Hey, good afternoon, everybody. Thank you for joining us for this session this morning with Arch Capital's management team. I'm Mike Phillips, Morgan Stanley's Property and Casualty Insurance Analyst. Before we get started, let me get through the obligatory housekeeping items. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please do reach out to your Morgan Stanley sales representatives. Thanks very much for that. Again, good afternoon. We have Marc Grandisson, CEO of Arch Capital, and David Gansberg, President and CEO of the Global Mortgage Division here with us on the line for the next 30 minutes or so. Gentlemen, thanks so much for your time. Appreciate it. Also, to remind you guys in the field, if you're out there, if you want to submit questions on the field, we can take those, and I can read those off. Again, Marc and David, thank you very much for your time. We have about 30, 35 minutes, so it's going to go fly by, I'm sure. Thanks for your time. We'll try to make it interesting for you, Mike. We'll try to make it interesting. All right. I think you will. All right. Let's start off high-level stuff. You've talked about the three-legged stool. Maybe kind of zoom in on that a little bit and anything that's developed recently that would make you lean in one direction versus the other on the three legs that we know about so well. Yeah. No, I think more of the same. I think if anyone has looked at our results and you'll write things in our focus in terms of where we're growing for the last 12 months or five quarters, it's pretty clear that our focus has been maintaining MI, even though we had, to say the least, a couple of quarters that were interesting. To say the least, last year turned out to be positive and which is a great place to be. Actually, probably helped maintain, and we'll hear David talk about this a bit more, helped maintain probably sustainable good growth and profit in the MI for a little bit longer than we would have otherwise have been exposed to had COVID-19 not happened. I didn't wish COVID to happen, but you have to look at kind of the bright side of things and not always with negative. I think on the P&C side, I think we had tremendous growth as you saw on the reinsurance side. I think it speaks to the testament of being able to react very quickly, very aggressively when market conditions do improve in a significant way and fashion. I think insurance was not that far behind. I think that we had growth about 20%-25% over the last 12 months growth. I think it speaks to a couple of things, right? It speaks to the cycle management that we're known to be very adept at doing. We have been defensive on the P&C side for a while, having David doing wonders on the MI, really helping us reward the capital and invest in our P&C units to really set ourselves up for the time and opportunity that we're seeing over the last five quarters and sort of able to grow on the P&C side, both insurance and reinsurance. I think we were presumably more underweight than most people would expect us to be on the P&C side and for the right reasons as we talk about the cycle. I think the company now is having on the three legs, really strong, actually, which is we haven't seen this in quite a while for our company. We're pretty excited about the opportunity, and we get to choose as opposed to having sort of clear number one and number two back in 2017, 2018. I think now we have to really dig in and look at the opportunities that are out there and say, "Great, where do we need to deploy more or less?" That's exciting, right? Having more than one or two options to go to is great for us. I think with the vision as you know of being diversified still, having a focus on specialty, that certainly has been a great story. I think the one thing I would add as well in terms of our growth and where we focus our efforts over the last couple of years is London, our U.K. business, has made a few acquisitions, and I think Lloyd's reaction to the market conditions of late has helped us tremendously growing that platform, achieving some scale, and really taking the opportunity that were out there in the Lloyd's markets. That's also been another great win in our sail from that perspective as well. A little bit of everything. A little bit of good looks, I would say, as well, and a couple of good opportunities in various segments. I think we're hitting on all cylinders and having a good time. As I said, tell everyone it's a great time to be at Arch right now. Arch is in a great place, and the market is awesome. It's really fun. We can underwrite and say yes way more than we ever did over the last five or six years. Thank you. That's good summary, good high level. I guess maybe if we zone in on David and MI for a second. As you said, Marc, you did pretty well there even last year during the pandemic, mortgage did. How can you summarize how strong the MI market is today? Oh, it's been a great run, right? Clearly, it's been better than we really ever could have expected. I think it's interesting now, Marc talks about how mortgage contributed some good results while the P&C was in the soft part of the cycle. Now we're for the first time in a long time, there's competition for capital again, right? We got to in the mortgage group sharpen up a little bit, right? It's no longer capital aplenty, right? We've got to make sure we can justify it and figure out where the best place is to put that capital. As far as mortgage opportunities in today's market, it's still a very positive place to be, right? Credit, while it took a step back during the pandemic, is right back on track. Conditions are very favorable for us. All macroeconomic conditions, demographic conditions are all favoring increased homeownership opportunities, strong credit. Even though the P&C business is revving up, mortgage is still strong, and we think it will still be a strong contributor to our earnings