Q4 2019 Earnings Call

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Ladies and gentlemen, please stand by your conference call begin momentarily. Thank you for your patience in please standby.

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Good day, ladies and gentlemen, and welcome to the Q4 2019 arch Capital Group Earnings Conference call. At this time, all participants are in 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 then zero on your touched on telephone.

As a reminder, this conference call is being recorded.

Before the company gets started with its update management wants the 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.

Sequentially 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.

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'd now like to introduce your host for today's conference Mr., Marc Grandisson, Mr. France, Warren Sir you may begin.

Thank you Crystal and good morning to you.

Oh, it's completed 2019 on strong footing, the mortgage insurance market remains healthy and our property and casualty operations are well positioned for the pricing improvements taking place in many areas of the market.

Oh operating income producing an annualized return on common equity over 11.7% for the fourth quarter and 12% for the full year.

Well book value per share grew 3.2% for the quarter in nearly 23% for the year.

Well property and casualty rates are increasing in several lines of business. We believe the market remains any transitioning phase between soft in a harder conditions.

Given the uncertainty of current claim trends, we believe our industry needs further rate increases to provide a more clear risk reward proposition.

And this transitional environment risk selection and thoughtful capital allocation remain critical to generating superior returns.

As we discussed last quarter brings in the market conditions are evident to us from both the rise in our submission activity in our ability to achieve significant rate increases.

Dislocation is ongoing at some industry participants de risk.

Tightening underwriting standards and by actively managing down their exposures.

We believe that these conditions are likely to continue in the foreseeable future due to the continuing uncertainty regarding losses from the recent soft policy years.

Well there are some lines of business, where the rise in loss costs can be tied to social inflation in I'll review, a large component of the stress on the PNC industries performance is due to prolong soft market conditions and optimistic lost because over the last three to four policy years.

Well it reported capital levels are still high combined ratios are still below 100.

Therefore, the duration of the transition or hardening market is unpredictable.

Within our insurance segment conditions for growth improve throughout the year as indicated by 29% growth in our fourth quarter 2019, net written premiums.

A one quarter of our premium growth came from recent acquisitions, while 50%, what's created organically through new opportunities and the rest coming from rate improvement.

Following three years of elevated property losses, and both the U.S. and internationally property rate increases, particularly DNS risks in cat exposed area in the U.S. are up more than 25%. We have also seen rate increases ranging from 10% to 20% in large commercial.

General liability and public company. The you know policies, but as we discussed previously raised or not rising and all lines and in some areas rates or not rising enough.

Switching now to our reinsurance business.

Pricing in that segment tends to follow primary insurance and we have observed some signs of discipline returning to the reinsurance market.

No facultative reinsurance business, we are seeing increasing submission levels a much improved pricing.

Like reinsurance has been a leading indicator treaty market conditions, historically, and we like the positive signal Frac is giving us at this point.

On the Treaty side, we are beginning to see modest improvements in terms and conditions, including declines in seating commissions ranging from one to three percentage points.

Ceding commissions remain elevated however, in or 500, bips above the level seen in the last hard market.

Focusing on than January 1st reinsurance renewals for a minute.

Rate increases in what is primarily a property cat reinsurance renewal period created a few opportunities for our reinsurance group, but we remain on the weight cat risk as a reminder, our self imposed internal risk limitation is 25% of equity capital.

At this point, our one and 250 year PML stand up only 6% of equity capital.

Turning now to our mortgage insurance segment.

Tim I continue to perform well as I mentioned earlier, the operating environment is correct to rise by strong credit quality and a healthy housing environment. In addition, lower interest rates led to strong new mortgage originations in the quarter Accordingly, our new insurance written at arch am are you.

Yes was strong at roughly 24 billion in the quarter.

Overall, our U.S. insurance in force was 287 billion at quarter end and the underwriting quality of recent originations remain very high on a macro basis.

Lower interest rates in the high employment have made housing more affordable.

The same time demographic forces in the U.S. are creating a tailwind as millennials move into their prime household formation years.

Lower interest rates also lead to greater refinancing activity in the quarter, which explains the decline in or persistency rate in the fourth quarter down to 76%.

From a historical perspective, this level remains high and along with good mortgage origination activity supported growth you know insurance in force in the quarter.

With respect to our investment operations interest rates have returned to historically low levels.

As in our underwriting approach, we have maintained our focus on risk adjusted total return, which contributed to our growth and book value per share in this quarter and the year.

In summary artist position following years, a deemphasizing, the most commoditized and sub business lines and property casualty market is favorable.

We had the human and financial capital to grow should the market continued favorable trajectory into 2020 and with that I'll handover the call to Francois.

Thank you Mark and good morning to all before give you some comments on observations on our results for the fourth 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 segment.

The operations of Watford Holdings limited.

Our filings the term consolidated income was one.

After tax operating income for the quarter was 308.4 million, which translates to an annualized 11.7% operating return on average common equity and 74 cents per share.

Value per share grew to $26 and 42 at December 31st a 3.2% increase from last quarter and a 22.8% increase from one year ago.

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

Starting with the not starting with underwriting results losses from 2019 catastrophic events in the quarter depth of reinsurance Recoverables and reinstatement premiums stood at 30.4 million or 2.2 combined ratio points compared to 9.7 combined ratio points in the fourth quarter.

2018.

These losses impacted both our insurance and reinsurance segments and were primarily due to typhoon Hagibis and a series of smaller events.

As for prior period net loss reserve development, we recognize 54.7 million of favorable development in the fourth quarter net of related adjustments or 4.0 combined ratio points compared to 6.1 combined ratio racial points in the fourth quarter of 2018.

All three of our segments experienced favorable development at 2.8 million 19.1 million and 32.8 million for the insurance reinsurance and mortgage segments respectively.

We had solid net written premium growth in the insurance segment of 28.7% over the same quarter one year ago.

The insurance segments accident quarter combined ratio, excluding cats was 100 point, 101.6% higher by 330 basis points from the same period, one year ago.

Approximately 220 basis points of the difference.

Is due to an elevated level of large large attritional claims in the quarter, primarily from our surety unit, which can experience some volatility from quarter to quarter.

The balance is primarily due to a higher expense ratio driven by investments, we're making in the business and the integration of our UK regional book and other smaller acquisitions.

Now moving on to our reinsurance operations, where we had a relatively stable core.

Net premium growth was at 4.3% from the same quarter, one year ago, and the accident quarter combined ratio, excluding cats stood at 92.3% compared to 96.2% on the same basis, one year ago.

The difference is mostly attributable to the presence of a large attritional casualty loss are rising from the California wildfires in the same quarter one year ago.

Our expense ratio remained essentially unchanged at 26.9%.

The mortgage segments accident quarter combined ratio improved by 200 basis points from the fourth quarter of last year.

As a result of the continued strong underlying performance of the book, particularly within our U.S. primary EMI operations the calendar quarter loss ratio of 0.9% is lower by 120 basis points. Then the result recorded in the same quarter, one year ago, mostly as a result of better than expected.

Claim experience.

Benefits to the loss ratio from current year are favorable development was 510 basis points. In addition to the 940 basis points related to prior years. The expense ratio was 20.7% consistent with as a result from same period one year ago.

Total investment return for the quarter was a positive 100 and saving seven basis points on the U.S. dollar basis as our high quality portfolio continued to perform well.

For the 12 month period, our portfolio returned 7.3% an excellent result, driven by particularly strong returns across or fixed income and equity investments.

Duration of our investment portfolio at December 31st was down slightly to 3.40 years from 303.64 years at September Thirtyth in was overweight relative to our target allocation as we continue to expect a lower for longer global interest rate environment.

The corporate effective tax rate in the quarter on pretax operating income, which was 6.9% and reflects the geographic mix of our pre tax income and a 30 basis point benefit from discrete tax items in the quarter.

