Good day, ladies and gentlemen, and welcome to the Q2 2019 Arch Capital Group 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. [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.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 reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income 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.I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. François Morin. Sirs, you may begin.

Thank you, Crystal, and good morning to you all. Our operating results were very good this quarter and were driven by solid underwriting performance, like catastrophe losses, which together with higher bond and equity prices in financial markets led to a 6.6% increase in our book value per share this quarter. Our operating ROE for the second quarter at 13.1% remains satisfactory.Market conditions in our Property Casualty segments continue to improve and as a result, we selectively increased our writings. While we hope that the market firming has legs, we will continue to focus on allocating capital to those lines with the best risk/reward characteristics. In our view, this is a market which favors those companies who are nimble and who focus on expected returns, risk selection and risk selection and segmentation in building their book of business.Across the property and casualty industry, we have seen several market opportunities where we have increased our capital deployment, notably in London and in E&S lines in the U.S. It is worth noting that because we have kept our powder dry in the recent soft markets, we are better positioned today to flex into these markets as rates improve. Despite these tailwinds, the firming is not occurring across the board. One factor that makes us cautious is the uncertainty surrounding the margin of safety.In some cases, rates are increasing on a relative basis but are not adequate on an absolute basis. Across all lines in the second quarter, our Insurance Group's rate changes, as measured on renewals only, averaged around plus 3.5%. However, there is strong anecdotal evidence that the majority of our new business came in at better levels than the renewal business. This is a sign of a transitioning market.Overall, we estimate that roughly 20% of our increased premium writings in…

Thank you, Marc, and good morning to all. Before I give you some comments and observations on our results for the second quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e., the operations of Watford Holdings Ltd.In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $317.4 million, which translates to an annualized 13.1% operating return on average common equity and $0.77 per share.Book value per share grew to $24.64 at June 30, a 6.6% increase from last quarter and a 19.2% increase from one year-ago. This result reflects the effect of strong contributions from both our underwriting operations in our investment portfolio.Starting with underwriting results. Losses from 2019 catastrophic events in the second quarter net of reinsurance recoverables and reinstatement premiums stood at $7.2 million or 0.5 combined ratio points. These losses flow through both our insurance and reinsurance segments and were primarily due to convective storm activity in the U.S.As for prior period net loss reserve development, we recognized approximately $35.5 million of favorable development in the second quarter, net of related adjustments or 2.7 combined ratio points compared to 5.1 combined ratio points in the second quarter of 2018. All three of our segments experienced favorable development at $1.5 million, $11.3 million and $22.8 million for the insurance, reinsurance and mortgage segments, respectively.The insurance segment's accident quarter combined ratio excluding cabs was 99.4%, 90 basis points higher than for the same period one year-ago. The year-over-year comparison for the insurance segment is affected by two notable items. First, we experienced a relatively higher level of current accident year attritional loss activity this quarter across a few lines of business in the U.K;…

Thank you. [Operator Instructions] And our first question is Josh Shanker from Deutsche Bank. Your line is open.

Yes. Thank you very much. Marc, you said that in your prepared remarks that you thought because you weren't writing so much business during the slumping years of pricing that you were better positioned than others. Brokers and customers like to know that there is a consistent market regardless of pricing available to them and companies that come in and out in a mercenary sort of way tend not to get the business. How can Arch come in and be competitive in these markets compared with the companies that have been willing to write policies at less margin?

Well, as in – hi, Josh. As in every market, I think that when there's a – sort of a shift in capacity some incumbents who have been providing continuity of coverage actually take a pause and they look around and say, well, maybe we don't want to do that risk or do that risk at very different terms and conditions. And we did not move away from all the markets. Actually, we're still very much present.I think that our growth or would I say, we weren't as involved in the market for the last three or four years. I think you have to look at our trend rate of growth, which was less than what you would have expected the market to grow. So we tend to be below the long-term average. I think right now you see us be above the long-term average. And brokers, I like everything else, when they need capacity, they have to look for capacity for good quality outfits.And we actually are growing in areas where we already are present. There's some risk that we did not see before, did not have a chance to quote or participate on or frankly, we found the price to be inadequate for our liking, and now they're coming back to us and say, well, what about that risk, Mr. Arch? You didn't write it before and that's what happens.So the relationship is not solely client insured by insurer, it has to do – as you know, we're a broker market company, so the relationship is through the broker channels across multiple lines of business. A company that writes over $3 billion a year premium is not a maverick or – I'm not sure what word you use, but we're not a mercenary company.

I didn't mean to use that word in a pejorative way.

You did. But you did.

And in terms of – I know that – so Nicolas has come in to run the insurance business. And I guess there's a non-time specific goal of getting combined ratio down to a 95%. As I look at the people you had running the insurance business over the last 20 years or not quite 20 years. You had some incremental talent running that business. And a 95% combined ratio has been a rare moment of success for that segment. What can Nicolas bring to the market that's going to help you get to those goals?