for a long period of time. Okay, good. Do you see anything looming, I guess, on that business from either interest rates or any kind of regulatory issues that concern you? Not really. I think it's all positive. The one thing that I wouldn't say worries me, but it's something that I'd like to keep an eye on, is the pace at which home prices are appreciating. Some home price appreciation is a good thing. Too much home price appreciation is not a good thing. It's what we saw going into the GFC was home prices increasing at unsustainable rates. While I'd like to say we're not there, I don't even like to say housing words that start with the letter B and have two other Bs in there because it's a scary word and it causes alarm when it's not necessary. We're certainly not there, but I'd say we need to watch, and we need to see what happens. If it continues at the same pace, then it'll be a different discussion. For now, we're keeping a watch on there. I think the prospect of increasing interest rates, which we all think is coming, and frankly, we've all been thinking that for, I don't even know how many years, should start to cool things down a little bit on the housing front. I think it will self-correct, but that's the one thing that we're keeping an eye on for now. Okay, thanks. Marc, where do you see the primary insurance commercial pricing today? It's been coming off a bit in the first quarter, and talk of maybe that continuing, but then we have fears of on the loss trend side, maybe rising. Can you talk about the pricing environment in primary commercial lines today versus maybe where you saw it at the beginning of the year? I think it's not coming off. I don't know why people are using that word, but I just want to make sure it's clear for everyone. I think that always we have to remind everyone that nothing is coming off. We just, instead of making 20%-25% rate increase, we're getting 14%-15%, and we're still getting a very healthy rate level. I would say it's a second round of rate increase. I think it's the second round. We're getting rate on rate. We're clearly, I believe, we've crossed the line where things are in a good direction, not 100% return where we would want to be back in 2020. If you add another 10%-12%, and we believe we should get to see another round of rate increase, even perhaps into 2022. It's not going to be to 15%-20%, but even if it gets 5% or 7% or 8%, it's still building upon that higher ground that we've reached as of last year, which is great news. That, Mike, to me, means that we also have sustainability in the profit and margin. Forgetting for one second the margin. Everything else being equal, which it never does, I know, but forgive me for one second. If you say, "All right, we're getting two or three rate increases, we're clearly 25%-30% in some instance or 40% above where we were when we head into that correction," if you will. It's going to take a little while before it goes back to the level where it's no longer acceptable. We're getting two or three more years out of that. A hard market is not like one year on, then next year it's bad. It's a wonderful little developing story. It's more like a sitcom that has multiple season than just a one-and-done movie. I think right now what we're seeing is still the market, in general, is thinking rates up on the insurance side. The reinsurance side may be a different story. I'll take it in one second. The rate is increasing on the insurance side. It did, as I mentioned on earlier calls, it did go first in the harder to place, the more difficult, the E&S market. We've seen it now creeping through the more broader marketplace. Not to the same extent. The primary line, the smaller risks are more bespoke, more commercial, do not need a 15% or 20% or 30% rate increase, but they're getting 5, 6, 7, 8, which they weren't getting last year. Even though you may see a headline number decreasing in terms of positive rate increase, it's still going up, and now it's spread out to more lines of business, which is a really good place to be. The one thing I will say, and this will be a question that I'm sure you'll ask, Mike, is on the property catastrophe space, I think it's gone up, but not to the same extent that we would have wanted to be going up. Collectively, we're not the only ones saying that to you, obviously. I think it's because of the capital that's there. There's still a lot of capital that's there that has different return expectations, that sort of dampens a little bit the impetus to get rate increases. Having said all this, the property catastrophe market is probably 13%, 14% return. It's not bad in and of itself, but I guess for us at Arch, as you know, it is a part of what we do, it's not a larger part of what we do. On the cat side, I think to us, we need to get significant more return than that to get our appetite, a lot more interest in the space. Specifically, as David mentioned, when we have opportunities that are more stable and more predictable, such as the MI, where the returns are as well, as good, if not better than those kinds of returns. Overall, I think the reinsurance is a little bit lagging in terms of price. I think that their insurance market, and you see it in our insurance pricing and improvement in combined ratio, I think that our insurance is ground zero for benefiting from the margin. Our reinsurance portfolio is also improving, but it's improving in the areas that are more specialty driven, a bit like our insurance portfolio, a bit more bespoke, and we're also seeing really nice increases there. Very excited. Very exciting times. You've mentioned a couple of times the specialty in E&S. Tell us how you define that and the makeup of that in your book. It's sort of a loose term that some people throw around. Yeah. It's different for different companies. How do you guys define that there at Arch? Because that's a big piece of the rate environment. To