Q3 2019 Earnings Call

Arch Capital Group 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.

If anyone should require assistance during the conference. Please press star one zero on your Touchtone telephone.

As a reminder, this conference call is being recorded.

Before the company gets starts with the started with his 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 FCC 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 to 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 FCC 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., France from Morgan, Sir you may begin.

Thank you Bristol and good morning to you.

Our diversified business model of specialty insurance reinsurance and mortgage lines of business produced good growth and acceptable risk adjusted returns for shareholders in the third quarter.

Operating earnings generated an annualized return on that on common equity of 10% for the third quarter as our book value per share grew 3.9% and more than 21% on a trailing 12 month basis.

Before I discuss market conditions in the broader PNC sector I would like to address a topic that is currently getting a lot of attention, namely.

The increase claims inflation or loss trend in this part of the cycle, we're not surprised to hear about adverse claims development that some in the PNC industry are experiencing.

We have discussed our view of loss trends on these calls over the past several years and I'd like to remind our shareholders that arch, we approach pricing our products and establishing our reserves with a bias towards conservative loss trend estimates.

As I have mentioned before this re teaches us that on average the PMC industry experiences claim inflation rates about 200 basis points above the CBTI. Although this can fluctuate over time.

It seems to us at a premium rate decline seen by the industry over the past several years should have led to higher card loss picks.

It is important to bear in mind that in many lines of business. It takes three to five years before an accurate level of trend can be confirmed.

We believe that this gap between the estimated an actual loss trend has contributed to the uncertainty in reserve development. This uncertainty helps fuel both disruption and dislocation in several areas of insurance, which we have been and our.

Capitalizing on.

Dislocation is evident in the rise in our submission activity. This year and it is also reflected by the fact that we are achieving higher rate levels on new business then on renewal business in several segments to give you some sense of the data our submission activity in the third quarter was up more than.

20% in CNS property, and 15% each of units casualty and professional lines specifically DNL.

However to date, we believe that these disruptions are more indicative already transitional market than a traditional hard market as we have not yet seen rate increases in hardening across the board risk selection is still paramount.

Across all lines in our insurance group renewal rate changes average a positive 3.5% for the quarter as net premium grew 22% in the third quarter above the same period in 2018.

About 30% of that growth came out of an acquisition. We completed earlier this year in the UK small commercial line space rate increases contributed a quarter of the overall segments growth, while new business opportunities generated the balance.

It is worth reminding you that we expect to close on our acquisition of the Bobby can group in the fourth quarter and we believe that the enhanced presence and scalability of our Lloyd's operation and will provide us with further opportunities.

Now turning to the reinsurance market.

Reinsurance pricing tends to follow that are the primary insurance industry, but with a few twists catastrophe and large attritional losses can disproportionately affect reinsurance result, creating localized opportunities in areas of the reinsurance business property fact, and marine are examples.

While improving markets.

Over the past several years.

We have significantly reduced our net exposure to property cat risk in response to the declining level of risk adjusted rates.

The occurrence of Japanese typhoons in both the third and fourth quarter of this year has impacted global reinsurance industry result, and should should support the ongoing need for additional rate improvement.

Turning to our mortgage insurance segment arch semi continues to perform well and market conditions continue to be characterized by strong credit quality and a healthy housing environment in terms of new production, our third quarter, New insurance written or Eni W grew 18% over the same period.

Year ago.

That production was driven by growth in the mortgage insurance market due to a broad inquiries in mortgage originations combined with an increase in a level of mortgage insurance purchased from private mortgage insurers.

Overall insurance in force grew about 2% sequentially in the quarter at arch use semi as higher prepayment activity was more than offset by new EMI originations.

We continue to be pleased with a credit quality of our insurance in force as key risk metrics in our USA my portfolio remain at historically favorable levels.

Notwithstanding the good market conditions in EMEA sectors, we continued to mitigate our downside risk from an economic cat cat event through the purchase of insurance linked notes.

With respect to our investment operations, we have maintained our focus on total return and continuously repositioned the portfolio to adjust to financial markets conditions, which contributed significantly to our growth in book value per share this quarter and with that I'll hand, the call over to Francois.

Thank you Mark and good morning to all.

Before I give you some comments on observations on our results for the third quarter I wanted to remind you that consistent with prior practice. These comments are on our core basis, which corresponds to arches financial results. Excluding the other segments you the operations of Watford Holdings limited.

In our filings that term consolidated includes Watford.

After tax operating income for the quarter was 261 million, which translates to an annualized 10.3% operating return on average common equity and 63 cents per share book value per share grew to $25.61 at September Thirtyth, a three point.

0.9% increase from last quarter, and a 21.1% inquiries from one year ago.

This result reflects the effect of strong contributions from both our underwriting and investment operations.

Starting with an under starting with underwriting results losses from 2019 catastrophic events in the quarter net of reinsurance Recoverables and reinstatement premiums stood at 68 million or 5.2 combined ratio points.

These losses impacted both our insurance and reinsurance segments and were primarily due to hurricane Dorian Pinsight will in fact side.

As for prior period net loss reserve development, we recognized approximately $51.7 million favorable development in the third quarter net of related adjustments or 3.9 combined ratio points compile compared to 6.7 combined ratio points in the third quarter of 2018.

All three of our segments experienced favorable development at 3.9 million 14.7 million and 33 million for the insurance reinsurance and mortgage segments respectively.

We had solid net written premium growth in the insurance segment, 22% over the same quarter one year ago.

While approximately 30% of that growth comes from the UK Regional book of business. We acquired earlier. This year. We also had a strong quarter of new business and an improving renewal rate environment in most of our lines of business.

The insurance segments accident quarter combined ratio, excluding gas was 100.3% essentially unchanged from the same period one year ago.

Some of the pricing and underwriting actions, we have taken over the last several years have begun to filter through the loss ratio, while our expense ratio remained slightly elevated primarily as a result of investments we're making in the business.

In particular as discussed on prior calls the integration of our UK regional book and older smaller acquisitions is ongoing and increase the overall insurance segment expense ratio this quarter by approximately 130 basis points.

Investments in our underwriting claims in IC operations explain most of the remainder of the increase in the expense ratio.

We continue to expect that the expense ratio for the segment will remain higher than the long term run rate until the growth in net written premium we achieved over the last few quarters, both organically and from acquired businesses is fully earned.

Now moving to onto our reinsurance operations, where we also had solid growth this quarter with net written premium up 40% over the same quarter one year ago.

Over 60% of the growth came from the casualty segment, where we were able to write select new opportunities and distressed sectors of the market, including a multiyear treaty that represented approximately 65% of the growth for this line of business.

As we have set in the past some of these opportunities can be lumpy and distort quarter over quarter comparisons.

Property, excluding property cap and property GAAP make up most of the rest of the increase in net written premium.

The reinsurance segments accident quarter combined ratio, excluding gas stood at 92.8% compared to 92.5% on the same basis, one year ago.

Parts of the large part of the large attritional loss activity. We experienced this quarter includes some exposure to the Thomas scope collapse.

Our expense ratio remained satisfactory at 26% down 140 basis points since the same quarter one year ago.

The mortgage segments accident quarter combined ratio improved by 290 basis points from the third quarter of last year. As a result of the continued strong underlying performance of the book, particularly within our US primary EMI operations the calendar quarter loss ratio of 3.8% is higher by 60 basis points then.

The result observed in the same quarter, one year ago, Although last year's loss ratio benefited from favorable prior development. There was approximately 320 basis points higher than what was observed this quarter.

The expense ratio was 20.8% lower by 60 basis points than in the same period, one year ago.

Total investment return for the quarter was a positive 100 basis points on an on a U.S dollar basis as our high quality portfolio continued to perform perform well our investment portfolio duration is over rate relative to our tech target allocation up slightly to 3.64 years at quarter end as we.