So the first thing that Nicolas is bringing to the insurance group is this little bit more proaction in terms of when the market transitions or shifts. And that's something that you could feel and experience when you talk to our underwriting team. That's number one. Number two is, gross have different tools and than we had available to ourselves, say 10 years. Predictive analytics isn't – comes to mind. This is really something that is relatively new when we see the benefits of it on a daily basis.And Arch are embarked as you know Josh on the across-the-board project to get everybody to predictive analytics. And that speaks to the segmentation and underwriting selection that we've talked about. In addition, you see this through some of the numbers. On the IT we do have healthy amount of investment. We took a guy from our MI group, which was superb and best-of-breed in terms of IT development, and we sort of brought that there as well. So it's a combination of culture and really giving more tools and having access to more tools. So I'm not sure that it's really people specific.

And do you have a – I know you didn't give a time, but when you say but when you say we're hoping to get to a 95%, is that a 3-year plan? Or is that – is there no time behind this? Is there any way of like sort of getting a little more specific.

Like I said on earlier calls, I'd like. This to be yesterday, but I think we have to go through it in steps. I think that, Josh, I'm very encouraged by the development and the improvements that we've made in insurance. And certainly, the tailwind we have in the market is going a long way to get there quicker.

Okay. Thank you very much.

Thank you.

Our next question comes for Elyse Greenspan from Wells Fargo. Please your line is open.

Hi, good morning. My first question I guess tying in to Josh's last question on the 95%. You guys have always been a bit more tempered on where you see loss trend within the insurance market. Obviously, you gave us – in your prepared remarks, Marc, you said, rates up about 3.5%? Can you give us a sense of where you see loss trend today and kind of how that's changed over kind of how that's changed over kind of the past last three to six months, if it has?

It hasn't changed a whole lot. We actually are going through a very deep dive in loss trend. I do think that we still have uncertainty around this. We have very recent years, a different kind of economy, last three or four years. It's going to take us – take a while for us to finally determine what the trend is. I would just only tell you that it's not an exact science. So we try to look at discernible pattern. I think you've heard on other calls that there is a recognition that there is something afoot on the severity side of things, more specifically.And the frequency remains to be seen, if that is going to compound for the pre-opinion. But for now the severity is definitely picking up. So that's what has taken us –we still are very, very careful. So when I talk about the 3.5% lease, it's made up of a range, right, from minus one in certain lines of business to plus 12%, 13%.So those who are clearing plus 10%, plus 15% obviously are clearing anything above what could be in terms of range of expectations on the loss trend, right? If you think the loss trend is an expectation between 2% to 4%, even at the higher end, if you clear 10% rate increase and if it's a second year of 10% increase, it gives you that much more comfort. That's how we think about it.

Okay. And then could you also – in terms of pricing, could you give us a sense of what you're seeing within the E&S market? Are more risks going to the E&S market? How's the price there compared to the standard market? And what does your trajectory look like on the E&S side of things?

So, yes, on E&S side I think it's sort of – if you look in terms of steps, a lot of things were written in Lloyd's and other admitted market. A lot of business is thrown back into the U.S. E&S market, which we're a participant of as you know. And so it's coming to us. It's coming to other E&S carriers around the country. We're not solely benefiting from this. But clearly, the rate coming in were as expiring, they were lower than what we would've liked to have, otherwise we would've written those deals.And it's mostly property, I would say at this point in time, because of the – certainly not helped by the recent cat losses. So if you look at it from the sum total position, clearly E&S is getting traction, it's coming back to us. We're looking at it and we're able – as I said in my remarks, some of them are getting substantial rate increases and they need to, but they need to get those rate increases to get to the level of returns that we are seeking.So – and we think that this is – specifically in the property side, our team is seeing some legs to it. They're really seeing an increased amount of – in the number of submissions. And we see some legs through it for the next couple of quarters, which is encouraging, which is the first time I could really say that to you.

Okay, great. And then on – there were some potential regulation out last week in terms of the potential for the Patch rule to go away. I was just wondering, I know that, that would be kind of a 2021 event, but could you just comment on Arch's exposure on the MI side if there was a change? And just give us a little bit of an understanding on how that could impact your mortgage insurance business.

Well, it could definitely impact not only ours but the overall MI segment, right about a 30% share of the GSE Patch is a big deal. I think we're communicating with them. We're talking to the GSEs and CFPB and trying to give them our comments and our view on this.At a high level, it could go multiple ways, but the best ways for us would be and this is something what we would advocate is that that business could also find its way onto the private market, right. I mean there's clearly a path for this to be more on a private placement as well.Going the way of the FHA, I mean it's certainly something that they can decide to do, but that would be sort of assured that they have to do politically. I think at this point in time at least, it's too early. We definitely are involved in this. The encouraging words from the CFPB were that trying to leveling the playing field across all participants, which means the GSEs and the private capital markets, this is how we want to and wish to interpret this.So we'll be in touch with them and we are hopeful that there will be a transition or there will be some very thoughtful and deliberate way to resolve that. So we're not overly excited at this point in time, but we certainly are looking it intently.

Okay. Thank you. I appreciate all the color.

Great. Thanks, Elyse.