The 2019 fourth quarter effective tax rate on operating income includes an adjustment to interim period taxes recorded at an annualized rate.

This adjustment increased the company's after tax results on pretax operating income available to arch common shareholders by 12.4 million or three cents per share.

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

Turning briefly to risk management with the recent improvements in catastrophe pricing, we have increased or natural cat PML to 612 million as of January one, which at slightly more than 6% of tangible common equity on the net basis remains remains well below our internal limit at this single event we.

One and 250 year return level.

This change demonstrates our ability to deploy incrementally more capital in an improving market to opportunities that offer adequate returns on an unexpected basis.

In our mortgage segment as mentioned on our prior earnings call. We completed our 10th Bellamy transaction in the fourth quarter with coverage of 577 million as of yearend 2019 to enforce bellamy structures provide aggregate reinsurance coverage of approximately 3.3 billion.

With respect to capital management, we did not repurchase shares this quarter, our remaining authorization, which expires in December 2021 stood at 1 billion at December 30, Onest, our depth to total capital ratio stood at 13.1% at quarter end and debt plus preferred to total capital ratio was 19.

Percent down 300 feet 50 basis points from year end 2018.

Finally, as you know we closed on the Barbecuing acquisition in November of last year, the integration of their platform is well underway.

For the 2020 calendar year, we expect to incur approximately 65 million of intangible amortization across all acquisitions. We have made prior to December 30, Onest 2019.

With these into introductory comments, we are in our prepared to take your questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or do you wish or move yourself from the Q. Please press the pound key once again to ask the question. Please press Star then one now.

And our first question comes from Yaron Kinar from Goldman Sachs. Your line is open.

Hi, good morning.

So my first question just goes to growth in the insurance segment.

If I heard your comments correctly it sounds like you're so lukewarm in terms of the market opportunities and the rate environment and rate adequacy.

And yet I think even excluding the acquisitions you grew at a good 20% quicker so.

I guess, where where are you seeing the opportunities and if you were to become more constructive on market conditions, where do you see that growth.

[laughter] capping.

The first part is I think the question. The first part is I think were lukewarm in the sense of saying it is a full on hard market. We just want to impress upon everyone that.

When the early stages of really changes and we don't know how long thats going to last and also made comments about the funded industry has an all time capital.

Hi, and still printing very reasonable combined ratio numbers. So.

I just wanted me to pointed it's not across all lines of business, having said this of growth that you see us experienced so no go through for the year and certainly in the fourth quarter.

In our isn't the areas where.

Market up coming back to what pricing level than return expectation. So we had deemphasize those lines of business for quite a while actually as a softer years.

We're eating into our.

On production and I think of late we've seen in a resurgence of submissions and were able to hit and get our pricing and return so in the areas, where we're growing I would say that it is definitely an improving market.

And improving such that we believe we're clearing.

Some of the loss loss trend the loss cost trend concerns at one may have.

It's also want to remind that we had not grown as much as.

As as the market would have.

Paul could have indicated over last year. So this is hyper no. This is good growth on a lower number for instance on the on the Dnos side. We a premium written was about half of what it was last year versus five years ago. So you don't need much of a in on increased would you make a dent.

You know in that overall price increase in the second.

Question is.

We can grow a lot and as we as we saw we you know you thought you ask Yom whether we can grow based on the conditions.

Conditions continue on and we're seeing right now.

Ill still a is still getting something very very good I think we can still grow a fair amount I think we have been.

Our guys ill people had been very busy even in those softer years, but I do believe that we have extra capacity and appetite to write more.

Quite a bit more if it happens how much will depend and be dictated by overall rate level in 2020.

But it sounds like that premium growth could accelerate pen and the right market conditions.

That is a fair statement okay.

And do you have any sense, where you're booking curve, the new business coming on relative to the overall portfolio in insurance.

Adequacy of returns there is yes, so we haven't changed much of a loss picks no I want to put things in perspective, as well is that the rate changes that have taken place. We're talking about really started to be we believe in old enough above loss cost trend since the.

Middle of 2019, so it's a bit early in premature to to make any any changes to your booking your loss ratio Utica is on an accident year basis plus.

Thanks could develop on history history, all the accident years prior to 2019, so it's premature to make any comment on two loss pick as we speak frankly loss pick it they ought to improve and we believe everything else being equal they should improve over the next couple of years still they'll take no six to seven quarters to really see.

Well, good Tractions and see some movement there.

Understood. Thank you and best of luck of your had thank you Aaron.

Thank you and our next question comes from Jimmy Bhullar from Jpmorgan. Your line is open.

Hi, Good morning, first I just had a question on the tax rate.

Proved a lot 18 to 19 and I think it was lower than what you'd expect to dissolve.

That does it.

Ethic makeup of income or and what's your expectation.

Or sort of likely being 2020.

Well, yes, a couple of points here I think the or it was a bit lower than what we had.

I guess given as arrange earlier in 2019, there's a couple of discrete items that play played out throughout the year, which helped out in terms of publishing the final tax rates. So when I just I took some those I look back and you know without these adjustments, which is really how we think about when we give you a range. The the 2018 tax rate was 11.2.

This year was 10.9, so very close ultimately you know we had some additional benefits that brought it down 10.4 for the year. So.

Yes, I mean as you know tax rate is very much a yeah. It's hard to have a lot of precision on the tax rate because we just don't know where the worthy of the losses are going to be.

Before they happen, so whether theres, a catheter favorable or unfavorable development on prior years et cetera.

So looking at 2020, I'd say, we're very comfortable saying that we're going to probably being the same range. Maybe if you want to expand it maybe to try to make sure. We're in the range, maybe 10 to 14 unified in years past Lastly, we said 11 to 14 so.

Maybe there's potentially it could be a bit lower but I think a it's a bit early again them and they were early days of 2020 and hopefully that's enough for you too.

To update the models.

And then on the my business, obviously or overall margins have been very strong and same goes for peers as well and a lot of that's just the.

The results on the legacy block, but if you look at.

Neil business. Our leads are those in the sort of double digit range or is it more sort of a single digit how do we type business in terms of newfield.

I'd like to it'll take a while for your overall.

Towards new business.

Oh, well stocked up now we're selling the well into double digit returns still in the market. It's still very good quality I would even argue to the risk of the later last half of the year actually improve somewhat for the industry not only for us and I think that has to do with Fannie and Freddie sort of putting bit more constraints on the.

Whistling in the business so no still very very healthy returns.

And then just lastly on any comments on one of them on renewals and specifically, what they'd better worse than your expectations and and anything any sort of views on.

Sort of upcoming for wonder Nols in many years.

The one one renewals were.

In continuation might you had some rate increase in the third quarter broadly in the industry Forthe fourth quarter was a bit better the first quarter lined up to be.

Yet better yet so yes better rate in rate environment at one one clearly for the first quarter, we don't know what it means for full one I'm done for.

Your next dictating what the future will hold I.

It's a low supply and demand of and perception of relative risk is is a market based thing. So sometimes I think market should go up and it doesn't and sometimes it goes down and it's all over the phase. So it's too early to tell where for one and seven one we'll we'll end up but clearly the momentum a woman continues now it's going to be.

It's an improving market clearly.

Thank you.

Thank you.

Next question comes from Elyse Greenspan from Wells Fargo. Your line is open.

Hi, Thanks, good morning.

First question Hi, My first question is I guess on one one a little bit we've heard about retrocessional market being pretty strong this year.

Well as arch waiting on more of that business and just how did you observe on what went on in a retro market at one one is that a sign of potentially better things calm what would you think it would be for some of that for one and six one renewals.

Yeah, I mean, certainly on the I mean, you see that a little bit in our cat PML. They went up in large portion because of additional retro business that we wrote that I would say was very much opportunistic so whether that sticks and whether that means tells us something about four ones were six ones. We just don't know.