Continued to expect a continued slow down and economic growth and a lower for longer global interest rate environment.

The corporate effective tax rate in the quarter on pretax operating income was 11.7% and reflects the geographic mix of our pretax income and a 40 basis point benefit from discrete tax items in the quarter. Excluding this benefit the effective tax rate on pretax operating income was 12.1% this quarter.

At this time, we believe it's still reasonable to expect the effective tax rate on operating income will be in the range of 11% to 14% for the full year.

As always the effective tax rate could vary depending on the level in location of income or loss and varying tax rates in needs each jurisdiction.

Turning briefly to risk management, despite the recent and increases in catastrophe pricing, our natural cat exposures on a net basis remain at historically low levels at October one with the northeast still representing or peak zone at slightly more than 4% of tangible common equity at the one and 250 year return level.

We remain committed to deploying more capacity in the segments if rates and expected returns on catastrophe exposed accounts continued to improve over time.

In our mortgage segment, we recently completed or test Bellamy transaction earlier this month with coverage of 577 million.

Currently the in force Bellamy truck structure is provide aggregate reinsurance coverage of over 3.7 billion.

With respect to capital management, we did not repurchased any shares this quarter, our remaining authorization, which expires in December 2019 stood at 161 million at September Thirtyth 2019.

Our debt to capital our debt to total capital ratio stood at 13.5% at quarter end and debt plus preferred to total capital ratio was 19.5% down 300 basis points from year end 2018.

In terms of fourth quarter activity, we expect to use resources on hand to fund the Barbecuing acquisition at closing once we receive regulatory approvals with these introductory comments. We are now prepared to take your questions.

Thank you.

If you have a question at this time, please press the star and the number one key on your Touchtone telephone. If your question has been answered or do you wish to remove yourself from the Q. Please press the pound cake and for optimal sound quality, we do asset. If you are using a speaker phone that you. Please with the handset before asking your question and again, ladies and gentlemen that star one to ask.

Question.

And our first question comes from Mike Zaremski from Credit Suisse. Your line is open.

Hey, good morning.

In the prepared remarks, and I think you talked about some stress.

In the marketplace.

And.

It's my understanding them and the primary insurance space.

Wrong and its reinsurance to it feels like the greatest dislocations kind of enough Mega size to count space, where capacity is is very constrained.

Just curious has had an opportunity arch can gravitate toward or that's not your sandbox and maybe you could kind of talk to where you see the greatest dislocations in the marketplace in which to benefit you.

I think your assessment is right on I think that you will hear on other calls and fund the marketplace that.

The result, our larger that carried more limits.

Our going through more dislocation because competitors competitors are reevaluating their risk appetite and this is where most of the capacity to plumbing was.

What I say over extended in the last several years and this is where most remediation is taking place and you will find that mostly in the Ns and a large commercial risk and this is where we have seen most of the increase in submission activity. We had been historically being who we are on the defensive.

For those risks and we are very well positioned to take advantage of that I think we are on a receiving in of looking at more of those opportunities as we speak and this is where we are able to flex more of our muscle.

Okay. So Jason so just want to confirm so you know.

We obviously have.

Great rating from the rating agencies.

And in Q have a.

Relatively large balance sheet, but the primary insurance balance sheet smaller so can you.

In terms of a counterparties and the brokers day to they see was like they looked at that total arch entity.

Our balance sheet, one kind of assessing whether you guys can take a big piece of large account space.

Yes, they are and I think they also looking at us from a perspective commercial in though some commercial I think those for you that we are wanted a few that said we have no heightened appetite for risks that are priced appropriately in nothing to community and broker community inclined community is very open to death, and very willing to to engage with us.

Okay. That's helpful.

And switching gears to mortgage insurance.

There was a recent.

Agreement with the FHLB and department of Justice.

Earlier this week.

And Theres been some talk about maybe it it shifts mortgage insurance volumes banks coming back to the FHLB and maybe out out of the private marketplace. I don't know if you have any thoughts there from barking up.

Something that could take place I always ask thoughts about everything so [noise].

Initial comment to you Mike is that it's very early right. It was announced last week, it's not already this week and I think it's an attempt to I guess decriminalize being FHLB as a result of the banking the banking system sectors sort of being reluctant to provide update your product through it but its channel.

You know, but we'll see how that goes in where it ends up they also uncertainties as to whether a different among administration would have a different view and it's really an agreement with you. If you like you said and the and HUD as to how it will be treated its too early I will say to tell you in general.

What we hear in Washington, though is that the private sector is still a fake most favored area, where the government wants did that mortgage interest rates to be deployed and we have seen is for many years.

We'll see where that takes us, but where we're watching it and we'll have more sense for where it goes it's gonna take a long time over the next until several years.

And just one last on mortgage insurance volume since.

Do you I believe in past quarters, you've kind of alluded to maybe giving back some market share as competitors all have there on proprietary systems it feels like.

Probably didn't give up market share this quarter, but it's too early to tell US is is that is your view still kind of assume you might over the next year. So most down a little bit in market share still strong obviously, an absolute basis.

We don't we don't manage the company on the market share basis. As you know, we just put out they are pricing and see where the market gives us after a quarter, but you're quite right with the new black box environment is a lot harder to see where everything falls out and I think we're not the only ones I think most of our competitors will feel the same way and we're still in the early innings of how the.

Deployed there their pricing modules, how we how the client reactor there's versus ours. So.

So I, we just see that we put up pricing up there with our return and it so happens that we receive them we're able to write the amount of business that we wrote in this quarter I would not describe any market share target from where we sit.

Thank you.

Thank you.

Thank you. Our next question comes from Elise Greenspan from Wells Fargo. Your line is open.

Hi, Good morning, Hey, My first question Hey, Mark how are you on my first question is on your.

Your pricing commentary so an insurance you said.

3.5% price in the quarter and so I'm trying to get a sense I know, there's a lot going on within that Bob can some new business as well as your acquisition, but how do you guys view of loss trend I guess, if you're getting three and a half point price.

I would assume trend in aggregate is probably in excess of that and can you just kind of help us. Thanks, it down a little bit better yeah. The three to have for our portfolio as you pointing as you're pointing out rightfully is at its a very very diverse book of business.

Some lines of business are still as I said, it's not a across the board hardening market for some lines of business are flattish and some are actually getting way in excess of a 10, 12% a rate increase in some new business are getting a quite a bit above even a five or 6%. Even if you the middle of the road so I would I.

We just had you thinking about you know the starting point it also pretty important so.

It's not in over the three and a half is one number to attempts encapsulates everything and it works well when you have a very.

Very monolithic marketplace will vary monolithic book of business, but as you pointed our market. Our business is very diverse so I think that where you see growth it's either because we're seeing good opportunities in terms of no. Good return healthy returns regardless of the rate change and if we have a rate change in a growing opportunities because then the rate changes clearly.

Reading the loss trend, we're always look for margin of safety. We are looking at rate change and claims loss trend, it's not a game of of decimal.

Okay, and then a lot of new business right I think you guys said.

Three quarters of the insurance brokers on new business this quarter, So I guess.

If we think about you're getting good price on that you said better than renewable but I would assume you're probably setting the loss picks up a little bit higher than where the legacy arch business would be so how do we think about.

Kind of that ongoing margin profile of the insurance spot quite and Mike.

This new business and the goal I think you know to get down towards that mid ninetys underlying margin.

Yeah, I think if we if you look at the way we react to the marketplace acquiring business that gives us good return and good margin because it doesn't have to be because of rate change in may just be because of wanting to fund a new home because of risk appetites of other players are such that that business point is we do art to our balance sheet at this one aspect or whether the.

The rate.

