Arch Capital Group's Q3 2025: Contradictions on Reinsurance Growth, MidCorp Impact, and Casualty Reserves

Date of Call: October 28, 2025

Financials Results

• EPS: $2.77 per share after-tax operating EPS; company said after‑tax operating income and net income were both up 37% year‑over‑year.
• Gross Margin: Consolidated combined ratio 79.8% for the quarter; 9‑month combined ratio 83.6% (includes California wildfires and severe convective storms); ex‑cat accident‑year combined ratio ~80.5% (down 40 bps sequentially).
• Operating Margin: After‑tax operating return on average common equity 18.5% annualized; annualized net income return on average common equity 23.8% (CFO); book value per share grew 5.3% in the quarter.

Guidance:

• Mortgage segment on pace to deliver approximately $1.0B of underwriting income for the year.
• Share buybacks are preferred near‑term capital return method; $732M repurchased in 3Q and ~$250M additional in October; board evaluating further repurchases.
• Management intends to deploy capital into underwriting opportunities that meet risk‑adjusted returns and pursue opportunistic M&A.
• Portfolio positioned conservatively to generate reliable investment income; investable assets $46.7B and quarterly net investment income $408M.
• Expect clarity on Bermuda substance‑based tax credits by early December; potential material benefit once enacted.

Business Commentary:

• Record Financial Performance:
• Arch Capital Group Ltd. reported over $1 billion of after-tax operating income and net income of over $1.3 billion for Q3 2025, both up 37% year-over-year.

• The growth was attributed to strong underwriting performance across businesses and solid investment returns.

• Mortgage Segment Performance:

• The mortgage segment generated $260 million in underwriting income for the quarter, contributing to the overall financial success.

• The high-quality in-force portfolio and stable mortgage originations supported this performance.

• Capital Management and Share Repurchases:

• Arch announced $732 million in share repurchases during the quarter, reflecting strong liquidity and attractive stock prices.

• The company stated that share buybacks will be their preferred method of capital return due to favorable market conditions.

• Insurance Segment Growth and Premium Trends:

• The insurance segment recorded an 8% increase in net premium written, with middle market and middle property contributing to growth.

• Growth in the middle market sector was facilitated by the acquisition of MidCorp and Entertainment, enhancing the company's platform.

• Reinsurance Business Conditions:

• The reinsurance segment produced a record $482 million in underwriting income, reflecting improved underlying profitability.
• This was due to favorable prior-year development and reduced catastrophe losses, despite a challenging pricing environment in property cat lines.

Sentiment Analysis:

Overall Tone: Positive

• Company reported record quarter: "over $1 billion of after‑tax operating income and over $1.3 billion of net income both up 37% year‑over‑year"; consolidated combined ratio 79.8%; repurchased $732M in 3Q and added $250M in October; mortgage and reinsurance produced strong underwriting income; management repeatedly described the outlook as bullish and emphasized capital flexibility.

Q&A:

• Question from Elyse Greenspan (Wells Fargo Securities, LLC): How should we think about the level of buybacks going forward and buyback versus a special dividend this year?
  Response: Management: Prefer buybacks in the near term given stock price and limited immediate organic growth opportunities; board continually evaluates and there is capacity to do more buybacks.

• Question from Elyse Greenspan (Wells Fargo Securities, LLC): How do you see premium growth outlook for the insurance book given MidCorp annualization and non‑renewals and softening spot market?
  Response: Management: Bullish on insurance — expect profitable growth led by middle market and casualty rate strength; limited E&S property exposure should allow Arch to outgrow its target markets.

• Question from Elyse Greenspan (Wells Fargo Securities, LLC): Any high‑level thoughts on potential exposure to the hurricane currently in the Caribbean?
  Response: Management: Too early to quantify; could be significant for Jamaica and resort exposures, will monitor once landfall location and insured values are known.

• Question from Andrew Kligerman (TD Cowen): What would normalized reinsurance growth have been absent one‑offs and how do you see growth going forward?
  Response: Management: Normalized growth this quarter likely ~‑3% to ‑4% (vs reported ≈‑11%); outlook mirrors insurance — short‑tail rate pressure but rising casualty opportunities, while cedents retaining more creates volume headwinds.

• Question from Andrew Kligerman (TD Cowen): How do you see E&S premium for the industry and Arch's positioning over the near‑to‑intermediate term?
  Response: Management: Industry is bifurcated — casualty growth will push more business to E&S while some cat/shared property may return admitted; Arch is positioned to gain in casualty and is underweight stressed E&S property lines.

• Question from Joshua Shanker (BofA Securities): When did buybacks occur during the quarter and appetite for 4Q/1Q repurchases or special dividend?
  Response: Management: Buybacks were consistent through the quarter with a pickup in September and activity in October; comfortable buying during wind season due to diversified risk profile and will continue opportunistically.

• Question from Tracy Benguigui (Wolfe Research, LLC): How important is staying in the new AA‑ rating category when thinking about capital deployment?
  Response: Management: AA‑ is an advantage (not strictly critical); Arch already maintains capital broadly at that level and will weigh trade‑offs but currently values the rating for market and product benefits.