But for sure we saw some definite some some some good opportunities in the specifically in the retro space at one one that we were happy to have the capital to to be able to deploy and take advantage of the opportunities.

Okay, and then with the insurance, but I know you guys in the past of talking about that expense ratio being elevated just due to the accounting and the earn in from some of the.

Some of them more recent deals you always have done I'm, assuming that there was still somewhat of an impact on that in the fourth quarter and can you. Just you know kind of give us a sense to think about how would you have barbecuing coming on how we should think about the expense ratio with any insurance stuck in 2020.

Yeah. So as I said in my remarks, I think the expense ratio was roughly call. It 100, and 130 bips or so was in this quarter was the result of the effectively bringing on online the UK regional book, a so we're now a year into.

[music] wed so I wouldnt everything else being equal 2020, we should see the premium being earned out and the expense ratio coming down the new twist as Barbecuing and as you know the the Lloyds market in particular has a slightly higher elevated expense ratio, which we think is there.

As an offsetting benefit on the loss ratio, but I mean to give you a bit of directionally a bit more we think the 2020 expense ratio is gonna be for interest we think it should be right around where it was for 2019.

It's not going to much improved materially I think it's going to get worse, because we're going to see some benefits but I.

I think it should be about at the same level.

Okay. That's helpful. And then lastly on on the insurance pricing Mark you know you seem to be on you know pretty positive, especially relative to where he was your comments have been you know for most of that most of 2019 and it's a developing market and I guess, you know every market seems to be different and no capital.

Obviously, a lot more robust and if we got back to past Upturns is there any market like if you think back I'm do artist history does this you know compared to the early two thousands this compared to no kind of 2013 is is there a market that this feels similar to when we can kind of think about pricing and kind of met or does it feel because it is still.

Sure inflation issue, maybe different than any of these past markets.

Oh, it's different in terms of the health of the industry in the combined ratio as I mentioned, that's for sure. So that makes it a very unique opportunity, but I do believe we have major players pulling capacity out so even though its printed capacity effectively used capacity is definitely lower.

When you overall market specific in the large risk you know some of the players and we've talked about them Lloyd being clearly one of them.

I think I would tend to think it looks it feels a bit more into 2005. After Katrina Rita will not because capital was still plenty people pay their claims a couple of companies that some issues the buying large you know.

The pricing went up and it was largely as a result of perceived risk and I think this is what's going on I think people as an industry. This uncertainty about around social inflation is creating a lot of uneasiness and in pushes us to want to charge more to make sure recover as much of the event.

Well it yet as we can so thats sort of what I would say the perceived a heightened risk perceived is higher it's not a bankruptcy driven reinsurance driven necessarily market turns. So it's a blend of a few of those hard every mark I guess you live in learning and experienced new things as you go up but yes, that's what I would summarize it to.

Okay.

Okay. Thank you so much I appreciate the color actually thank you.

Thank you and our next question comes from Mike Zaremski from Credit Suisse. Your line is open.

Hi, good morning.

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First question.

On the U.S.M.I.

I Wonder if your competitors this morning spoke to.

Decline and expect to declining premium yields in 2020 any any.

Color there, whether you expect a similar dynamic.

Given pricing on new business might be a little tighter versus a using risk based pricing.

I think that we did phenomenon thats going on as result of refinancing clearly points you to a lower priced lower premium rate and that's because the risk is less than right. A lot of the refinancing we saw in last two quarters and accelerate in the third and fourth quarter is people sort of refinancing because the ins.

Chris rates.

Our does that much better and it's the makes sense for them to a to refinance by doing so the LTV that was originally put on a book of business. Two three years ago is actually lower which is lowering the risk and everything else being equal. It also has a knock on effect on VTI on the debt to service to the income servicing and employ.

Moves them as well so that risk that you with the same thing people same how same environment, but in this whole with there was also some house price appreciation. So you get all these things going on this is not as risky proposition now as as if that it was two three years ago. So would lend itself to sit at the pricing should be in.

Okay to lower pricing because of all these various moving parts, but it doesn't mean the returns this change and that's really the key we want to share with with you guys is topline and EMI is really really.

Hard to pin down or singles as cancellations and it's very hard to see how we'd all evolves, but the Indian will we care about and what we've seen is that the return characteristics of the things that will be finance, which one could say is underlying this somewhat decrease in price in premium rate is actually just a topline phenomenon.

It's not a return phenomenon. The returns are still very healthy and that's what we're actually focusing on.

Okay. That's helpful. Next I'm, just kind of broad question about ER, the reinsurance segments that kind of look at the combined ratio for the last couple of years, it's been in the mid nineties.

I think that translates into a single digit our OE, but you can I. Please correct me, if that's not right and I guess catastrophe levels don't appear to have been.

Well materially higher than expected either so just kind of thinking about the future. You know as it is is that largely reflective of just simply the competitive it operating environments and and I guess you know hopefully there's continued momentum in steps and 22 to improve the CR or we profile of the segment.

So first you're wrong, it's not in the single digit so let's make sure. We're clear here okay. Great. Yeah, I think it's as much better than that I think the range. Our reinsurance portfolio is not a is a different one and then there's been mix shift over the last two three years, we were a lot more we're.

A lot more property cap out of the 10 12 years ago. So this though there's always moving parts in the reinsurance platform and I would say that our play for instance in motor in Europe will January will by definition lead us to a higher combined ratio, but a returns are still pretty it very well in excess or well in the range away.

We would want them to be to bite that business. So I think the combined ratio in reinsurance is just a reflection of this constant calling pulling pushing through realigning capital within the various lines of business and I think what you're seeing is a is.

As a combined ratio that is reflective of what we see in terms of opportunities in terms of returns are but I can tell you for certain that our reinsurance group as a very very ambitious soon on return on equity expectation. When you write the business and Thats. What every underwriting decision is based on not on combined ratio.

Okay got it. So I was I was wrong is that there's your portfolio as a whole, it's probably less capital than I was assuming setting versus some cares. Thank you for the one thing I'll add to that Mike just quickly on the returns I mean and that really it's all about our cycle management, where our premium volume is a went down quite a lot over the last number of years on the reinsurance segment.

If the market gets healthier, which it's showing some signs of that I think I don't think are a rhetorical necessarily get that much better, but I think we'll be able to have a bit more growth on the topline expand the platform and see more opportunities.

Thank you.

Yes.

Thank you and our next question comes from Brian Meredith from you'd be yes. Your line is open.

Yeah. Thanks, a couple of questions here first just on the insurance segment I know you talked about how Barbara cons Gonna impact your expense ratio will it if any impact your underlying loss ratio I guess just to add on that that is it going to prevent you from.

Baby, achieving an underlying combined ratio below 100 in that and that insurance area in 2020.

Well Barbecuing is.

In the Big picture doesn't really move the needle. It's it brings a lot a nice trades with it. It has some fee businesses that we like it has also gives us that makes us more relevant in London, but the one thing that.

You should be aware of is a lot of the capacity that barbecuing is deploying is actually third party capital so that doesnt sticks to our ribs in terms of the combined ratio, yes, we'll have some benefits on on the fees and et cetera, but.

Big Picture, you know Barbecueing on a net basis wrote about a $125 million a premium last year in 2019 split roughly 50 50 between insurance and reinsurance whether that business, we're certainly going to shut down some lines, we're gonna do some real.

Underwriting along the way so no once you do a bit a math on it you will quickly hopefully appreciate that you will for the insurance segment on its own I mean, barbecuing is not going to be a big factor and how 2020 plays out in order to the combined ratio I saw on that note. The ACA Focess point ill realistically, Brian we need to focus on.

We are right now growing the growing and seizing the opportunities that presented into our insurance segment and if anything that will bring us to in order to combined ratio will lead us to 12 ish nor are we talking on on equity I think is going to come through the current opportunities that we see in our ability to seize upon it which is plenty.