The rate is going up I think that we have a very very straightforward actuarial methods to look at where we were assuming the loss trend and the rate change and we booked that appropriately and I would argue conservatively. So that we don't have.

No surprises are we actually have.

Enough room to maneuver going forward, but but broadly speaking margin has is expanding as we speak on business that we write in display in the segment in this time the point.

Okay. That's helpful. And then my last US numbers question I think it.

From you guys updated us mortgage earnings from about within the ballpark I think like 75%.

Is that still kind of about the right level or maybe it's gone a little bit higher this year.

Well, yes, it's definitely higher this year because mortgage is done phenomenally well and we've got some cash on the B and C side.

Were as as the PNC market I think is improving slightly over over the last few quarters and hopefully there's more room to grow we'd like to think that the PNC earnings are going to start growing as a proportion of the total in mortgage will be a bit less less.

Yes, so I mean mortgage we still think has a lot of runway in it as well, but just I think where we can see more earnings coming through the BNC segments and that should help balance it out a little bit more.

Okay. Thanks for the color.

Thanks Lisa.

Thank you.

Our next question comes from Josh Shanker from Deutsche Bank. Your line is open.

Good morning, everybody wanted wanting a two questions one PMC related and one mortgage related on the PMC side. Obviously the growth is very strong in the quarter can we foresee and when can we foresee it.

Hey reduction in the expense ratio based on amortizing a larger a premium base across a similarly sized our cost structure.

Yes, Josh I think we don't like to have make forecast, but I think it's realistic that this the C or think that sometime in 2020 as we earn some of the premium that we've again the UK regional booked at Wolf filter in and second half of 2020 like that.

I think that maybe.

We should see some improvement everything else being equal I think thats kind of what were.

We're thinking about.

You guys I've heard that we said before we were still on all we still have a target to achieve a 95.

Combined ratio.

That we're not we're not committed to win whether thats.

Year to year is five years down the road, we're making the right Im improvements along the way, but we certainly at least on the interaction that over the next 12 to 15 18 month like to thank the we're going to see some some improvement coming through on the combined ratio.

Great. Thank you.

Specifically expense ratio, obviously, the loss ratios up to the underwriting of course, correct, yes, but on the more high on the mortgage side.

I see a lot of new insurance written in the quarter.

But a very high proportion came from reprice and.

Contracts with Oh, LTV lower than 85% can you talk a little bump and new business whether to have persistency to it whether the housing appreciation somebody takes that business off your books, how should we think about the growth from the core specifically and how it differs from prior quarters.

Well the growth the overall market is getting better and youre quite right. The purchasing is actually growing despite the if you look at the protective of the and be able to go forward over next couple of years the growth in mortgage origination is still there on the in the purchase market didn't find a refinancing was so not a surprise, but it's a reaction to the drop in mortgage.

Ray by about 110, Bips over the last 12 month and that's to be expected. So we have this now once a flurry, but we had this heightened activity of refinancing that is occurring and the reason, we and the reason that the refinancing is still a big as Anil.

I would say that can bid bigger proportionate with my attached to it is a lot of it was originated new recently and this still haven't cross the LTV below 80%, So which allows us actually to go back again to the same client and we up our mortgage insurance offering to them.

That's it.

Is that if that business.

More profitable on a risk adjusted basis, because it's closer to.

Getting to a point, where where theres, a lower risk that needs and Mike or is a lower risk because it has a lower persistency 'cause it's close to getting below 80%, how should we expect that business versus.

Hi, guys until risk wise, it's it's a little bit it's about the same risk why that's the thing goes to the same process of evaluating I think there is pricing, it's a little bit less pricing and a lot of it has to do with its sort of rolling forward. The same book of business is like a renewal book of business, so with a slightly less but I think risk adjust.

Just a very very similar.

If you factor everything in our these.

Are these customers likely the same customers you had before or.

Because of your procurement of skills or.

It is the mix change that depends on who picks it up and it's a crapshoot if you get that refinery.

From a previous customer I think you can make some action points to try and protect that book of business, but the latter is more likely if you don't do anything I think it does go through it back is thrown back into the pool, you may be refinanced by a different mortgage originator to begin with so that will have different relationships going along with that so.

Okay. Thank you for all the answers appreciate it thanks Josh.

Thank you Sir our next question comes from Jeff Stein from Dowling and partners. Your line is open.

Thanks, Good morning.

Good morning.

First up could you provide the net I'm cost and the results this quarter.

Well, what do we look at it it varies obviously by layer or some of the old Bellamy needs of amortize, but big picture.

Jeff or I mean, you should think about roughly 3% of the outstanding balance has as the cost. So we told you we have about 3.7 billion of outstanding Bella need.

Limits in place, a 3% and I'll, let you do the rest of the math.

Okay.

And then can you talk about the trend this year in terms of detachment points. It looks like the new business deals we've seen this year.

I have moved beyond just being Mezz cover and now we're now we're looking at Mezz plus cat cover can you can you talk about the decision to do that.

Market reception for continuing to that going forward and how you weigh the.

The risk benefit versus cost.

Right well certainly initially the attach on detach structures were very much focused on pmires or coverage and capital requirements I want to say in the last few we've moved a little bit like you said beyond that there's a bit more of a focus with rating agencies that have slightly different views on.

Capital requirements. So we're always.

Interested in the tradeoff and making sure that yes, yes, maybe we can get some additional protection at a at a rate at a rate there were at a cost that is.

Efficient for us and Thats part of our capital month management decisions. So it's.

That's how we look at it and I think part of your question. There is tremendous appetite in the investment community for for these types of products as you know and the fact that we're we're expanding the programs a little bit and going up a bit more into the like you said pass the mezzanine layers of risk we've had tremendous success.

In placing those instruments and we think there hopefully there for.

For further down the road.

And then just a quick last follow up the other half was it was basically flat sequentially.

Are you is that just lapse rate experience are you seeing any change in the attractiveness of the GRC CRT market.

It's just a normal roll off Jeff or have we got as you know we've been added since 2014. So you would have a sort of a seasoning and so getting of sort of a run rate.

On terms of appetite and having frankly, our allocation being more stabilizing with less two three years. Okay. Thanks.

Welcome. Thank you.

Thank you and our next question comes from Garen Konare from Goldman Sachs. Your line is open.

Good morning, everybody.

I guess my my main question is just around the premium growth in insurance and reinsurance seeing some griffin of longer tail lines and I think you even explicitly talked about a multiyear program that you signed in.

Or multi year of treating you signed in casualty reinsurance.

Just given the loss trends that we're hearing about and just kind of.

In Greece concerns around deterioration there.

Can you maybe tell us or talk us through how are you gain comfort and growing those line here.

Yes that transaction is very unusual and I would call I would put in the camp of a bit more.

Optimistic in nature, another we don't want to renew Woodford foreseeable future but.

No. This is this came to us in though.

With a lot of deep changes to the pricing the attachment point and whatnot. So it's not that you renewed a same structure necessarily you are on so there's a lot of moving parts to that transaction that one would be squarely in the camp of.

Tremendous distress, which you said in your new comments Francois and definitely.

At the heightened level of return that we believe morning covers any of the range of outcome of potential outcome on the loss trend going forward, it's about margin of safety here.

Okay, and that's that's specific transaction and then more broadly via other growth and programs construction Nexus surplus.

Casualty.

Similar I mean, the construction and national accounts would have more bid more workers comp. So we have a bit more view and the loss trend in there so that helps.

Picking a loss picks.

CNS casualty I think you would have a very similar phenomenon not to the same sort of distressed level that I just mentioned in the reinsurance transaction, but certainly you have no similar orbitz homes of distress being pushed in two with the different marketplace and having to the repriced and price level that we believe far make up for any uncertainty we may.

You have in terms of loss trend.

Got it.

