Meyer Shields (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q3: Additional hires are underway to strengthen actuarial and data analytics functions. The mid-core business is running efficiently, and synergies are realized. - François Morin(CFO)

How do casualty reserves and social inflation impact your outlook? - Cave Montazeri (Deutsche Bank)

2025Q1: We believe the casualty social inflation story is not entirely played out, and further pain is expected. - Nicolas Papadopoulo(CEO)

Contradiction Point 5

Capital Return Strategy - Buybacks vs. Special Dividends

It involves the company's capital return strategy, specifically whether they prefer buybacks or special dividends, which are crucial for investor expectations and financial planning.

How should we think about future buyback levels given this year's strong earnings, and will the company prioritize buybacks over a special dividend for capital returns this year? - Elyse Greenspan(Wells Fargo Securities, LLC, Research Division)

2025Q3: Our approach to capital return involves buybacks as a preferred method, especially given the current environment with limited growth opportunities and a favorable stock price. - François Morin(CFO)

Are share buybacks due to the stock price decline, and will you remain active in 2025? - Jamminder Bhullar(JPMorgan)

2024Q4: Share buybacks may continue if capital is not fully deployed. - François Morin(CFO)