So I guess, what you're saying is that it could be the underlying combined ratio kind of dropping below 100 and getting to those returns we not may not see it here in 2020, but its 2021 or whatever is the opportunities could you comment.

That's right. If you look grind to rates no really move starting middle of last year and a lot of stuff is being renewed still on the in the new what onboard rate environment. So we have to write the business first you have to earn it. So tiny 20 and 21 you exactly why you exactly where we are yet thats why it takes a while to see the.

The good these being reflected the same way to come on top of bad these to get reflected that.

Got you [laughter] and then.

I know the reinsurance Mark I'm, just curious I know a lot of the business you're right. This is quota share type business, how much of your reinsurance business is call it exposed to areas, where you're seeing a significant amount of price increase DNS certain property lines and that you might see a benefit from the subject premium price.

And coming through.

I think though the beautiful thing about our friends. The reinsurance group is that there are going you were kind of company. They can do anything going your way or do anything so in general they have access and are able to see the deals that are DNS casualty property whatever so there we have now we've been around for 18 years.

Weve written a lot of reinsurance, we still a billion half plus and no. We're not a small were smaller to grand scheme of things, but we still have a lot of selling point to know in London in Zurich in the U.S. and Bermuda. So in a where we're able to grow if the growth opportunities are there there's no no no issue there whatsoever.

Gotcha, but would it would affect your subject pretty basis already on the books are you seeing kind of growth there.

I think the by virtue of the improvement even for 2020, we don't give guidance, obviously as you know right nice nice try.

[laughter] if rates if rates and rates keep on increasing and keep on keep up the level. They are at the healthy no positive rate and and if it keeps into 20 2021, we will we will have more premium clearly I'm not sure what you asking and try not to answer there my questions I'm trying to get the right pitch here, but.

Okay.

<unk>.

<unk> I've used when I'm trying to get out is that I get the premium growth situation right and then it's more the underlying obviously business is actually seeing improved price to write and rate. Yes. You know just like you know you're seeing in your own business. It just would impact that could potentially have on your reinsurance margins Oh, Yes of course, yes, youre right were seeing.

Through the quarter share the in your relatively newer phenomenon. It's anecdotal is it seems to be starting even the excess of loss pricing now is picking up in speed. So thats also encouraging. So we may have some and ill add to your point, you're right. We're not a huge excess of loss at these in a traditional.

General liability lines and professionalize, you're right, we're benefiting from our quota share participant and company. Yes. We are great. Thank you. Thank you Brian.

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

Thanks, a couple of small questions to start off with for.

Are there any plans to change the amount of mortgage insurance retained on U.S. paper work is ceded to Bermuda in 2020 Bucks is clean I'd.

No plans at this point I mean as you know it's all about we try to have as much capital as we can in offshore just because it's a better.

Better domiciled gives us much more flexibility, but at this point and as you know there's tax implications we.

Don't want a trip the be tax issue. So at this point no no plans to change anything.

Okay perfect.

Second I know in the past.

You talked about capital deployment opportunities that ended up that BARDA again and in the UK. It does bring if you get a sense that to what you're seeing now in the pipeline in terms of other potential opportunity.

I think where.

We're seeing a bit less often I think people are busy more looking at their stuff and trying to improve their book of business I think thats ready and more of an inward focus.

I think you know M&A, we have we see all of them or we believe we see most of a transaction that are been talked about.

I think we were a bit more open and were able to strike some transactions over the last year, because the pricing was right and the opportunities was there, but no we don't see acceleration or no somewhat of a decrease activity, but I think just serves as a result of the described marketplace being a bit more dislocated thats really what I would say.

Okay, and then that brings me to third question.

I'm wondering whether you talked about how combined ratio the still will be reported a profitable, but there's also the soft market impact, which at least I would interpret as suggesting that maybe the real combined ratios aren't as good.

Does that.

Delta look any different now than it did before Pat hard or hardening market.

That's a really good question Meyer.

I don't know the answer this I haven't looked at a numbers at the end of 99 2000.

It doesn't seem.

Ill tell you my gut feeling right now it doesn't feel to be as much of a delta.

And also in terms of what impact it could have on a capital markets. If we were more levered as an industry 99 2000.

When we're running a 1.31 0.4 premium to surplus now were <unk> 0.7, 0.65, 0.8, whatever so lot less levered, so probably more absorbable, but at the same time, there's less investment income.

So if you look at if you think that the market changes as a result of thing that cash flow negative or having to not having recurring income.

Then I think that it's we're probably in similar position, meaning that the loss the losses or if you combine the underwriting income with the which was negative at the end of 99 with the investment income, which was very positive I think we're probably in a combination in a similar place, but we have higher capital so more cushion to absorb it.

Okay. That's very helpful. Thank you so much okay, great. Thanks, Mike.

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

Hey, Thanks, I just had a couple I guess first one [laughter].

If you get about.

2020, as a potential year, given what's happening from a pricing standpoint for margin improvement for the industry.

Yeah, I understand why that could be a challenging.

What I could be Tony for some but I think when I look at arch relative to competitors, there's more of a short tail mix.

Whether it's in primary insurance also facultative three [laughter], Hey, I guess will give you could just commented on it.

Why isn't doing more constructive near term outlook for margin improvement given you're clearly getting rate.

Great all at a rate in some of these property lines, where where there does seem to be kind of lay up argument for margin expansion.

So let me correct you quickly line on the insurance side, you know where 70, 75% liability in terms of premium written so that would sort of sort of dampens. If you will the acceleration or the recognition of the improvement in terms and conditions. So makes us a bit more cautious. So that's something you need to to bear in mind. This is on the insurance segment.

And again on the on the interim segment, even speaking to the short tail.

It's still does take a while to get through you know.

Like I said significant improvement in rates, we took place in oak, starting you know middle of Middle ish of 2019. So it does still take awhile to recognize no and really see the earning coming through the unearned premium is a combination as as you know for other underwriting years on the reinsurance side.

Trying to think of it I think it's it's also there's a fair amount of liability as well in there right. First one is also a fair amount of property, although property as you as we mentioned is also de leverage on the property Cat. We did increase the other property, we're running a lot more on the non cap excel.

This is more opportunistic and that you're right, we should probably see whether we were what margin expansion. There wasn't we believe is there we should see it but again. It was written you know last third fourth quarter. So it will come again over the next to no. Other next 12 months. So it takes a while it takes a while yet to be basin patients is a virtue in R&D.

Understood and then.

My second one is just around I think weve. It seems like we've heard less from the reinsurance about the casualty environment in losses coming in.

You could just talk about.

You know the extension, which you know what do you see on the reinsurance book in terms of claims activity on the casualty side versus primary like is there a real lag.

The claims started to happen or is that probably still on the comp I mean any theories as to.

When in how we might see more paid losses, I guess on the reinsurance side.

It's a very very good question I think when we we do have a tale of two cities here I think that are.

The insurance are seeing their claims of course of course, we have the you know the the advantage or the the luxury to have an insurance company. That's on top of claims and no and participate the marketplace. When we look at what information or reinsurance folks are getting there was clearly a lag I'm not saying its misinformed and whatnot, but there was clearly.

A lag and it's been there forever. This is not a new phenomenon. Ryan this has been going on for years up for as long as we've been as I've been in the business. It's been there and it was there before my time. So there's always inflammation is symmetry in inflammation delay by the time it gets to the insurance company. They have to look at this it.

You wait booked a reserve and that book the reserve and then they in turn.

You know inform their reinsurance partners on a quarter share so that easier because you are able to do more claims review and beyond tough it'll be side by side with them. You can also compare whether we have other of our clients on similar risks and whatnot on an excess of loss as you could expect it's a little bit more difficult as a further lag.

On that one as well so we clearly you have a lag and recognition in our reinsurance company has been really really Adam and and proactive and try to recognize some of the losses that may not be enough enough reported and that's also what made us did more careful.