And then maybe more broadly as as you're looking at deploying capital into insurance or reinsurance.

Okay.

When you think of quota share reinsurance here.

Getting the benefit of improving underlying conditions, and then maybe additional improvement non.

The reinsurance side does that start to become more attractive than the insurance book.

I think the issue I think the reinsurance a playbook is a little bit different I think you have you can buy struck a strike of a pen.

Embark on a.

A significant partnership with the ceding company under reinsurance or really move the needle quickly as we saw in that transaction I just mentioned on the insurance is a slower build.

But I think if you look back at our 2002 2003 history.

No the reinsurance.

I mean is a lot quicker because that has the ability to be much quicker and get access to business thats going through rate change and improvement rather much quicker.

And our insurance group will but then on interest group was not far behind as you saw the numbers this quarter.

So thats from more of a think label Garo.

Okay. Thank you so much.

Thank you. Our next question comes from Brian Meredith from you via your line is open.

Hey, Thanks, a couple of questions here first I'm just curious on the big transaction reinsurance transaction did it distort any of the ratios and also was there any unearned premium kind of portfolio that came into with it which would have maybe completed the earned premium.

No. It's early so any that there's no LPD theres no incoming poured in so it's a great up multiyear deal and then distort the ratio is not really so there's.

Normal level of.

Loss ratio expense ratio, it's been not a whole lot has been earn over as it is so it really in the big picture for the segment. There is no impact at this point.

Great. Thanks, and then just curious.

In the insurance segment, you know some of the investments that you're making that you highlighted claims et cetera et cetera.

How long of those expected to continue here for and maybe another way to think about it is if I look at your other underwriting expenses kind of growth that you're seeing.

How much of that is due to the acquisition versus just investments you're making.

I'd say roughly speaking, there's probably a good I mean more more than half maybe two thirds is from the acquisition that we've made so we brought on a fair amount of people with the acquisition and as we said before the beyond a premium has to earn and we think that by early 2020 that that portfolio will.

I've been fully with us for for a full year.

And then on top of that Theres still a few more adjustments or investments. We made in terms of the staff. We brought in some other underwriters that help supplement some of the lines of business, where we seeing opportunities.

Contingency reserve so theres a lot of statutory rules, we have to abide with.

Great. Thanks, only had one question Mark.

Yes, it's more expensive and I think that one of the investment that we talk about is to get no much more efficient in dealing with those submissions and being more proactive using tools such as predictive analytics to really get to the ones that we have a higher chance of hitting so this is certainly part of yes absence.

<unk>.

The point that we're investing to be able to.

Augment the throughput and on the platform that's one of them.

Okay in general do.

The distribution I was going to calibrate what assets are more of the <unk> as a percentage onboard the submissions price adequately now.

Or.

Is there.

Disruption in the marketplace.

That youre seeing or that agents are pushing thats. It just doesn't make sense Q2 arch right now.

So right now we're seeing more submission coming to us our hit ratio is not no. It's still you know it's already stages of finding its footing. It's also reactive to the market place price.

So, but clearly we are finding all in the new business, a similar and possibly in a growing modes in open a more of our liking as to what's being proposed in the marketplace by virtue of the fact that business is not put out any units market for for pricing or for consideration tells you that it will be.

Most likely repriced the problem that we have with this as you could appreciate it it doesn't mean, it's reprises price adequately.

Right you could come in come out of a place where it needs Bobby at 30% increase could get to this to this CNS and we've thrown into the marketplace and only come in a sense 15 or go for 10 15, that's not enough for us to do so that it's still very important to be selective in what you do and maintain as we have our underwriting discipline.

Okay. Thank you so much thanks bye.

Thank you. Our next question comes from Ron Bobman from capital returns. Your line is open.

Hi, Thanks, a lot I had a question about Watford.

It's obviously trading at a huge discount to book.

And.

It's sort of.

Indicates sort of a just belief in from from my view it just belief in either the underwriting quality or the investment portfolio were strategy.

And.

Not that I subscribe to it but at least the the market seem to describe subscribe to sort of one of those two.

[noise] justifications.

What are what are the arches thoughts about where it sits stock price wise and the planned.

And maybe the use of capital that arch.

To to remedy if you're so motivated obviously, there's been some personal investment sizeable.

The last few months.

By arch executives, but beyond that would you comment please.

Yeah I'll start on for Mark will chime in I think at a high level certainly with there's only so much we can say, but we're still very committed to to the Walker platform. It's been it's been good for US I think it gives us the ability to access business in a different way that we wouldn't be able to do so.

Just with arch.

Turning to stock price.

Who knows what the market is thinking I would argue that maybe theres overreaction in based on some of the other hedge fund reinsurers and how they perform so I wouldnt.

Speculate or think debt.

Where it's going to go but I my personal belief as it's probably a bit there's some overreaction going on so mark anything you want I think the one thing I would add onto this is.

We're I'm still in and I feel like the company's perspective, and I would even argue that it's even better at this point on I think that the marketplaces is getting better and Watford is uniquely positioned fee side by side with us and as we underwrite and help them like good business on the books, so I'm actually more positive anything today.

Great and I was six months ago, which.

I was already but positive to begin with.

As you go.

Alright, Thanks, gentlemen, thank you.

Thank you. Our next question comes from Ryan Tunis from Autonomous Research. Your line is open.

Hi, This is actually Christodoulou in for Ryan Tunis. One question I had was just on the elevated large losses in reinsurance I think you mentioned a there was some impact from Thomas Cook collapsing could you maybe give a breakdown of how much of an impact the large losses had on the underlying results.

There.

Yes, I mean, it's not major I think I just made the point to let have you guys.

Think about it so that it can happen. These things happen. This quarter was Thomas Cook. It could have been sub analysis been other things on the bad property tax losses, So right, it's not a out.

Out a norm it's right now I think it's around a 3% impact on on the loss ratio this quarter.

Yes, that's what we're in the business are doing we ensure I mean, we were in the risk business and we're not making excuses were just let you know we're just I mean very consistent what we've seen in the basson highlighting it so thats.

Thats, all I think I want to say now.

Okay. That's helpful. And then one more question on just getting the insurance profitability down to your 95% target eventually.

How is the changing pricing environment changed your view on your internal timeline and strategy in terms of this this next there.

I think it's not changing where we're going I think that the market is most likely helping us getting that quicker sooner.

That's what I would tell you.

Okay. Thank you so much you welcome you're welcome.

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

To everyone, they're happy Halloween. Thank you would see you next quarter.

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

Good day, ladies and gentlemen, and welcome to the Q3 2019 arch Capital Group Conference call.

Hi, I'm all participants are in listen only mode.

We will conduct a question answer session and instructions will follow at that time.

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As a reminder, this conference call is being recorded.

For the company get starts what 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 federal Securities laws.

These statements are based on management's current assessments and assumptions and are subject to a number of risks and uncertainties.

That's currently actual results may differ materially from those expressed or implied.

For more information on the risks and other factors that may affect future performance. That's for sure reveals periodic reports that are filed by the company what does he see 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 to forward looking statements in the call to be subject to the safe Harbor created thereby.

Management also 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 FCC yesterday, which contains the Companys 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. Frank from warrant Sir you may begin.

Thank you are crystal and good morning to you.

Our diversified business model of specialty insurance reinsurance and mortgage lines of business produced good growth and acceptable risk adjusted returns for shareholders in the third quarter operating earnings generated an annualized return on that on common equity of 10% for third quarter as our book value per share grew three point.

9% and more than 21% on a trailing 12 month basis.

Before I discuss market conditions in a broader PNC sector I would like to address a topic that it's currently getting a lot of attention, namely.

