Good afternoon to everybody. This is Mark Dwelle with RBC Capital Markets. We're at the Arch Capital Group session, the first session of the afternoon. Hopefully, everybody had a good and productive morning. Welcome to the RBC Financials Conference. I'm joined here by François Morin, Chief Financial Officer and Treasurer of Arch Capital Group, and Maamoun Rajeh, who's the Chairman and CEO of Arch Worldwide Reinsurance Group. Just to set a little bit of the backdrop, I'll remind everybody that you can enter questions for Arch. There's a question box to the left of the display screen. Key your questions in there. They'll pop up here and we'll pass those along as those start rolling in. I'll lead off with a couple of first questions and then we'll take it to the floor and we'll keep going until we either run out of time or run out of questions. With that, I don't know if either of you guys want to make any kind of opening comments just in general or I can head straight into questions. Thanks for having us, Mark. I think we met a lot of the people here on the line this afternoon, and we're excited about the opportunity to tell our story. Certainly, if there's questions, please send them our way and we'll be happy to try and answer them as best we can. Okay. Well, I'll start it off. Obviously, pricing has been the big story for the last year or so. Over the last several quarters, I think every quarter Marc Grandisson has found some fresh analogy to try to help us illustrate exactly how good it is and how good it could become and so forth. Maybe I'll start with you, Maamoun, by just You don't have to use an analogy. I don't want to put you on the spot. Maybe just describe what you're seeing in terms of positive trends in pricing, both in the insurance and the reinsurance market. If we're at the map at the mall, where are we now? Well, thanks, Mark. I promise I won't throw another one. We were joking in an earlier call that I think we've done basketball, we've done hockey, God helps us, what else he's going to throw out. No, good to be here. Look, we've had discussions around this all morning, but overall, the trends that we're seeing around pricing, I think we just need to remind ourselves it's not new, right? We started to see these in late 2019 going into the 2020 year. 2020 just really exacerbated things with COVID. The underpinning for all this is simply triple-digit combined ratio. At some point, if you're losing money deploying capital in this business or you're not making an adequate return on the capital that's being deployed, you start to wonder and go through reasons. The press and the industry panels and all of us in our reports have talked about all the myriad issues that have compounded together to make it a difficult landscape. The community, those of us in the reinsurance community, I'll speak specifically on reinsurance, but really in the P&C world, just at some point, enough's enough. Pricing really needed to reflect all the confluence of issues we're facing, starting with lower interest rates and going all the way to the higher frequency and severity of CAT events that have befell us in the last handful of years. From a reinsurance perspective, we always feel best when that pricing momentum actually begins with our clients. It actually begins on the primary side of the house. Healthier clients are good for reinsurers. This business of ours is really interesting, right? For the same units of exposure, if you get paid more premium, you need to allocate more capital to it. That increase in capital needs means more business for us and more demand for our product as reinsurers. I think you make a good point. A lot of times guys like me sit in a chair and will say, "Oh, well, your accident, your combined ratio has improved by four points. That's probably as good as it gets." That's really not the point. The gap combined ratio, as you said, is 100 and something. Whether it's because of COVID, whether it's because of catastrophes, whether it's because of any other thing, that's the number that comes across the plate. That's the number that goes into book value growth and makes ROEs and all of that, and what pays the bills at the end of the day. I think it does point out that while there's some good things happening below the surface, it's not up to the fully on the surface yet. There's still a lot of runway to work with. We've learned over the years that this business requires a bit of a margin, right? You need to think of a margin of safety above and beyond how you, on print, price your product. You think of this Texas event, this Winter Storm Uri that took place is yet another example of a tail event, right? Tail event and the power goes out, so you get a massive size storm. That in itself is a peril that we can wrap our head around. Then you say to yourself, well, beyond that, the utility company went shut down and all of a sudden we have four days of subzero temperatures, speaking of centigrade. Those are the sorts of things, you go back, hearken back to Katrina, a wind event that we can all wrap our head around, then there's the levees break and the floods that come after it. Such is our business, and it just really speaks to view of risk and this discipline that this industry needs to maintain, is to have a little bit of a buffer in terms of pricing. We're getting there. I don't know that, Mark, we're not there, right? We feel at Arch that this momentum is positive and we think it still has legs, but we're not at a place where this market is a hard market or a dislocated market in the sense that we saw back two decades ago when we started in 2001. Okay. Yeah, I think the Munich Re guy used the fact the industry hasn't priced in any oops factor yet. I like that I don't know that that's a technical term, but we all knew exactly what he meant when he said it. Nicely well said. Yep. As you think about the market, obviously every line and geography kind of moves a little bit different. Are there lines that you feel like are a little bit further along or geographies that are maybe further along or ones that still have relatively more runway? Yeah. I think the old analogy you used to use was green light, yellow light, and red light. Is everything a green light or