us, specialty, beyond the excess and surplus lines, which is typically the policy that Doesn't find a home into the regular admitted marketplace because it's too difficult, because it sort of doesn't fit a nice little box in terms of the main admitted carriers. You need to go outside, and then when you do this, you have more freedom of rates and conditions, right? Because that risk needs a home. The excess and surplus line is first, kind of E&S specialty that we would think about. The specialty is also D&O, surety, like things that you need specific expertise. We like to think of those lines of business where you need some thinking. It cannot be done by a machine. There's a lot of variability around that kind of risk that you do, and it doesn't lend itself to a very programmatic sort of pricing module. There's a lot that meets the eye. It's a talent-intensive line of business as opposed to process-intensive or system-intensive. Okay, good. Thanks. The last couple of quarters we've seen, and you talked about it's other companies have too, is some positive developments because of frequency and I guess I'm curious to see what you think about how that's maybe changing as things open back up again. Where I sit today, we're literally full back. Streets are crowded, bars are crowded, everything else is back to normal. What are you seeing in your book in terms of frequency? Is that going away? If so, how does that factor into all your comments on the rate adequacy? Yeah. Frequency-wise, we've seen a decrease like everyone else has, as a result of COVID-19. There's less activity, business activity, less friction, less losses. That we definitely have seen this in our book of business. It's starting to come back again, but it's nowhere near. We're not seeing a pickup. We're expecting to get back to pre-COVID probably between now and year-end in terms of frequency. There might be a little bit of a blur, a little bit of an increase in the short term. We would expect things are pent up, maybe claims were not reported or people did not know there was a problem with something that they have, that they could have otherwise claimed against six months ago now, things get back to surface. We're going to see a little bit pickup in frequency. Again, I think that from our perspective, we haven't really taken a whole lot of credit for it in our results for the last, for 2020 and 2021, because we think that this is just temporary. We didn't want to take full credit for that, and so we're sort of maintaining, we believe, a prudent, more longer-term approach to the reserving level. If things go back to some normalcy, we'll have some cushion there we believe in our reserving. We should have a cushion to make sure we're not surprised. In terms of social inflation and inflation in general, it is clear that we're seeing labor costs going up and material costs going up, specifically on the first party. This is definitely happening. We have a surge. I'm building a new house right now, so I can attest to it firsthand that it's costing us much more beyond the regular drip on the budget. I think that things are costing more. It remains to be seen if it's temporary. I think things will get back to some normalcy at some point, but we may be in for a little bit of turbulence for the next two or three quarters. I think that our game plan at Arch is to make sure we have the proper reserve and we're not taking all the credit right away, that we're protecting ourselves from that perspective. In terms of what it means for the future, well, we'll have to see how it develops in terms of whether it's long-lasting. If we believe it is long-lasting, there's nothing yet to tell us it's going to be sustainable for the next four or five years. If it does happen, the beauty of being in insurance is you price it on a yearly basis, and you can change your assumptions and decide what you do and allocate capital differently based on what your beliefs are in terms of returns. We'll have to adjust accordingly. We're not the only ones in there, right? The beauty of this is, this will be a market-wide phenomenon. The market has been pretty good at responding to those things of late. We're encouraged by the discipline and the level of scrutiny management and you as investors are putting on our industry as to make sure that our margins are sustainable and stable. I think it's a good sign. What about inflation on the non-property, on the casualty side inflation? There's been a lot of talk about that recently, I guess, is it more talk right now and fears of what may come when ports and everything else open back up again, and you mentioned social inflation? Are you seeing anything today that actually is kind of concrete proof that there is more casualty trend inflation than maybe there really was last year? Yeah. I think we've talked about the recent trends we've seen on the claims from a liability perspective, policy limit demands, right? Lawyers are a lot more aggressive in asking for full limit, hoping that you'll trip up so they can open the limits and make it unlimited. That's not a new phenomenon, Mike. That's been going on for three or four years. The litigation funding is not going away. One would argue that they were probably idle with some of the money. Things were not moving as fast, we could see some resurgence of sort in that segment. That does increase. This is not really a recent phenomenon, Mike. This is not new. We've seen this for quite a while. In terms of what's happening right now, I think there is obviously less cases being tried. There's a lot of mediation, still a lot of indemnity and discussion going on. By and large, the trial and everything has been slowed down. Again, most of what we settle on does not have to go to trial, right? We do a lot of stuff in mediation. We're seeing a little bit of increase in there, but not the hyperinflation that people are talking about. We've