The increase claims inflation or or loss trend in this part of the cycle, we're not surprised to hear about adverse claims development that to some in the PNC industry are experiencing we have discussed our view of loss trends on these calls over the past several years and I'd like to remind our shareholder that at all.

As we approach to pricing our products and establishing our reserves with a bias towards conservative loss trend estimates.

As I have mentioned before history teaches us that on average the PNC industry experiences claim inflation rates about 200 basis points above the CP VI, although this can fluctuate over time.

It seems to us at a premium rate declines seen by the industry over the past several years should have led to higher card loss picks.

It is important to bear in mind that in many lines of business. It takes three to five years before an accurate level of trend can be confirmed.

We believed that this gap between the estimated an actual loss trend has contributed to the uncertainty and reserve development. This uncertainty helps fuel both disruption and dislocation in several areas of insurance, which we have been in our.

Capitalizing on.

Dislocation is evident in the rise in our submission activity. This year and it is also reflected by the fact that we are achieving higher rate levels on new business then on renewal business in several segments to give you some sense of the data our submission activity in a third quarter was up more than.

20% in CNS property, and 15% each up even as casualty and professional lines, specifically BNL. However to date, we believe that these disruptions are more indicative of a transitional market than a traditional hard market as we have not yet seen rate increase.

As an hardening across the board risk selection is still Paramount.

Across all lines in our insurance group renewal rate changes average a positive 3.5% for the quarter as net premium grew 22% in the third quarter above the same period in 2018.

About 30% of that growth came out of an acquisition. We completed earlier this year in the UK small commercial line space rate increases contributed a quarter of the overall segments growth, while new business opportunities generated the balance.

It is worth reminding you that we expect to close on our acquisition of the Barbican group in a fourth quarter and we believe that DNS presence and scalability of our Lloyd's operation and will provide us which further opportunities.

Now turning to the reinsurance market.

Reinsurance pricing tends to follow that of the primary insurance industry, but with a future with.

Catastrophe and large attritional losses can disproportionately affect reinsurance result, creating a localized opportunities in areas of the reinsurance business property fact, and marine are examples of improving markets.

Over the past several years.

We have significantly reduced our net exposure to property cat risk in response to the declining level of risk adjusted rates.

The occurrence of Japanese typhoons in both the third and fourth quarter of this year has impacted global reinsurance industry result, and should should support the ongoing need for additional rate improvement.

Turning to our mortgage insurance segment, our semi continues to perform well and market conditions continue to be characterized by strong credit quality at a healthy housing environment in terms of new production, our third quarter, New insurance written or Eni W grew 18% over the same period.

Year ago.

Production was driven by growth in the mortgage insurance market due to a broad increase in mortgage originations combined with an increase in a level of mortgage insurance purchased from private mortgage insurers.

Overall insurance in force grew about 2% sequentially in the quarter at arch U.S. semi as higher prepayment activity was more than offset by new EMI originations.

We continue to be pleased with a credit quality of our insurance in force as key risk metrics in our USA my portfolio remain at historically favorable level.

Notwithstanding the good market conditions in the EMI sectors, we continue to mitigate our downside risk from the economic Cat cat event through the purchase of insurance linked notes.

With respect to our investment operations, we have maintained our focus on total return and continuously repositioned the portfolio to adjust to financial markets conditions, which contributed significantly to our growth in book value per share this quarter and with that I'll hand, the call over to Francois.

Thank you Mark and good morning to all.

Before I give you some comments on observations on our results for the third quarter I wanted to remind you that consistent with prior practice. These comments are on a core basis, which corresponds to arches financial results. Excluding the other segments I view the operations of Watford Holdings limited.

In our filings that term consolidated being closer to offer.

After tax operating income for the quarter was 261 million, which translates to an annualized 10.3% operating return on average common equity and 63 cents per share book value per share grew to $25.61 at September thirtyth.

3.9% increase from last quarter, and a 21.1% inquiries from one year ago.

This result reflects the effect of strong contributions from both our underwriting and investment operations.

Starting with an under starting with underwriting results losses from 2019 catastrophic events in the quarter net of reinsurance Recoverables and reinstatement premiums stood at 68 million or 5.2 combined ratio points.

These losses impacted both our insurance and reinsurance segments and were primarily due to hurricane Dorian Penn Dice will in fact side.

As for prior period net loss reserve development, we recognized approximately $51.7 million favorable development in the third quarter net of related adjustments or 3.9 combined ratio points complied compared to 6.7 combined ratio points in the third quarter of 2018.

All three of our segments experienced favorable development at 3.9 million 14.7 million and 33 million for the insurance reinsurance and mortgage segments respectively.

We had solid net written premium growth in the insurance segment, 22% over the same quarter one year ago.

While approximately 30% of that growth comes from the UK Regional book of business. We acquired earlier. This year. We also had a strong quarter of new business and an improving renewal rate environment in most of our lines of business.

The insurance segments accident quarter combined ratio, excluding cats was a 100.3% essentially unchanged from the same period one year ago.

Some of the pricing and underwriting actions, we have taken over the last several years have begun to filter through the loss ratio, while our expense ratio remained slightly elevated primarily as a result of investments we're making in the business.

In particular as discussed on prior calls the integration of our UK Regional book and other smaller acquisitions is ongoing and increase the overall uninsured segment expense ratio this quarter by approximately 130 basis points.

Investments in our underwriting claims and IC operations explain most of the remainder of the increase in the expense ratio.

We continue to expect to the expense ratio for their segment will remain higher than the long term run rate until the growth in net written premium we achieved over the last few quarters, both organically and from acquired businesses is fully reserved.

Now moving to onto our reinsurance operations, where we also had solid growth this quarter with net written premium up 40% over the same quarter one year ago.

Over 60% of the growth came from the casualty segment, where we were able to write select new opportunities and distressed sectors of the market, including a multiyear treaty that represented approximately 65% of the growth for this line of business.

As we have said in the past some of these opportunities can be lumpy and distort quarter over quarter comparisons.

Property, excluding property cap and property cap make up most of the rest of the increase in net written premium.

The reinsurance segments accident quarter combined ratio, excluding cats stood at 92.8% compared to 92.5% on the same basis, one year ago.

Part of the large part of the large attritional loss activity. We experienced this quarter includes some exposure to the Thomas scope collapse.

Our expense ratio remain satisfactory at 26% down 140 basis points since the same quarter one year ago.

The mortgage segments accident quarter combined ratio improved by 290 basis points from the third quarter of last year. As a result of the continued strong underlying performance of the book, particularly within our US primary am I operations the calendar quarter loss ratio of 3.8% is higher by 60 basis points then.

The result observed in the same quarter, one year ago, Although last year's loss ratio benefited from favorable prior development. There was approximately 320 basis points higher than what was observed this quarter.

The expense ratio was 20.8% lower by 60 basis points than in the same period, one year ago.

Total investment return for the quarter was a positive 100 basis points on an honor U.S dollar basis as our high quality portfolio continued to perform perform well our investment portfolio duration is overrate relative to our tech target allocation up slightly to 3.64 years at quarter end as we.

Continue to expect a continued slow down and economic growth and a lower for longer global interest rate environment.

The corporate effective tax rate in the quarter on pretax operating income was 11.7% and reflects the geographic mix of our pretax income and a 40 basis point benefit from discrete tax items in the quarter. Excluding this benefit the effective tax rate on pretax operating income was 12.1% this quarter.

At this time, we believe it's still reasonable to expect the effective tax rate on operating income will be in the range of 11% to 14% for the full year.

As always the effective tax rate could vary depending on the level in location of income or loss and varying tax rates in each each jurisdiction.

Turning briefly to risk management, despite the recent and increases in catastrophe pricing, our natural cat exposures on a net basis remained at historically low levels at October one with the northeast still representing our peak zone at slightly more than 4% of tangible common equity at the one and 250 year return level.