are there any yellows yet? Yeah, look good. We historically transact in about 15 or so products, if I could think of them that way, right? We say to ourselves, "If we have three horses running, four horses running, we're in a good place. We can actually allocate capital disproportionately some lines and make some nice returns." Are we in an all-green place today? No. I would say we're in a better place than we've been in a long, long time, and it is pretty comprehensive. We're seeing lines of business clear our hurdles in ways that we haven't seen in the past. We talked about this early in another call. We're not the sort of binary shop that we fill our boots once things clear. We are really play the curve and we always want more, to the extent that we find things that are clearing well above our hurdle, we're going to allocate capital more disproportionate into that line and we're going to continue to monitor across all of our sub-sectors where we flex and where we pull back. It's a relative game, right? It's an absolute basis that gets us in, but it all becomes relative within each class to its history and its potential, and then across each class to its relative performance. We have got a constant sort of monitoring and metrics around those in how we deploy our capital. One of the lines that for a long time had been dialed way back had been property and property catastrophe in general. I know your PMLs at one point got down to where they almost weren't worth mentioning on the call because it really just, even in a worst-case scenario, it probably really wouldn't have bothered anybody's model all that much. It looked like you've begun to dial back up a little bit. Can you talk a little bit about that segment of the market and maybe what we're seeing there? Yeah, sure. Absolutely, we have leaned into that market, we have been on a steady incline in terms of exposure deployed and increasing PML as prices have moved up, right? What we like most about post-loss markets is that not only do you get an uplift in pricing, but you get an uplift in the quality of the underwriting for the customers that we reinsure. Simple things as monitoring deductibles, simple things as buying back against exposures that inure to the treaty. Very small, minor sort of blocking and tackling that come into play, and we're seeing a lot more of that. We like the segment of that market or the timing of that market to come into it. Historically, we've played in simple risk. We've played in personal lines, more homeowners-driven CAT products, CAT pools. Now we start to move more into commercial SME, in some instances even some of the more high-tech classes. Yes, we've moved our PML up, but we're still in a place where there's still a lot of potential uplift in pricing that can get us wholesale into the class. When you start small, as we have at Arch, we've been in a dry spell of sorts. We have been very disciplined in the last five years, particularly in property CAT. The ability to increase and increase in the areas that you want with price moves that are above average. We have that ability where we're clocking rate changes, the teams are putting up ERCs, effective rate changes, that are materially higher than the average reported in the market. When you're small and you get to grow, you're able to selectively grow into it. The next batch of growth, or if I look at our peers who are already pretty well established in property CAT, the incremental growth is just, again, reversion to the mean. You're going to pick up the average rate rise in the market, and you're not able to deploy it at an exponential increase from the past, which we can do. A lot there. Hopefully, I've given you color on kind of what we're thinking about. Yeah, it definitely does. As you think about what's happening, I always like to divide the rate improvement discussion into two parts. There's the absolute pure price, and then there's the benefit you get from whether it's contract structure or deductible or limits or hours clauses or whatever. Those are the things that don't necessarily show up on the top line, but they show up on the bottom line when something happens and you don't have to pay it, or you don't pay as much, whatever the case may be. How do you see the breakdown of price between those two broad buckets? Yeah. Look, in the second bucket that you mentioned, which we'd call terms and conditions, traditionally, it used to be that you'd have to, as a reinsurer, structure around the price and create a slightly bigger piece of the pie for yourself. Today, it's a lot easier because that creation is happening on the primary side of the house when they're getting property premium rises of 20%, 25% plus in E&S. They're also imposing terms and conditions that are more strict. That takes the pressure off of what we would measure in terms of structural improvements and quantify those. I don't have a precise split for you on this, but I can tell you that it's a bigger piece of the puzzle in terms of overt improvement in terms. The subjective improvements in terms are harder to quantify. Right. I'll say it's always a lag, right? Mark, you know this. It's always going to lag behind. The quality of the premium in this marketplace are higher quality than even we will quantify than, say, just a couple of years ago. Yet another reason, yet another conviction against on putting more premiums on the books. Thank you for that. I'll just remind everybody, if you have a question, please key it into the Q&A box. We'll be happy to get it in front of the group. Maybe switching gears a little bit, since François' been anxious to answer a question. Maybe we'll turn over to the mortgage insurance side of the house and give him a shot at that. Certainly, it's a business that 2020 had something for everybody in there, between significant reserve additions in response to delinquencies, regulatory effects, very vibrant and strong housing market, refinance activity. I think pretty much every line of the model pretty much was impacted. Where are we now? Just, again, to level set, where do we stand now? We've come through a difficult period. It seems like we're heading towards a hopefully calmer 2021. That's certainly the hope, Mark. You're right. I