also priced historically, that might explain why we've had these results close to the 100 combined from 2017-2019, is we've priced with everything 3%-4% trend from the ground up, and accordingly modifying it as you go on the excess layers as we saw fit. We haven't really seen or determined or changed our view of that, at least at that point in time. We've taken more of a longer-term perspective, if you will. David, you mentioned in one of your earlier comments, the B word with the housing market. Can you talk about how inflation may affect that mortgage business? Is that what you're referring to? Any other aspects of inflation we should think about when we look at the MI business? Sure. Inflation really has an interesting impact on MI, and I'll separate it into two components. The first is, what is the impact on your in-force portfolio? I think it's actually positive, which is interesting and the opposite of the impact that we see on the P&C business. Inflation on an existing portfolio, especially when you have delinquent loans, is actually a good thing. If you've got a home that's delinquent and you see a little bit of inflation, the values start going up, it's a great way for that borrower to be able to get out of that home without generating a loss for the originator. To the extent that you're in a period of time where you've got a large block of delinquent loans, a little bit of inflation is a good thing. It helps you solve the problem of delinquencies because it allows borrowers the option to sell their home. That's actually good. Some of the studies we've done, that actually counterbalances to some extent the negative impact on the P&C loss reserves. Then the second way to think about inflation is on the new business. Say typically our ability to write new business becomes a little more challenging because there's generally less new business. With inflation comes higher interest rates. Higher interest rates means less refinance incentive for borrowers. Fewer people are refinancing. That means less opportunity for new business, and it also means, for new purchases, higher costs. Affordability generally across the industry is still very positive. When you start to see inflation, you see interest rates going up, and you also see prices going up. That affects borrowers in terms of their monthly payment. Availability and affordability start to get compromised a little bit. As we see inflation, as we see interest rates, I think we would expect the pace of new mortgage originations to slow down a bit. Most immediately, you're going to see that with refinances, and then you may see a little bit with purchases as well. Makes sense. I guess stick with you for a second, David. Was there anything during the, any kind of structural changes that were a result of the GFC that maybe helped the MI business during the COVID shutdowns last year? I think absolutely. A number of structural changes, the first of which was just the introduction of underwriting discipline. You look at the quality of portfolios that were written in 2005, 2006, 2007, and you look at the GFC. A big part of the GFC was not about the impact of the economy. It was about how poorly underwritten the business was. We learned underwriting discipline in the mortgage insurance business, so that now if you look at our portfolio, it's pristine. The credit there is not nearly what it was in 2006, the last time we saw financial stress. I think that's probably the most important condition. We've actually gone back and looked, and we looked at business written pre-crisis. It was as much as 70% would not even be eligible today to get mortgage insurance. You look at any of that no-doc, alt-doc, low-doc business, some of the low FICO scores, some of the debt-to-income ratios. As much as 70% is not even eligible today. To me, that's the biggest lesson, and it's probably the simplest, too. If you're in the insurance business, you got to be careful about what you underwrite. You can't underwrite unlimited risk stuff with the hope that home prices keep increasing, so it might bail you out of your problem if you have one. That's the thing. Then structurally, risk-based pricing is another big change. That's allowed the mortgage insurance industry to better match risk in the loans that they underwrite with the price that they charge. Now that went from an Arch-only innovation to an industry-wide phenomenon. That certainly improved the industry, and it's also made people more aware, I think, of what kind of return they need to get. I think we've, in essence, created a bit of a floor as to how low rates will go over time because with better allocation of capital to the mortgage insurance business and with the PMIERs requirements overlaying there. I think you've added a floor, and I think you've made a less volatile business over time. Then the extensive use of mortgage insurance-linked notes is another thing. That's going to reduce the volatility in the business. I think a lot of the wild fluctuations in profitability that we saw during the crisis are not likely to happen today because it's a very structurally different business, both from the business that's written as well as the way that the companies are retaining risk. It went from a very much buy and hold to an accumulate and distribute to other people. It's created a much better risk profile as well on a net basis as well as a growth basis. Yeah, lots of good stuff. Lessons learned, but some really positive changes there. Thanks for that recap. Maybe switching gears for a second. You've done some investments in taking stakes in other insurance businesses, the Watford Re, Coface, things like that. I guess can you talk about how you decide to go that route versus maybe kind of build things, what they do, but build those from scratch on your own instead of kind of taking the investments? Yeah, I think Coface is an easy one because there's no way