Current writings or lack thereof in the liability space, but it's clearly a lag and then on the reinsurance.

That's helpful. Thanks.

Thanks Ryan.

Thank you.

And I am showing no further questions from our phone lines I'd like to turn the conference back over to Marc Grandisson for any closing remarks. Thank you everyone happy Valentine's day make it a happy Valentines weekend, if you have a chance bucking the 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.

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Good day, ladies and gentlemen, and welcome to the Q4 2019 arch Capital Group earnings Conference call.

At this time, all participants are in 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 then zero on her touched on telephone.

As a reminder, this conference call is being recorded.

For the company get started with its update managed to whats the 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 that's 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 fall 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, but then the meaning of the private Securities Litigation Reform Act 1995.

The company intense the forward looking statements in the call to be subject to the safe Harbor created thereby.

Management also will make reference to some non-GAAP measures of financial performance.

Affiliation to gap 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'd now like to introduce your host for today's conference Mr., Marc Grandisson, Mr. France warrant Sir you may begin.

Thank you Chris go and good morning to you.

Oh, it's completed 2019 on strong putting the mortgage insurance market remains healthy and our property and casualty operations are well positioned for the pricing improvements taking place in many areas of the market.

Our operating income producing an annualized return on common equity over 11.7% for the fourth quarter and 12% for the full year.

Well book value per share grew 3.2% for the quarter and nearly 23% for the year.

Well property and casualty rates are increasing in several lines of business. We believe the market remains in a transitioning phase between soft in a harder conditions.

Given the uncertainty of current claim trends, we believe our industry needs further rate increases to provide a more clear risk reward proposition.

And this transitional environment risk selection and thoughtful capital allocation remain critical to generating superior returns.

How do we discussed last quarter.

Anything market conditions are evident to us from both the rise in our submission activity and our ability to achieve significant rate increases.

This location is ongoing at some industry participants de risk.

Tightening underwriting standards and by actively managing down their exposures.

We believe that these conditions are likely to continue in the foreseeable future due to the continuing uncertainty regarding losses from the recent soft policy years.

Well there are some lines of business, where the rise in loss costs can be tied to social inflation in I'll review, a large component of the stress on the PNC industries performance is due to prolong soft market conditions and optimistic lost because over the last three to four policy years.

But reported capital levels are still high combined ratios are still below 100.

Therefore, the duration of the transition or hardening market is unpredictable.

Within our insurance segment conditions for growth improve throughout the year as indicated by 29% growth in our fourth quarter 2019, net written premiums.

About one quarter of our premium growth came from recent acquisitions, while 50%, what's created organically through new opportunities and the rep coming from rate improvement.

Following three years of elevated property losses, and both the U.S. and internationally property rate increases, particularly E.N.S. risks in cat exposed area in the U.S. are up more than 25%. We have also seen rate increases ranging from 10% to 20% in large commercial.

General liability and public company, the you know policies.

But as we discussed previously rates are not rising and all lines and in some areas rates are not rising enough.

Switching now to our reinsurance business.

Pricing in that segment tends to follow primary insurance and we have observed some signs of disciplined returning to the reinsurance market.

In our facultative reinsurance business, we are seeing increasing submission levels a much improved pricing.

Back reinsurance has been a leading indicator PUC treaty market conditions, historically, and we like the positive signal Frac is giving us at this point.

On the Treaty side, we are beginning to see modest improvements in terms and conditions, including declines in ceding commissions ranging from one to three percentage points.

Ceding commissions remain elevated however, and arc 500, vips above the level seen in the last hard market.

Focusing on January 1st reinsurance renewals for a minute.

Rate increases and what is primarily a property cat reinsurance renewal pure created a few opportunities for our reinsurance group, but we remain on the weight cat risk as a reminder, our self imposed internal risk limitation is 25% of equity capital.

At this point, our one and 250 year PML stand up only 6% of equity capital.

Turning now to our mortgage insurance segment, our semi continued to perform well as I mentioned earlier the operating environment is characterized by strong credit quality at a healthy housing environment. In addition, lower interest rates led to strong new mortgage originations in the quarter Accordingly.

Our new insurance written that arch EMI U.S. was strong at roughly 24 billion in the quarter.

Overall, our U.S. insurance in force was 287 billion at quarter end and the underwriting quality of recent originations remain very high on a macro basis.

Lower interest rates and the high employment have made housing more affordable.

The same time demographic forces in the U.S. are creating a tailwind as millennials move into the Prime household formation years.

Lower interest rates also lead to greater refinancing activity in the quarter, which explains the decline in our persistency rate in the fourth quarter down to 76%.

From a historical perspective, this level remains high and along with good mortgage origination activity supported growth in our insurance in force in the quarter.

With respect to our investment operations interest rates have returned to historically low levels.

As in our underwriting approach, we have maintained our focus on risk adjusted total return, which contributed to our growth and book value per share in this quarter end the year.

In summary, our disposition following years deemphasizing, the most commoditizing sub business lines and property casualty market is favorable.

We have the human and financial capital to grow should the market continued favorable trajectory into 2020 and with that I'll handover the call to Francois.

Thank you Mark and good morning to all before I give you some comments on observations on our results for the fourth 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.

The operations are Watford Holdings limited.

Our filing that term consolidated includes Watford.

After tax operating income for the quarter was 308.4 million, which translates to an annualized 11.7% operating return on average common equity and 74 cents per share.

Value per share grew to $26 and 42 at December 31st a 3.2% increase from last quarter and a 22.8% increase from one year ago.

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

Starting with the not starting with underwriting results losses from 2019 catastrophic events in the quarter.

Over reinsurance Recoverables and reinstatement premiums stood at 30.4 million or 2.2 combined ratio points compared to 9.7 combined ratio points in the fourth quarter of 2018.

As losses impacted both our insurance and reach segments and were primarily due to typhoon Hagibis and a series of smaller events as for prior period net loss Reserve development, we recognize 54.7 million of favorable development in the fourth quarter net of related the job.

Mitch or 4.0 combined ratio points compared to 6.1 combined ratio racial points in the fourth quarter of 2018.

All three of our segments experienced favorable development at 2.8 million 19.1 million and 32.8 million for the insurance reinsurance and mortgage segments respectively.

We had solid net written premium growth in the insurance segment.

28.7% over the same quarter, one year ago.

The insurance segments accident quarter combined ratio, excluding cats was 100 point, 101.6%.

Higher by 330 basis points from the same period, one year ago.

Approximately 220 basis points of the difference.

As due to an elevated level of large large attritional claims in the quarter, primarily from our shortly unit, which can experience some volatility from quarter to quarter.

The balance is primarily due to a higher expense ratio driven by investments, we're making in the business and the integration of our UK regional book and other smaller acquisitions.

Now moving on to our reinsurance operations, where we had a relatively stable quarter.

Net premium growth was at 4.3% from the same quarter, one year ago, and the accident quarter combined ratio, excluding cats stood at 92.3% compared to 96.2% on the same basis, one year ago.

The difference is mostly attributable to the presence of a large attritional casualty loss arising from the California wildfires in the same quarter one year ago.

Our expense ratio remained essentially unchanged at 26.9%.

The mortgage segments accident quarter combined ratio improved by 200 basis points from the fourth 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 0.9% is lower by 120 basis points. Then the result recorded in the same quarter, one year ago, mostly as a result of better than expected.

Claim experience.

The benefit to the loss ratio from current year, a favorable development was 510 basis points.

In addition to the 940 basis points related to prior years. The expense ratio was 20.7% consistent with as a result from same period one year ago.

Total investment return for the quarter was a positive 107 seven basis points on the U.S. dollar basis.

Our high quality portfolio continued to perform well.

For the 12 month period, our portfolio returned 7.3%.

Excellent result, driven by particularly strong returns across our fixed income and equity investments.