We remain committed to deploying more capacity in the segments if rates and expected returns on catastrophe exposed accounts continued to improve over time.

In our mortgage segment, we recently completed or test Bellamy transaction earlier this month with coverage of 577 million.

Currently the in force Bellamy trucks structure is provide aggregate reinsurance coverage of over 3.7 billion.

With respect to capital management, we did not repurchase any shares this quarter, our remaining authorization, which expires in December 2019 stood at 161 million at September Thirtyth 2019.

Our debt to capital our debt to total capital ratio stood at 13.5% at quarter end and debt plus preferred to total capital ratio was 19.5% down 300 basis points from year end 2018.

In terms of fourth quarter activity, we expect to use resources on hand to fund the Barbecuing acquisition at closing once we receive regulatory approvals with these introductory comments. We are now prepared to take your questions.

Thank you.

You have a question at this time, please press the star and the number one on your question telephone. If your question has been answered all your with your move yourself from the Q. Please press the pound king and for optimal sound quality, we do asset. If you are using a speaker phone that you. Please with the handset before asking your question and again, ladies and gentlemen that star one to ask.

Question.

And our first question comes from Mike Zaremski from Credit Suisse. Your line is open.

Hey, good morning.

In the prepared remarks thank.

Thank you talked about some stress.

In the marketplace.

And.

It's my understanding them and the primary insurance space I could be wrong and its reinsurance to it feels like the greatest dislocations that kind of enough mega size to count space, where capacity is this very constrained.

Just curious is that an opportunity arch can gravitate toward or is that it's not your sandbox and maybe you can kind of talk to where you see the greatest dislocations in the marketplace and which could benefit you.

I think your assessment is right on I think that you will hear on other calls and fund the marketplace that.

There is that our larger that carried more limits.

Going through more dislocation because competitors competitors are reevaluating their risk appetite and this is where most of the capacity to plumbing was.

I'd say over extended in the last several years and this is where most remediation is taking place.

And you will find that mostly in the Ns and a large commercial risk and this is where we have seen most of the increase in submission activity. We had been historically being who we are on a defensive for those risks and we are very well positioned to take advantage of that I think we are on a receiving and.

Looking at more of those opportunities as we speak and this is where we're able to flex more of our muscle.

Okay. So Jason so just want to confirm so.

You obviously have.

Great rating from the rating agencies.

And in Q have a.

Relatively large balance sheet, but the primary insurance balance sheet smaller so when you.

In terms of a counterparties and the brokers day to date CEO as they look at the total arch entity.

Balance sheet, when kind of assessing whether you guys can take a big piece of large account space.

Yes, they are and I think they also looking at us from a perspective commercial and though some commercial I think those for you that we are wanted a few that said we have no heightened appetite for risks that are priced appropriately and nothing to community and broker community inclined community is very open to that and very willing to to engage with us.

Okay. That's helpful.

And switching gears to mortgage insurance.

There was a recent.

Agreement with the FHLB and department of Justice.

Earlier this week.

And there's been some talk about maybe it it shifts mortgage insurance volumes banks coming back to the.

Hey, Jay and maybe out out of the private marketplace I don't know if you have any thoughts there if some barking up.

Something that could take place I always thought about everything so [noise].

Initial comment to you Mike is that it's very early you're right. It was announced last week, it's not already this week and I think it's an attempt to I guess decriminalize being fate Shea as a result of the banking the banking system sectors sort of being reluctant to provide if your product through it and Thats channel.

But we'll see how that goes in where it ends up there also uncertainties as to whether a different amid administration would have a different view.

Three an agreement with the order like you said and the and HUD as to how that will be treated its too early I will say to tell you in general.

What we hear in Washington, though is that the private sector is still a fake most favored area where the government wants.

Mortgage insurance risk to be deployed.

I've seen this for many years.

We'll see where that takes us, but where we're watching it and we'll have more sense for where it goes it's got take a long time over the next several years.

And just one last on mortgage insurance volumes since.

Do you I believe in past quarters, you've kind of alluded to maybe giving back some market share as competitors all have there on proprietary systems it feels like.

Probably didn't give up market share this quarter, but it's too early to tell US is is that is your view still kind of you might over the next year. So most down a little bit in market share still strong obviously, an absolute basis, we don't read on that as a company on the market share basis. As you know, we just put out they are pricing and see where the market gives us after a quarter.

You're quite right with the new Black box environment, It's a lot harder to see where everything falls out and I think we're not the only ones I think most of our competitors will feel the same way and we're still in the early innings of how they deployed there the pricing modules, how we other client reactor there's versus ours. So.

So I would just see that we put up pricing up there with our return and it so happens that we receive and were able to write the amount of business that we wrote in this quarter I would not describe any market share target from where we said.

Thank you.

Thank you.

Thank you. Our next question comes from Elise Greenspan from Wells Fargo. Your line is open.

Hi, good morning.

First question, Hey, Mark how are you on my first question is on your.

Your pricing commentary so an insurance you said.

3.5% price in the quarter and so I'm trying to get a sense I know, there's a lot going on within that Bob can some new business as well as your acquisition, but how do you guys view of loss trend I guess, if you're getting three and a half point price.

I would assume trend in aggregate is probably in excess of that and.

Can you just kind of help us thanks, it out a little bit better yes, we're going to have for our portfolio. As you pointed as you're pointing out rightfully is at its a very very diverse book of business.

Some lines of business are still as I said, it's not a across the board hardening market. The some lines of business are flattish and some are actually getting way in excess of a 10, 12% a rate increase in some new business are getting a quite a bit above even a five or 6%. Even if you the middle of the road so I would.

We just had you thinking about you know the starting point it also pretty important so.

It's not in over the three and a half is one number to attempts encapsulates everything and it works well when you have a very.

Very monolithic marketplace will vary monolithic book of business, but as you pointed our market. Our business is very diverse. So I think that where you see growth is either because we're seeing good opportunities in terms of no. Good return healthy returns regardless of the rate change and if we have a rate change in a growing opportunities. Because then the rate changes clearly be.

Reading the loss trend, we're always look for margin of safety. We are looking at rate change and claims loss trend, it's not a game of of decimal.

Okay, and then a lot of new business right I think you guys said.

Three quarters of the insurance brokers on new business this quarter, So I guess.

If we think about you're getting good price on that you said better than renewal, but.

I would assume you're probably setting the loss picks up a little bit.

Higher than where the legacy arch business would be so how do we think about.

Kind of.

Ongoing margin profile of the insurance spot quite unlike banging on this new business and the goal I think you know to get down towards that mid ninetys underlying margin.

Yes, I think if we if you look at the way we react to the marketplace acquiring business that gives us good return and good margin because it doesn't have to be because of rate change in may just be because of the wanting to fund a new home because of risk appetites of other players are such that that business finds its way through our to our balance sheet, that's one aspect or whether the.

The rates.

The rate is going up I think that we have a very very straightforward actuarial methods to look at where we were assuming the loss trend and the rate change and we booked at appropriately and I would argue conservatively. So that we don't have.

Surprises are we actually have.

Enough room to maneuver going forward, but but broadly speaking margin has is expanding as we speak on business that we were right. In this in this segment in this time to point out.

Okay. That's helpful. And then my last US numbers question I think it's the last time you guys updated us mortgage earnings from about within the ballpark I think like 75%.

Is that still kind of about the right level or maybe it's gone a little bit higher this year.

Well, yes, it's definitely higher this year because mortgage is done phenomenally well and we've got some cats on the B and C side, we're as as the PNC market I think is improving slightly over over the last few quarters and hopefully there's more room to grow we'd like to think that the PNC earnings are going to start.

Growing as a proportion of the total in mortgage will be a bit less less.