you can really build a platform that kind of natural. We've looked at it I think 10 years ago. We've been reinsuring that business for quite a while, understand it very well, and know there's a lot of value in the primary side, right? If you control the customer, it's a product that, frankly, is more European-based, right? Mike asks some of our investors in the U.S. are not as familiar with it as they could be, and we'll make sure we get you guys more familiar with this over time. I think this is a bit of a moat-like kind of business. The top three providers, Coface was available at a good price. We felt at a price that would give us a 10, 11, 12 hour we were looking for. It's a transformation story. It's got a lot of upside it could do. We started with 29 and a half. We'll see where it ends up in the end. If you are us, you say, listen, the more diverse in specialty lines of business or not as specialty lines, very bespoke, very unique. To the extent that you can get into that space and overlay some cycle management over time. You have a lot more, the proverbial ponds to fish from. You sort of diversify your stream of income and where you can feed yourself. Clearly, a very interesting proposition for us. Building it would have cost way more than anybody than anything we could have imagined. We like the management team. David is also involved with those folks as well, he's getting to know them. Over time, we'll see how it develops. That's for Coface. Clearly, this is a buy as opposed to a build. Watford was also a good opportunity. I think that the model, we don't do everything perfectly. There's a great recognition that being a publicly traded company with that kind of investment by the profile, so it didn't work and it wasn't getting to do justice and was sort of creating more questions and concerns for us than it needed to do. We just take it privately and partner up with two solid partner of ours to really grow that platform. Still very much value in that model. From our perspective at Arch, as you know, Mike, one of our key things is to also increase our footprint in terms of third-party capital. To the extent we can really get paid for what we do well, and we're pretty good at capital management, we want to think that we're pretty good at underwriting as well, and probably first and foremost in underwriting. To the extent that we can get paid for underwriting, all the better. I know David and his team are also doing very similar things in their own areas, trying to leverage their underwriting knowledge and underwrite on behalf of third parties. That's also something that we would want to develop more of. Watford is a really nice vehicle for us and for those co-shareholders with us because they know us, and they know we'll do cycle management and do what we do well. Without possibly down the road, most likely with less investment risk, the market is allowing us to do those kinds of underwriting. Other things that David acquired, David pushed for an acquisition in Australia, which you heard about. Again, a relationship that we know, people that we know for at least 10 years. We know them very well. Sole provider of some of their products. All the acquisitions, I will tell you, Mike, are first, they're not big, so they're manageable, and they're all with people we know very well and with whom we have good relationships, we know well, and something very special and specialized about what they do. Once you add up to them, there's a reason for all of them, I think they're part of your arsenal. Frankly, most of what we did is nothing really that new to us, which is very important. It's not like we're going into the shoemaking business. We're still very much an insurance and in lines of business that we know very well. That would be quite diversification. It would be. Let's see what we have time here. Maybe one more on, because you mentioned capital management. Thoughts today on that and all that comes with that, purchases and everything else that come with that umbrella of capital management, given where we're traded today, still pretty far below pre-pandemic levels, which is a bit frustrating. How you think about that as you look at your stock valuations today? Well, I think David mentioned the fact that we're competing internally for all the units of trying to get a place in the sun and get a bigger piece of the pie, and I think the pie is growing. We also have more opportunities to deploy the capital. Also, we're always evaluating, and again, for the first time in a little while, to your point, and we know what's happening ahead of us, and we know that we have a three-year payback. As you guys know, we sort of have this in our back of the minds through the grid that we utilize, and the stock is at that level. I guess right now we're always in the process evaluating, does David want more capital? Does Maamoun, does Nicolas? Does the investment group? Mike, we can also try to look at our investment group to see whether we could deploy a bit more of our capital. The returns are depressed, as we all know, but can we do more with that? Then at the end, when we say, well, maybe buying shares would also be the next thing to do. Also, I think what we have currently, Mike, which is also nice from a capital management perspective, is it's an and, it's not an or, so we could do all of those things in a way. That's actually a really nice place for us to be. I think we have sort of full optionality from that perspective. We're, as you know, very prudent, but very proactive in managing capital, including share repurchases, as we did in the first quarter. Okay. Well, good. Well, thank you. We have, I think, time for it, but thank you both very much for your time, Marc and David. Looking forward to the rest of the year and how it plays out. We'll be talking soon. Thanks so much, guys, for your time. Thanks, Mike. Thank you. Thank you, Mike. Yep, you bet.