think we had second quarter in particular, there's a lot of uncertainty out there. The introduction of the forbearance programs added some complexity to how we think about the financial impact to Arch or to all the MIs for that matter, how those were going to play out. As the high level of delinquencies that were reported in the second quarter started to come down over the third and fourth quarters, they seem to be on the similar downward trend in the early months of 2021, we feel really good today. I want to say, you mentioned it, the strong house prices was certainly a major contributor. We feel very strongly that the more people have more home equity they have in their homes, the more equity, it makes a big difference. In terms of performance of the mortgages and how we think people will come out of delinquencies, et cetera, is a very strong indicator of the ultimate performance. Strong home prices, a lot of refinance activity, which I think was done, it really worked out fairly well for us in the sense that the product was repriced at a higher level given the uncertainty around COVID. We were able to have massive record high originations in the second and third and fourth quarters with the higher premium level, with very strong credit quality. Now we're entering a phase where potentially, and we're seeing it a little bit in the early months, early weeks of the year, is that with rising interest rates, will just make it for a stickier base of premium coming our way. I think it'll be increased persistency on the book. In terms of financial performance for Arch, and I think for the entire sector, will be positive. There's a lot of good things that give us a lot of comfort, a lot more reassurance compared to where we were in the first half of 2020 that we certainly think the worst is behind us at this point. Still a little bit of uncertainty around when the forbearance programs are going to end, et cetera. All in all, we're excited. I would think as you look at some of the data related to the originations, and you guys did a tremendous number of new volume, as you said, in the third and fourth quarters. That could really be true. We know banks were operating under a fairly strict lending standard, and if you were able to get a loan, you're probably a pretty good borrower. It could really be a vintage year over time as that cohort of business gets into the system. There's not going to be a lot of refinances out of a block of people who bought their homes for the first time in the second half of last year, at least for a while. You could really make a lot of ROE on that block of business looking out a few years. It seems like it could well be a gift that keeps on giving. Absolutely. Again, credit quality matters as much as ever. The standards haven't changed. You could've been a bit worried as we were doing everything. Everybody's working from home, and underwriters were making decisions without a lot more distributed process. We've dug hard and made a lot of analytics around, again, making sure that the book was as good at a quality as we saw. So far, we're extremely positive on the quality of the production that we saw in the latter half of 2020. You guys were able to access the ILN market, really even right in the teeth of the crisis, but it looks like you've accessed it again then more recently. Can you just talk about what you're seeing in that space? Obviously, it's intrinsic to the way you guys do your risk management and kind of set your capital levels and so forth for that business. Yeah, I think the first issuance after the post-crisis or post-pandemic was a bit more expensive, obviously, than we thought we wanted, that we would've preferred to pay. We felt it was important to work with the investors to get back to work, right? To open up the shop again and give them something that they were comfortable with at the time. We structured something that was a bit more remote in terms of exposure to loss. Paid a bit more premium for it, but it sent, we feel, a really good signal to the marketplace that, and to us as well, that everybody was back in business. Over time, over the second half of 2020, in total, we executed four transactions in 2020. The fourth one was actually a complement to the first one where we actually brought back down the attachment point. We were closer to the loss, but on a seasoned book. The investors were excited to be able to participate in that mezzanine layer of risk. Pricing came down a little bit, but we saw new investors come along. I think all in all, we're very happy where we are today, given the fact that less than a year or just about a year after the start of the pandemic, we're seeing pricing levels that are very close to what we saw before the pandemic. Now, you guys are definitely, well I will give you credit and say you more or less invented the market, but you've certainly been a market leader, whether you invented it or not. Congratulations on getting that done. No, thank you. It goes both ways. I think the more we access the market, the more the investors are comfortable with the product. It's important for us and for the investors to exchange on our views and regularly see what we like in the product, if there's any tweaks we need to make. I'd like to think we've been pretty constructive along the way to address their concerns. The way the structures amortize today is a bit different than they were pre-pandemic. I think it's an important part of what we do is to, like you said, create a market for the product, which serves us well, but also addresses the concerns of the investors. We truly feel it's something that is pretty essential to our business model, and we want to make sure it stays there for the long term. Thanks for that. Let's turn over to M&A. You guys had a, I'll say, a pretty active year between Coface, which I guess closed literally in the middle of the fourth quarter earnings call. I think that's the first time I've ever seen that. Wow. Likewise the Watford transaction, which I guess is still chugging down the tracks at this stage. Maybe you could talk about each of those, just the rationale, what they bring to the table, how that might all integrate together over time. Sure. I'll do Coface, and Maamoun will