• Question from Michael Zaremski (BMO Capital Markets): Views on normalized mortgage loss ratio versus historical and next cycle expectations?
  Response: Management: Expect normalized mortgage loss ratio around the ~20% range across a cycle; strong home prices and favorable FICO mix support continued outperformance, though cycle uncertainty remains.

• Question from Ryan Tunis (Cantor Fitzgerald & Co.): Is the facultative property decline driven by Arch walking away, cedents retaining, or rate?
  Response: Management: Decline driven mainly by cedents retaining more business and reforecasting lower exposure, plus rate declines in property — not because Arch is proactively cutting business.

• Question from Taylor Scott (Barclays Bank PLC): How much premium impact will remediation/non‑renewals of acquired programs have on insurance segment?
  Response: Management: Identified roughly $200M of programs premium expected to be non‑renewed from a $1.5–$1.6B MCE book; timing is staggered (some could start in Q4) and full impact will play out into 2026.

• Question from Robert Cox (Goldman Sachs Group, Inc.): As you renew the MCE book, any color on delegated vs non‑delegated and how far through program non‑renewals are you?
  Response: Management: Entire transferred book has been renewed to Arch and initial results meet expectations; remediation of MGA portfolios is underway and notice periods mean impacts will be realized over time into 2026.

• Question from Brian Meredith (UBS Investment Bank): Any update on Bermuda substance‑based tax credits and potential impact?
  Response: Management: Still awaiting clarity on transition credits; expect near‑final clarity in early December and hope for a substantial benefit once law is finalized and enacted before year‑end.

Contradiction Point 1

Reinsurance Growth Expectations

It involves changes in financial forecasts, specifically regarding reinsurance growth expectations, which are critical indicators for investors.

What would the normalized growth rate in reinsurance be without the two deals and reinstatement premiums? - Andrew Kligerman (TD Cowen)

2025Q3: The normalized growth, we think about for reinsurance would be, you know, in the neighborhood of 3% to 4% decline. - François Morin(CFO)

Will deploying more capacity to catastrophe lines increase the loss ratio? Are there updates to the catastrophe load guide? - Michael Zaremski (BMO Capital Markets)

2025Q1: The adjusted growth for this quarter is, we believe, more realistic and gives you a better view of what our growth expectations are for the rest of the year. - François Morin(CFO)

Contradiction Point 2

Impact of MidCorp Non-Renewals

It involves the impact of non-renewals on premium growth, which is a critical operational aspect affecting company revenue projections.

What is the expected impact of MidCorp/Midcouch program non-renewals on premium growth? - Taylor Scott (Barclays Bank PLC)

2025Q3: MidCorp non-renewals have an impact of roughly $200 million. - François Morin(CFO)

Could you clarify which primary companies are retaining higher risk? - Wes Carmichael (Autonomous Research)

2025Q1: We continue to expect further narrowing of combined ratio as we move through the year, as we are not capturing the full benefit from MidCorp yet. - François Morin(CFO)

Contradiction Point 3

Casualty Reserves and Social Inflation

It involves the company's perspective on casualty reserves and social inflation, which are critical underwriting aspects affecting financial stability.

In which casualty lines do you see opportunities? - Tracy Benguigui (Wolfe Research, LLC)

2025Q3: The view is that the casualty social inflation story has not fully played out. - Nicolas Papadopoulo(CEO)

What is the impact of increased casualty reserves and social inflation? - Cave Montazeri (Deutsche Bank)

2025Q1: The view is that the casualty social inflation story has not fully played out. Reserves remain stable, and while rates are above trend, underwriting requires risk selection. - Nicolas Papadopoulo(CEO)

Contradiction Point 4

MidCorp's Bottom-Line Improvements

It involves differing expectations about the timeline for MidCorp's bottom-line improvements, which impacts investor expectations and strategic planning.

What is the expected scale and its largest categories? What are the current pricing trends for quota share in casualty reinsurance? - Taylor Scott(Barclays Bank PLC)

2025Q3: The impact of actions will become evident in the second half of 2025, reflecting bottom-line improvements. - François Morin(CFO)

When might MidCorp achieve a combined ratio in the low 90s? - Elyse Greenspan(Wells Fargo)

2024Q4: It will take time for the integration to fully reflect in the combined ratio. We expect this to happen over the coming years. - Nicolas Alain Papadopoulo(CEO)

Contradiction Point 5

Growth Opportunities in Casualty Lines

It involves differing opinions on the growth opportunities and market conditions in casualty lines, which are integral to the company's strategic direction.

In which casualty lines do you see opportunities given current market conditions? - Tracy Benguigui(Wolfe Research, LLC)

2025Q3: We continue to see strong opportunities in casualty lines. In particular, we're focused on our excess liability business, which has seen a significant increase in demand recently. - Nicolas Alain Papadopoulo(CEO)

Are expected ROEs still attractive despite rate declines in prop cat reinsurance, and what are your thoughts on expanding in the SME market? - Michael David Zaremski(BMO Capital Markets)

2025Q2: We view casualty lines as very attractive right now to continue to grow in casualty, both in excess liability and in national accounts. - Nicolas Alain Papadopoulo(CEO)