Duration of our investment portfolio at December 30, Onest was down slightly to 3.404 years from 303.64 years at September Thirtyth inwards overweight relative to our target allocation as we continue to expect a lower for longer global interest rate environment.

The corporate effective tax rate in the quarter on pre tax operating income, which was 6.9% and reflects the geographic mix of our pre tax income and a 30 basis point benefit from discrete tax items in the quarter.

The 2019 fourth quarter effective tax rate on operating income includes an adjustment to interim period taxes recorded at an annualized rate.

This adjustment increased the company's after tax results on pretax operating income available to arch common shareholders by 12.4 million or three cents per share.

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

Turning briefly to risk management with the recent improvements in catastrophe pricing, we have increased our natural cat PML to 612 million as of January one, which at slightly more than 6% of tangible common equity on the net basis remains remains well below our internal limit of the single event one.

One and 250 year return level.

This change demonstrates our ability to deploy incrementally more capital in an improving market to opportunities that offer adequate returns on an unexpected basis.

In our mortgage segment as mentioned on our prior earnings call. We completed our 10th Bellamy transaction in the fourth quarter with coverage of 577 million as of yearend 2019. The in force Bellamy structure is provide aggregate reinsurance coverage of approximately 3.3 billion.

With respect to capital management, we did not repurchase shares this quarter, our remaining authorization, which expires in December 2021 stood at 1 billion at December 30, Onest, our debt to total capital ratio stood at 13.1% at quarter end and debt plus preferred to total capital ratio was 19.

Percent down 350, 50 basis points from year end 2018.

Finally, as you know we closed on the Barbican acquisition in November of last year, the integration of their platform is well underway.

For the 2020 calendar year, we expect to incur approximately 65 million of intangible amortization across all acquisitions. We have made prior to December 30, Onest 2019.

With these inc. introductory comments, we are in our prepared to take your questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your touched on telephone. If your question has been answered or do you wish to remove yourself from the Q. Please press the pound.

Once again to ask a question. Please press Star then one now.

And our first question comes from Yaron Kinar from Goldman Sachs. Your line is open.

Hi, good morning.

So my first question just goes to growth in the insurance segment.

If I heard your comments correctly it sounds like you're so lukewarm in terms of the market opportunities and the rate environment and rate adequacy.

I think even excluding the acquisitions Hugh Greg good 20% quicker so.

I guess, where are you seeing the opportunities and if you were to become more constructive on market conditions.

Where do you see that growth.

GAAP.

The first part is that thanks, a question the first part is.

I think were lukewarm in the sense of saying it is a full on hard market, we just want to impress upon everyone.

That.

When the early stages of rate changes and we don't know how long thats going to last now also made comments about the side of the industry has an all time capital.

Hi, and still printing very reasonable combined ratio numbers. So.

I just wanted me to pointed it's not across all lines of business, having said this of growth that you see.

Experience so no go through for the year and certainly in the fourth quarter.

Our isn't the areas where.

Market are coming back to what pricing level and return expectation. So we had deemphasize those lines of business for quite a while actually as a softer years.

We're eating into our.

On production and I think of late we've seen.

A resurgence of submissions and were able to hit and get up pricing every time. So in the areas, where we're growing I would say that it is definitely and improving market.

And improving such that we believe we're clearing.

Some of that loss loss trend the loss cost trend concerns at one may have.

It's also want to remind that we had not grown as much as.

As as the market would have.

Paul could have indicated over last year. So this is high but this is good growth on a lower number for instance on the on the Dnos side. We a premium written was about half of what it was last year versus five years ago. So you don't need much of an increase to really make a dent.

And that overall price increase in the second.

Question is.

We can grow a lot and as we as we saw we know you thought you ask Yom whether we can grow base on the conditions.

It's conditions continue on and we're seeing right now.

Still.

Still getting something very very good I think we can still grow a fair amount I think we have been.

Hi, guys ill people had been very busy even in those softer years, but I do believe that we have extra capacity and appetite to write more.

Quite a bit more if it happens how much will depend and be dictated by overall rate level in 2020.

But it sounds like.

That our premium growth could accelerate.

And the right market conditions.

That is a fair statement okay.

And do you have any sense, where you're booking the current the new business coming on relative to the overall portfolio in insurance.

Adequacy of returns Perez, yes, so we haven't changed much of a loss picks no I want to put things in perspective as well is that.

The rate changes that have taken place we're talking about really started to be we believe in old enough above loss cost trend since the.

Middle of 2019.

Early in premature to to make any any changes to your booking your loss ratio Utica is on an accident year basis, plus you know things could develop on history history. All the accident years prior to 2019, so it's premature to make any comment on two loss pick as we speak frankly loss.

If they ought to improve and we believe everything else being equal they should improve over the next couple of years they'll they'll take six to seven quarters to really see good tractions and see some movement there.

Understood. Thank you and that's not going to your hand, Thank you Aaron.

Thank you and our next question comes from Jimmy Bhullar from Jpmorgan. Your line is open.

Hi, Good morning, first I just had a question on that tax rate.

Improved a lot 18 to 19 and.

I think it was lower than what do you expect to dissolve.

Given that the demographic makeup of income heart and what's your expectation.

Or sort of likely bench for 2020.

Well, yes, a couple of points here I think the.

It was a bit lower than what we had.

I guess given as arrange earlier in 2019, there's a couple of discrete items that plate played out throughout the year, which helped out in terms of publishing the final tax rate. So when I just I took some those I look back and without these adjustments, which is really how we think about when we give you a range. The 2018 tax rate was 11.2. This.

Sure was 10.9, so very close ultimately we had some additional benefits that bought a doubt that 10.4 for the year. So.

Yes, I mean as you know tax rate is very much a.

Yes, it's hard to have a lot of precision on the tax rate because we just don't know where the where the the losses are going to be.

Before they happen, so whether theres, a catheter favorable or unfavorable development on prior years et cetera.

So looking at 2020, I'd say, we're very comfortable saying that we're going to probably being the same range, maybe if you want to expand it maybe.

Try to make sure we're in the rates, maybe 10 to 14 all it in years past month last year, We said 11 to 14 so.

Maybe there's potentially it could be a bit lower but I think.

A bit early again M&A, we're early days between 20, and hopefully thats enough for you too.

To update the models.

And then on the my business, obviously, our overall margins have been very strong same goes for beers as well and a lot of that the strong results on the legacy block, but if you look at.

Neil business. Our leads are those in the sort of double digit range or is that more sort of thing that they did not really type business in terms of new sales.

Slide that will take a while.

Your overall.

Towards new business.

Almost choked up now were soloviev well into double digit returns still in the market. It's still very good quality I would even argue that the risk of the later last half of the year actually improved somewhat for the industry not only for us.

Nothing that had to deal with Fannie and Freddie sort of putting but more constraints on the risk layering in the business. So no. It's still very very healthy returns.

And then just lastly on any comments on the one one renewals and.

Specifically, where they better worse than your expectations and and anything any sort of views on.

The sort of upcoming forward one renewals in many years.

The one one renewals were.

Continuation might you had some rate increase in the third quarter broadly in the industry Forthe fourth quarter was a bit better the first quarter lined up to be.

You had better yet so yes, better rate improved rate environment at one one clearly for the first quarter, we don't know what it means for full one I'm done for.

Takeda and what the future will hold I.

It's the laws supply and demand and perception of relative risk is is a market based thing. So sometimes I think market should go up and it doesn't and sometimes it goes down and it's all over the phase. So it's too early to tell where for one and 71 will end up but clearly if the momentum at one when continues no it's going to be.

It's an improving market clearly.

Thank you.

Thank you.

Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open.

Hi, Thanks, good morning.

First question Hi, My first question is I guess on one went a little bit.

We've heard about retrocessional market being pretty strong this year.

I was as archon weighting more of that business and just how did you observe what went on in a retro market at one one is that a sign of potentially better things calm what would you think it would be for some of that for one and six one renewals.