certainly, because he lives and breathes Watford every minute of the every single day, so he's got all the answers to that question. In terms of Coface, stepping back, we announced the transaction just about a year ago. It was a property that had had some issues in the past, and we knew that. A bit of a inefficient expense base and not necessarily the right strategy on how to stay relevant to their clients. While they were certainly one of the big three in the trade credit space, they were maybe somewhat of a distant third in terms of performance, at least. We knew that there's no reason why they couldn't improve and kind of return to the level of performance that the other two we think we saw were performing at. Their stock price kind of matched their level of performance and so we became intrigued and started thinking about, we know trade credit a lot because we do it- Sure certainly in a big way, and we've been doing it for a long time on the reinsurance side, so we know the space well, very well, and felt that if we were to make an investment into Coface, it would give us access to another source of income. In our model of being kind of cycle managers, we feel it's just another tool in the toolbox to be able to cycle in and out of. It provides more diversification. We don't have to put all our chips into one line of business. trade credit becomes a de facto new segment or new line of business, however you want to think about it. Sure if some lines mortgage is doing really well, maybe it doesn't do that well forever. It just gives us more stability, better predictable earnings, and that was certainly part of the value that we saw in the acquisition. The price was, we felt, a good entry point. It took a while to get regulatory approval, but here we are today. Again, we apologize for having to make the announcement during the call. It's just the reality of time zones and board meetings and Coface being a public company themselves. That was the one window we had to let everybody know that we had closed on the transaction. It's, again, very early days now that we're Sure a 29% owner. We'll learn more over the coming months. We'll get under the hood. We'll have the opportunity to hear more about truly what they're doing, what their strategy is, and how they're fixing some of their issues. We want to be along, we want to be there for the ride, and hopefully we can contribute along the way and maybe get some additional benefits, additional value out of the investment. Okay. Maamoun, how about on Watford? It sounds like you're the guy. Yeah. Look, I'll keep it very brief on Watford. Look, the rationale for us founding the company back in 2012 remains so much more intact today. Our leveraging of the underwriting platform at Arch remains a strategic sort of imperative for us. Having a vehicle with partners who we've worked with before, Warburg Pincus were founders of Arch. We were co-investors in founding of Elis. That's a little-known fact that people forget, but we were the incubators of Elis, and here we go, third time working together. Kelso are also dear friends of ours and partners in Premia. So we've partnered with an investor base that understands the company perhaps a little bit better than the prior set, and we're excited about bringing in more into the tent and continuing to realize value for all stakeholders from the moment we close, and hopefully we're close to that date. Excellent. We're getting close to the end here, and maybe I'll throw out one last question. One of the themes of our conference is really how has COVID changed things? How has it changed your business, both from how you do it, and then what might some of the longer lasting impacts be on your markets and lines of business? I'll throw that as a jump ball. You guys can fight over who gets to jump on that one first. Go for it, Maamoun. Go for it. François, he's got a foot on me, I think. Go for it. Look, operationally, it's presented all the challenges that all of our peers within the industry and others have faced. Boy, it's brought us together in ways that we never expected. We're already a highly collaborative shop. COVID just really reinforced that. If I project out to the future, I think the things that we really think a lot about is this culture of ours is pretty unique, and as we bring in new colleagues, it's just spending time with them and making sure that culture really infuses and gets assimilated. Our emphasis in 2021 is really to pay real close attention to that cadre of colleagues that are coming through. Fortunately, the place here in Bermuda is fantastic. We're open, we're having business lunches, and we're able to actually receive a fair number of our colleagues, and we're actively actually flying them in. Once they quarantine, they can be in the office and get right into it with us. That's a challenge. Longer term, look, this is a people business and sometimes deals take a while to incubate and gestate, so I also feel like hopefully soon we'll get out there and start to be again back in the fray, creating new opportunities. François, anything to add to that? No, from a personal level, I think we certainly obviously miss seeing the people more in person. I've also saved a lot of hours being on flights, and I think collectively, to some extent, it's better on the mental health side, and you're more accessible. You're always available because we're not on the road, we're not on planes. I think it's been, like Maamoun touched on it, the ability to stay connected, I think it's been a positive. I think it's been really good, and like everything in life, you make the most of it and adjust along the way, and I'm sure we'll have good lessons learned as a year into it. Certainly, I think the way forward will be a bit different than what it was a year or five years ago. We'll take the best of it and make the most of it. Well, as will we all. I think on that note, we'll bring this one to a close. Thank you both for making yourselves available here. I thought it was a good worthwhile discussion. If anybody has any questions or follow-up, let us know how we can help. Thanks all, and we'll sign off so you guys can get to your next meetings. Thanks. Thanks, Mark. Thank you, Mark. Have a good one.