So I mean mortgage we still think has a lot of runway in that as well, but just I think where we can see more earnings coming through the BNC segments and that should help balance it out a little bit more.

Okay. Thanks for the color.

Thanks Lisa.

Thank you.

Our next question comes from Josh Shanker from Deutsche Bank. Your line is open.

Good morning, everybody wanted owning our two questions one PMC related and one mortgage related on the PMC side. Obviously the growth is very strong the quarter can we foresee and when can we foresee it.

Hey reduction in the expense ratio based on amortizing a larger premium base across a similarly sized cost structure.

Yes, Josh I think we don't like to have make forecast, but I think it's realistic.

I think that sometime in 2020 as we earn some of the premium that we've again the UK regional booked at Wolf filter in second half of 2020 like to think that may be.

We should see some improvement everything else being equal I think thats kind of what were.

We're thinking about.

You guys I've heard it we started before we were still on all we still have a target to achieve a 95.

Combined ratio.

That we're not we're not committed to win whether thats.

A year or two years five years down the road, we're making the right from improvements along the way, but we certainly at least on the other women that over the next 12 to 15 18 month like to thank the we're going to see some and some improvement coming through on the combined ratio.

Great. Thank you and then that I'm, specifically expense ratio, obviously, the loss ratios up to the underwriting of course, correct, yes, but on the more high on the mortgage side, obviously, a lot of new insurance written in the quarter.

But a very high proportion came from reprice and.

Contracts with Oh, LTV lower than 85% can you talk a little bump and new business whether to have persisted wet weather little housing appreciation somebody takes that business off your books, how should we thinking about the growth from the core specifically and how differ from prior quarters.

Well the growth the overall market is getting better and you're quite right. The purchasing is actually growing despite the if you look at a protective of the and be able to go forward next couple of years the growth in mortgage origination is still there on the in the purchase Mark identify the refinancing was so not a surprise, but it's a reaction to the drop in mortgage.

Ray by about 110, Bips over the last 12 month and that's to be expected. So we have this I wouldn't say flurry, but we had this heightened activity of refinancing that is occurring and the reason, we and the reason that the refinancing is still a big as well.

I would say that can bid bigger proportionate with my attached to it as a lot of it was originated until recently and this still haven't cross the LTV.

Low 80 percents. So it allows us access to go back again to the thing client and we up our mortgage insurance offering to them.

That's it.

Is that if that replied business.

More profitable on a risk adjusted basis, because it's closer to.

Getting to a point, where where theres a lower risk that neither am I or is a lower risk because it has a lower persistency cause it's close to getting below 80% how should that business versus.

Hi, guys, so risk wise it it's a little bit it's about the same risk wise. It's the same goes to the same process of evaluating I think there is bright thing, it's a little bit less pricing and a lot of it has to do with its sort of rolling forward to same book of business is like a renewal book of business. So I would say slightly less but I think risk adjust.

Just a very very similar.

If you factor everything in our these.

Are these customers likely the same customers you add before or.

Because of your procurement of skills or.

It's been the mix change that depends on who picks it up and it's a crapshoot if you get that re five.

From a previous customer I think you can make some action points to try and protect that book of business, but the latter is more likely if you don't do anything I think it disco throw it back is thrown back into the pool, you may be refinanced by a different mortgage originator to begin with so that will have different relationships going along with that so.

Okay. Thank you for all the answers appreciate it thanks Josh.

Thank you Sir our next question comes from Jeff Stein from Dowling and partners. Your line is open.

Thanks, Good morning.

Good morning.

First could you provide the net I'm cost.

Our results this quarter.

Well, what do we look at it it varies obviously by layer or some of the old Bellamy needs of amortize, but big picture.

Jeff or I mean, you should think about roughly 3% of the outstanding balance as as the cost. So we told you we have about 3.7 billion of outstanding Delome.

Limits in place at 3% then I'll, let you do the rest of the Matt.

Okay.

And then can you talk about the trend this year in terms of detachment points. It looks like the new business deals we've seen this year.

I have moved beyond just being Mezz cover and now we're now we're looking at Mezz plus cat cover can you can you talk about the decision to do that.

Market reception for continuing to that going forward and how you weigh the.

The risk benefit versus cost.

Right well certainly initially the attach on detach structures were very much focused on PMI or more.

Our Virgin and capital requirements.

I understand the last few we've moved a little bit like you said beyond that there's a bit more of a focus with rating agencies that have slightly different views on capital requirements. So we're always.

Interested in the tradeoff and making sure that yes, yes, maybe we can get some additional protection at a at a rate at a rate or at a cost that is.

Efficient for us and Thats part of our capital month management decision. So it's.

That's how we look at it and I think part of your question. There is tremendous appetite in the investment community for for these types of products as you know and the fact that we're expanding the programs a little bit and going up a bit more into the like you said pass the mezzanine layers or risk we've had tremendous success.

In placing those instruments and we think there hopefully there for.

For further down the road.

And then just a quick last follow up the other half.

It was basically flat sequentially.

Are you is that just lapse rate experience are you seeing any change in the attractiveness of the G CCRC market.

It's just a normal roll off Jeff or have we as you know we've been added since 2014. So you would have it sort of a seasoning and so getting of sort of a run rate.

On terms of appetite and having frankly, our allocation being more stabilizing with last two three years okay. Thanks.

Welcome. Thank you.

Thank you and our next question comes from Garen Konare from Goldman Sachs. Your line is open.

Good morning, everybody.

I guess my my many questions just around the premium growth in insurance and reinsurance seeing some griffin come longer tail lines and I think you even explicitly talked about a multiyear program that you signed in.

Or multi year of treating you signed in casualty reinsurance.

Just given the loss trends that we're hearing about and just kind of.

In Greece concerns around deterioration there.

Can you maybe tell us or talk us through how are you gain comfort and growing those line here.

Yes that transaction is very unusual and I would call I would put in a camp of a bit more.

Optimistic in nature, another we don't want to renew Woodford foreseeable future but.

This is just came to us in though.

With a lot of deep changes to the pricing the attachment point and whatnot. So.

It's not that you renewed the same structure necessarily you are on so there's a lot of moving parts to that transaction that one would be squarely in the camp of.

Tremendous distressed wish you said in your comments Roswell and definitely.

At the heightened level of return that we believe morning covers any of the range of outcome of potential outcome. When the loss trend going forward, it's about margin of safety here.

Okay, and that's that's specific transaction and then more broadly the other growth and programs construction Nexus surplus.

Casualty.

Similar I mean, the construction and national accounts would have more and more workers Council, we have a bit more view and the loss trend in there so that helps.

Picking our loss picks.

CNS casualty I think you would have a very similar phenomenon not to the same sort of distressed level that I just mentioned in the reinsurance transaction, but certainly you have no similar overtones of distress being pushed in two with the different marketplace and having to be repriced and price level that we believe far makeup for any uncertainty.

You have in terms of loss trend.

Got it.

And then maybe more broadly as as you're looking at deploying capital into insurance or reinsurance.

Okay.

When you think of quota share reinsurance here.

Getting the benefit of improving underlying conditions, and then maybe additional improvement not the reinsurance side does that start to become more attractive than the insurance book.

I think the issue I think the reinsurance.

Playbook is a little bit different I think you have you can buy struck struck of a pen you know embark on a.

Significant partnership what a ceding company under reinsurance Iridium move the needle quickly as we saw in that transaction I just mentioned on the insurance is a slower built.

But I think if you look back at our 2000 through 2003 history.

No the reinsurance.

Tim is a lot quicker because that has the ability to be much quicker and get access to business thats going through rate change and improvement rather much quicker.

Then our insurance group will but then on the interest group is not far behind as you saw the numbers this quarter.

So thats on more of a think label Garo.

Okay. Thank you so much.