Yeah, I mean, certainly on the I mean, you see that a little bit in our cat PML. They went up and large portion because of additional retro business that we wrote that I would say was very much opportunistic.

So whether that sticks and whether that means tells us something about four ones are six ones. We just don't know but for sure. We saw some definite some some some good opportunities and specifically in the retro space at one one that we were happy to adapt to capital to be able to deploy and take advantage of the opportunities.

Okay, and then with the insurance book on I know you guys in the past of talking about that expense ratio being elevated just due to the accounting and the earn an from some of the on.

Some of them more recent deals you always have done I'm, assuming that there was still somewhat of an impact on that in the fourth quarter and can you just kind of give us a sense to think about do you have barbecuing coming on how we should think about the expense ratio with any insurance Buck in 2020.

Yeah. So as I said in my remarks, I think the expense ratio was roughly call. It 100 and 130 Bips are sold was.

In this quarter was the result of the.

Affectively, bringing on online the UK regional book.

So we're now our year end two wed so where everything else being equal 2020, we should see the premium being earned out and the expense ratio coming down the new twist as Barbara Ken and as you know the the Lloyds market in particular has a slightly higher elevated expense ratio, which.

We think is.

There is an offsetting benefit on the loss ratio, but I mean to give you a bit of directionally a bit more we think that 2020 expense ratio is going to be fractures. We think it should be right around where it was for 2019.

It's not going to improve materially I think it's going to get worse, because we're going to see some benefits but.

I think it should be about at the same level.

Okay. That's helpful. And then lastly on the insurance pricing Mark you seem to be pretty positive, especially relative to where you have your comments have been you know for most of that most of 2019 and it's a developing market and I guess you know every market seems to be granted no capital.

Well, obviously, a lot more robust and if we on back to past Upturns is there any market like if you think back I'm do artist history does this.

Para to the early two thousands this compared to no kind of 2013 is is there a market that this feels similar to want me to kind of think about pricing and credit met or does it feel because of the social inflation issue maybe different than any of these past markets.

Well, it's different in terms of the health of the industry and the combined ratio as I mentioned thats for sure. So that makes it a very unique opportunity, but I do believe we have major players pulling capacity out so even though its printed capacity effectively used capacity is definitely lower.

When you overall market specifically on the larger risk some of the players that we've talked about them Lloyd being clearly one of them.

I think I would tend to think it looks it feels good morning to 2005 after Katrina Rita will not because coupled with still plenty of people pay their claims a couple of companies that some issues, but by and large.

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The pricing went up and that was largely as a result of perceived risk and I think this is what's going on I think people as an industry. This uncertainty about around social inflation is creating a lot of uneasiness and in pushes us to want to charge more to make sure we cover as much.

The eventuality as we can.

So thats sort of what I would say the perceived a heightened risk perceived.

It's higher it's not a bankruptcy driven reinsurance driven necessarily market turns so it's a blend of a few of those hard every mark I guess you live in learning and experienced new things as you go up but yes, that's what I would summarize it to be.

Okay. Thank you so much I appreciate the color. Thank you. Please thank you.

Thank you and our next question comes from Mike Zaremski from Credit Suisse. Your line is open.

Hi, good morning.

First question.

On us and my.

One of your competitors this morning spoke to.

Decline and expect to declining premium yields in 2020 any any.

Color there whether you expect some are dynamic.

Given.

Pricing on new business might be a little tighter versus.

Using risk based pricing.

I think that we the phenomenon that's going on as result of the refinancing clearly points you to a lower price lower premium rate and that's because the risk is less than right. A lot of the refinancing we saw in last two quarters and accelerate in the third and fourth quarter is people sort of refinancing because the ins.

Trust rates.

Our does that much better and it makes sense for them to to refinance by doing so the LTV that was originally put on a book of business. Two three years ago is actually lower which is lowering the risk and everything else being equal. It also has a knock on effect on DTC right on the debt to service to income servis.

Prove to them as well so that risk that you with the same same people same how same environment, but and as hopefully there was also some house price appreciation. So you get all these things going on this is not as risky proposition now is that it was two three years ago. So would lend itself to sit at the pricing should be.

Okay to lower pricing because of all these various moving parts, but it doesn't mean that returned this change and thats really the key we want to share with with you guys is topline and EMI is really really.

Hard to pin down their single this cancellations and it's very hard to see how we'd all evolves, but the Indian will we care about and what we've seen is that the return characteristics of the things that will refinance which one could say is underlying this somewhat decrease in price in premium rate is actually just a topline phenomenon.

It's not a return phenomenon. The returns are still very healthy and that's what we're actually focusing on.

Okay. That's helpful.

Next I'm just kind of broad question about the reinsurance segments I kind of look at the combined ratio. The last couple of years, it's been the mid nineties.

I think that translates into a single digit our OE, but you cannot please correct me if that's not right and I guess catastrophe levels don't appear to have been.

Surely higher than expected either so Scott thinking about the future is is that largely reflective of just simply the competitive it operating environments and and I guess hopefully there's continued momentum in steps in 22 to improve the CR or we profile of the segment.

So first you're wrong, it's not in the single digit so let's make sure we're clear share accounts right. Yeah, I think it's as much about in that I think that the range our reinsurance portfolio is not a.

It a different one and then thats been mix shift over the last two three years, we were a lot more.

A lot more property cap as the 10 12 years ago. So this though there is always moving parts in the reinsurance platform and I would say that our play for instance in motor in Europe will generate well by definition lead us to a higher combined ratio, but a returns are still pretty it very well in excess or well in the range.

Where we would want them to be to write the business. So I think the combined ratio in reinsurance is just a reflection of this constant calling pulling pushing through realigning capital within the various lines of business and I think what you're seeing is a.

As a combined ratio that is reflective of what we see in terms of opportunities in terms of returns are but I can tell you for certain that our reinsurance group as a very very.

Ambitious and on return on equity expectation when you write the business and Thats. What every underwriting decision is based on not on combined ratio.

Okay got it. So I was I was wrong is that there's your portfolio alcohol, it's probably less capital than I was assuming flat versus some cares. Thank you for the one thing I'll add to that Mike just quickly on the returns EMEA and that really is all about their cycle management, where our premium volumes one down quite a lot over the last number of years on the Rangers segment.

If the market gets healthier, which it's showing some signs of that I think I don't think are a rhetorical necessarily get that much better, but I think we'll be able to have a bit more growth on the topline expand the platform and see more opportunities.

Thank you.

Yes.

Thank you and our next question comes from Brian Meredith from U.S. Your line is open.

Yeah. Thanks, a couple of questions here first just on the insurance segment.

I know you talked about how bbcon is going to impact your expense ratio will that if any impact your underlying loss ratio I guess is to add on that that is it going to prevent you from.

Maybe achieving an underlying combined ratio below 100, and that's in that.

The insurance area in 2020.

Well barbecue.

Yes.

In the Big picture doesn't really move the needle. It's it brings a lot a nice trades with it. It has some fee businesses that we like it has also gives us that makes us more relevant in London, but the one thing that.

You should be aware of as a lot of the capacity that Barbecuing is deploying is actually third party capital so that doesnt sticks or revs in terms of the combined ratio, yes, we'll have some benefits on the fees et cetera, but.

Big picture.

Barbecue and on a net basis wrote about a $125 million a premium last year in 2019 split roughly 50 50 between insurance and reinsurance whether that business. We're certainly going to shutdown. Some lines were going to do some re underwriting along the way so.

No once you do a bit a math on it quickly hopefully appreciate that you all for the insurance segment on its own I mean, barbecuing is not going to be a big factor and how it 2020 plays out in order to the combined ratio. So on that note. The ACA process point ill realistically, Brian we need to focus on as we're right now growing.

Growing and seizing the opportunities that presented into our insurance segment, and if anything that will bring us too.