Thank you. Our next question is from Daniel Baldini from Oberon. Your line is open.

Hi. Good morning. Thanks for taking my call. It seems like it's increasingly likely that there will be a hard Brexit at the end of October. And I was wondering if you could talk about the effects on your business. And specifically, your ability to do business from London, where you mentioned earlier you've increased activity, the ease of moving your London-based people around the continent to do business. And what exposure do you have to a further weakening in the domestic economy there?

Okay. So let me take the Brexit question. We already – as is everybody else in the industry, we have repositioned our European operation into Dublin. So this is where we are currently doing non-UK business as of the end of March, I believe is the timeframe. And we also have through Lloyd's, our Brussels – and Brussels is the establishment for Lloyd's within the EU. So we're also a participant in that marketplace.And we carry on with the UK business. And actually we are – to answer your last question, we're very keen on developing more of the retail, and we did the acquisition last year – end of last year of the Ardonagh Retail Network so that's actually going very, very well. So it creates some barriers to entry for possibly other participants, but I think everybody has been pretty good, including ourselves in establish – setting ourselves up for being able to write the business whatever happens, whether it's hard Brexit or negotiated Brexit.So we are already well ahead of whatever could happen, so little bit more expensive because you tend to have a bit less, right, concentration of back-office and then underwriting support, but by and large it's not a – hopefully that will presumably find its way through pricing anyway. And so we're very relaxed with Brexit.

Okay. Well, thanks very much.

Thank you.

Thank you. And our next question comes from Geoffrey Dunn from Dowling & Partners. Your line is open.

Thanks. Good morning.

Good morning.

Just a couple of number questions first. Can you disclose the aggregate ILN cost running through your premium line this quarter?

It’s about $18 million.

$18 million, okay. And with respect to the 19-3, what was it about the 2016 book that you didn't do it back then, you went back and did it now. Obviously, it was the one piece of the back book not covered, but I guess what was behind just the delay in covering it?

Well, I mean couple of things. One is, as you know we've been trying to get protection on the whole book. So yes, no question that 2016 was the only year that had not – did not had coverage on it. And the timing of it is really – I'd say a big reason is the fact that it's a seasoned book. I mean if you – we saw it last year when we placed the 2018-2 issuance, where that was covering the 2013 to 15 years.Once the book is seasoned a little bit, I mean investors have a lot more visibility in the performance and the spreads just are that much tighter. So we saw the exact same kind of behavior for this recent issuance and just wanted to wait until the book was seasoned enough until we went to the market with it.

Okay. And then with respect to the new notice growth, I think we're seeing all the legacy players go through a transition now, where the 2009 and after seasoning is offsetting the improvement on the 2008 and prior. Can you provide a little bit more color on the two different books there in terms of the impact on the 9% growth this quarter? What are your 2009 and afters growing their notices at versus the decline in the 2008 and prior?

I'm going to look at these numbers now. I don't have them handy. But what I could tell you is 6% of our book is prior to 2009. 94% is post 2008. So most of our growth will come from those years. And it's pretty much coming from the 2015, 2017, Geoff. So it's not really signaled different than anybody else around. I think these years have some seasoning and sort of finding a two, three years' mark right where they tend to get to default, so…

So all I'll add is this was the first quarter really where we saw more than half of the delinquencies are from 2009 and subsequent. So up until recently it was obviously trending up, but now it's really above 50%.

One last thing I'd add, Geoff, that this is all expected. There is nothing really to read more into it than just a natural phenomenon of growing the book of business, the insurance in force, and over time, the seasoning. Even the most recent year, we all tend to get some NODs. But as we remind ourselves, as you know, Geoff, these NODs, the ultimate claim rate on those is much smaller than anything we had seen for pre 2008, right. We're still below 10% ultimate claim rate.

Okay. Helpful. Thank you.

Thanks Geoff.

Thank you. And our next question comes from Sean Reitenbach from KBW. Your line is open.

Hello. I just heard some adverse development on order accident years related to binding [volatility] book. What are you seeing in that book of business now?

Well, I think it's something that we've identified, no question. We had some issues within the performance of that book. We've made some corrections along the way. We've shrunk to our volume, we've reunderwritten the book to some extent. Right now we think the reserve development is contained so we don't expect a whole lot of – I think we're in a good spot and don't think there will be more to come in a material way. But it's certainly a book that we know has underperformed and we've corrected it to some extent and we're keeping an eye on it.

Okay. That's helpful. And then also we've see some property and casualty competitors lose share in third-party capital assets under management and some are gaining share. What's happening at Arch?

We're gaining share.

Yes, I think there's a – we've seen – I think the quality of the operator we'd like to think has maybe a bit more – people put more value on that. So we have a good track record in underwriting on the property side. And I think there's more capital that's looking to find a home with a solid underwriting team and that's what we think we've demonstrated over time, and I'd like to think we can keep doing it.

Okay. Thank you very much. That’s all I have.

Thanks, Sean.

Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Mr. Marc Grandisson for any closing remarks.

Thank you, everyone. We'll see you next quarter.

Well, ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.