Thank you. Our next question comes from Brian Meredith from.

Your line is open.

Hey, Thanks, a couple of questions here first I'm, just curious on the big transaction reinsurance transaction.

Did the distort any of the ratios and also was there any unearned premium portfolio that came up with it which would have maybe inflated the earned premium.

No. It's early so that it theres no LPTA theres no incoming port in so it's a great up multiyear deal and then distort the ratio is not really so there's.

Normal level of.

Its loss ratio expense ratio, it's been not a whole lot has been earned over as it is so it really in the big picture for the segment. There is no impact at this point.

Great. Thanks, and then just curious.

In the insurance segment somebody investments that you're making that you highlighted claims et cetera et cetera.

How long of is expected to continue here for maybe another way to think about it is if I look at your other underwriting expenses kind of growth that you're seeing.

How much of that is due to the acquisition versus just investments you're making.

I'd say roughly speaking, there's probably a good I mean more more than half maybe two thirds is from the acquisition that we've made so we brought on a fair amount of people with the acquisition as we said before the Youre a premium has to earn and we think that by early 2020 that portfolio will.

Been fully with us for for a full year.

And then on top of that Theres still a few more adjustments or investments. We made in terms of staff. We brought in some other underwriters that help supplement some of the lines of business, where we seeing opportunities.

And other small areas like I mentioned claims on IP, where there is there's still investments we think our art, we're making that are appropriate and at the right on.

Just to make them I don't think those will keep growing as much. So once the premium that we're putting on the books now earns out or earns over the next 12 months that should stabilize and level and maybe even go down a little bit a little bit.

Great Great and then another question if I look at some of the growth that you guys are putting on.

Excluding this big multi year.

You came on lot of is heading more towards property kind of property cat.

This is the tend to be a little bit more volatile.

That's something we should expect perhaps you are going forward, a little more volatility that results, but maybe lower underlying.

Combined ratios kind of a shift kind of mix of business.

The property that we're growing in leaps and bounds is actually not necessarily.

Somebody has got exposed on the interest side, but there is a cat cover and other reinsurance protections against volatility for the result on the reinsurance thought I think most of property growth is actually not necessarily cat exposed.

So it's a bit of a different growth some of the cat exposed you've seen some cat.

Written growing although we say we were we are relatively on the ways that the very small compared to what you would expect vermillion our side.

So no we don't expect much more volatility as a result of that.

Great and then my last question just curious.

As we look at this kind of terrific growth you guys are putting on in the insurance in the reinsurance area I'm just curious how fungible was the capital between your mortgage insurance business and your insurance and reinsurance business as it is easy to take money out of there my operations.

Maybe fund growth in the insurance or reinsurance how does that all work.

Well, it's not 100% fungible, but I mean.

Maybe you noticed enough in our numbers this quarter. The Pmires ratio went down in the third quarter as a result of a fairly substantial dividend that was upstream from the U.S.U.S. on my operations to the group. So that is money that was that is available to fund growth in both the insurance.

All our other lines of business or segments.

So how easy is it to do it's a process, it's not certainly can't do it on a wimmer just overnight but.

Once we get the regulatory approvals and we sit down with them and show them scenarios and stress scenarios and forecast.

And certainly figuring out.

Also contingency reserves, so theres a lot of statutory rules, we have to abide with.

But big picture or we have the ability to use some of that capital and move it around in the U.S and other areas.

Great really helpful. Thank you.

Right.

Thank you. Our next question comes from Meyer Shields from KBW. Your line is open.

Great. Thanks, only had one question Mark I was hoping detail.

Understand how to think about the expenses associated with the submission flow uptick in PNC.

Yes, it's more expensive and I think that one of the investment that we talk about is to get no much more efficient in dealing with those submissions and being more proactive using tools such as predictive analytics to really get to the ones that we have a higher chance of hitting so this is certainly part of yes.

Absolutely mired in to the point that we're investing to be able to augment the throughput and on the platform. That's one of them.

Okay.

In general do.

The distribution.

Right what assets are more.

The at the present is there more the submissions price adequately now.

Or.

Is there.

Disruption in the marketplace.

That youre seeing or that agents are pushing up the just doesn't make sense Q2 arch right now.

So right now we're seeing more submission coming to us our hedge ratio is not no. It's still in all its already stages of finding its footing. It's also reactive to the market place price.

So, but clearly we are finding all in the new business, a similar and possibly in the growing modes and open a more of our liking as to what's being proposed in the marketplace by virtue of the fact that business is not put out any ines market for pricing or for consideration tells you that it will be.

Most likely repriced the problem that we have with this as you could appreciate it it doesn't mean, it's reprises price adequately.

If you could come in come out of a place where it needs probably a 30% increase could get to that to this CNS, we've thrown into marketplace and only come in a sense to go forth entrusting us not enough for us to do so that it's still very important to be selective and what you do have maintained as we have our underwriting discipline.

Okay. Thank you so much.

Thanks, Mike.

Thank you. Our next question comes from Ron Bobman from capital returns. Your line is open.

Hi, Thanks, a lot I had a question about Watford.

It's obviously trading at a huge discount to book.

And.

It's sort of.

Indicates sort of a disbelief and from my view would just belief in either the underwriting quality or the investment portfolio or strategy.

And.

Not that I subscribe to it but at least the market seem to describe subscribe to sort of one of those two.

Justifications.

What are your arches thoughts about where it sits stock price wise and the plan.

And maybe the use of capital that arch.

To remedy if you are so motivated obviously, there's been some personal investment sizeable.

The last few months.

By arch executives, but but beyond that would you comment please.

Yeah I'll start my answer Mark will chime in I think at a high level certainly with there's only so much we can say, but we're still very committed to the Watford platform.

It's been Neal it's been good for US I think it gives us the ability to access business in a different way that we wouldn't be able to do so.

Just with arch.

Turning to stock price.

Who knows what the market is thinking I would argue that maybe there is overreaction in based on some of the other hedge fund reinsurers and how they perform so I wouldnt.

Speculate or think debt.

Where it's going to go but I my personal belief as it's probably a bit there's some over ration going on so mark anything you want I think the one thing I would add onto this is you know where I'm still end.

I feel like the company's perspective, and I would even argue that is even better at this point on I think that the marketplaces is getting better and Watford is uniquely positioned fee side by side with us and as we underwrite and help them right. Good business on the books, so I'm actually more positive if anything today than I was six months ago, which.

It was already but positive to begin with.

Yes.

Alright, Thanks, gentlemen, thank you.

Thank you. Our next question comes from Ryan Tunis from Autonomous Research. Your line is open.

Hi, This is actually christothoulou in for Ryan Tunis.

One question I had was just on the elevated large losses in reinsurance I think you mentioned there was some impact from Thomas Cook collapsing could you maybe give a breakdown of how much of an impact the large losses had on the underlying.

Elsewhere.

Yes, I mean, it's not major I think I just made the point to let have you guys think about it so that it can happen. These things happen. This quarter was Thomas Cook. It could have been sup analysis been other things on the bad property tax losses, So right, it's not out of out a norm. It's right now I think it's our.

Around a 3% impact on on the loss ratio this quarter.

Yes, that's what we're in the business are doing we ensure I mean, we were in the risk business.

And we're not making excuses were just let you know we're just I mean very consistent what we've seen in the past and highlighting it so thats.

Thats, all I think I want to say now.

Okay. That's helpful and then.

My question on just getting the insurance profitability down to your 95% target eventually.

How is that changing pricing environment changed your view on your internal timeline and strategy in terms of business mix there.

I think it's not changing where we're going I think that the market is most likely helping us getting there quicker sooner.

That's what I would tell you.

Okay. Thank you so much you welcome you open.

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

To everyone, they're happy Halloween. Thank you with you next quarter.

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