The combined ratio that will lead us to 12 ish our return on equity I think it's going to come through the current opportunity that we see in our ability to seize upon which has plenty.

So I guess, what you're saying is that it could be.

The underlying combined ratio kind of dropping below 100 and getting to those returns we not may not see it here in 2020, but its 2021 or whatever is the opportunities continue to comment that's right. If you look Brian to rates no really move starting middle of last year and a lot of stuff has been renewed still on the in the new one on cold rate environment.

So we have to write the business first you have to earn it. So tiny 20 and 21 you exactly why you're exactly where we are yet thats why it takes a while to see the the good these being reflected the same way. It takes a long time for bad these to get reflected that.

Gotcha.

And then.

I know the reinsurance Mark I'm, just curious I know a lot of the business you're right is quota share type business, how much of your reinsurance business is call it exposed to areas, where you're seeing a significant amount of price increase DNS certain property lines and then you might see a benefit from the septic premium price.

And coming through.

I think though the beautiful thing about our friends. The reinsurance group is that there are going anywhere kind of company. They can do anything going your way or do anything so in general they have access and are able to see the deals that are CNS casualty property, whatever so that we havent we've been about for 18 years.

We've written a lot of reinsurance, we still a billion the half plus and no. We're not a small where smaller the grand scheme of things, but we still have a lot of selling pointing though in London and Zurich into us in Bermuda. So now we're able to grow if the growth opportunities out there that north no no issue there whatsoever.

Got you, but would it would affect your subject premium basis already on the books are you seeing kind of growth there.

I think the by virtue of the improvement you mean for 2020, we don't give guidance, obviously as you know right nice nice dry.

[laughter] rate if rates and raised keep on increasing and keep on keep at the level. They are at the healthy positive rate and and if it keeps into 2020 2021, we will we will have a more premium clearly I'm not sure what you asking I'm trying not to answer there my questions I'm trying to give them the right fits your body.

Okay.

Well I think I I mean, what I'm trying to get out is that I get the premium growth situation right and then it's more the underlying obviously business is actually seeing improved price to write in rate, yes, just like you're seeing in your own business. It just would impact that could potentially have on your reinsurance margins Oh, yes of course.

Yes, you're right, we're seeing it sort of quarter share.

Relatively newer phenomenon. It's anecdotal is it seems to be starting even the excess of loss pricing now is picking up in speed. So thats also encouraging. So we may have some and ill add to your point, you're right. We're not a huge excess of loss at season, the traditional general liability line to professional lines you're right.

Well, we're benefiting from our quota share participant and companies. Yes. We are great. Thank you. Thank you Brian.

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

Thanks, a couple of small questions to start off with.

[music].

Are there any currency change the amount of mortgage insurance retained on paper work.

Ceded to Bermuda in 2020, but the plane I did.

No plans at this point as you know, it's all about we try to have as much capital as we can in offshore just because it's a better.

That are domiciled gives us much more flexibility, but at this point and as you know there's tax implications we.

Don't want a trip the be tax issue. So at this point no plans to change anything.

Okay perfect.

Second I know in the past.

You talked about capital deployment opportunities that ended up that BARDA again and in the UK and those are going if you get a sense that to what you're seeing now in the pipeline in terms of other potential opportunity.

I think where.

We're seeing a bit less off so I think people are busy more looking at their stuff in trying to improve their book of business I think thats ready and more of an inward focus.

I think you know M&A, we have we see all of them or we believe we see most of it transaction that are been talked about.

I think we were a bit more open and were able to strike some transactions over the last year, because the pricing was right and the opportunities was there.

Yeah, No, we don't see acceleration or annual somewhat of a decrease activity, but I think just serves as a result of the described marketplace being a bit more dislocated thats really what I would say.

Okay, and then that brings me to third question.

I'm wondering whether you talked about how combined ratio the still being recorded as profitable, but there's also the soft market impact, which at least I would incorporate suggesting that maybe the real combined ratios aren't as good.

Does that.

Delta look any different now than it did before Pat hard or hardening market.

That's a really good question Meyer.

I don't know the answer this I haven't looked at a number is at the end of 99 2000.

It doesn't seem.

Ill tell you my gut feeling my no it doesn't feel to be as much of a delta.

And also in terms of what impact it could have on a capital and Mark I think we were more levered as an industry 99 2000.

We were running at 1.31 0.4 premium to surplus now were <unk> 0.7, 0.65, 0.8, whatever so lot less levered, so probably more absorbable, but at the same time, there's less investment income.

So if you look at if you think that the market changes as a result of being net cash flow negative or having to not I think recurring income.

Then I think that it's we're probably in a similar position, meaning that the loss the losses or if you combine the underwriting income with the which was negative at the end of 99 with the investment income, which was very positive I think we're probably in a combination in a similar place, but we have higher capital so more cushion to absorb it.

Okay. That's very helpful. Thank you so much.

Thanks, Mike.

Thank.

One comes from Ryan Tunis from Autonomous Research your line is open.

Hey, Thanks, I just had a couple I guess first one.

But thinking about.

2020 has the potential year, given what's happening from a pricing standpoint for margin improvement for the industry.

Yeah, I understand why that could be a challenging.

What I can be challenging for some but I think when I look at arch relative to competitors, there's more of a short tail mix.

Whether it's in primary insurance also facultative three.

Hey, I guess mortgage you could just commented on it.

Why isn't there are more constructive near term outlook for margin improvement given you're clearly getting rate.

This is ray auto rate in some of the property lines, where where there does seem to be kind of lay up argument for margin expansion.

So let me correct you quickly line on insurance side, where 70, 75% liability.

The premium written so that would sort of sort of dampens. If you will the acceleration or the recognition of the improvement in terms and conditions. So make us more cautious so thats something you need to to bear in mind. This is on the insurance segment and again on the on the interim segment, even speaking to the short tail.

It's still does take a while to get through you know.

Again, like I said significant improvement in rates, we took place in though starting you know middle of middle ish of 2019. So it does still take a while to recognize and really see the earning coming through the on premium is a combination as as you know for other underwriting years on the reinsurance side I'm trying to.

Think of it I think it's also there's a fair amount of liability as well in there right. First one is also a fair amount of property other property as you as we mentioned.

It is also.

Leverage on the property Cat, we did increase the other property, we're running a lot more on the non cap excel.

This is more opportunistic and that Youre right, we should probably see whether we were what margin expansion. There wasn't we believe is there we should see it but again. It was written you know last third fourth quarter. So it will come again over the next to no. Other next 12 months. So it takes a while it takes all yet to be base in patients is a virtue in arms.

Understood and then.

My second one is just around I think weve. It seems like we've heard less from the reinsurers about the casualty environment.

Losses coming in.

You could just talk about.

The extension, which you know what are you seeing on the reinsurance book in terms of claims activity on the casualty side versus primary like is there a real lag.

Claim started to happen or is that probably still on the comp I mean any theories as to.

When and how we might see more paid losses, hi, guys on the reinsurance side.

It's a very very good question I think when we we do have a tale of two cities here I think that are.

Insurance are seeing their claims of course of course, we have that the the advantage or the the luxury to have an insurance company. That's on top of claims and no and participate the marketplace. When we look at what information our reinsurance folks are getting there was clearly a lag I'm not saying its misinformed and whatnot, but there was clearly.

A lag and it's been there forever. This is not a new phenomenon. Ryan this has been going on for years up for as long as we've been as I've been in the business. It's been there and it was there before my time, so there's always inflammation symmetry in inflammation delay by atomic gets to the insurance company. They have to look at this.

You wait booked a reserve and that book the reserve and then they in turn.

Ill informed their reinsurance partners on the quarter share so that easier because you are able to do more claims review and beyond top and I'll be side by side with them. You can also compare whether we have other of our clients on similar risks and whatnot on an excess of loss as you could expect it's a little bit more difficult at a further lag.

On that one as well so we clearly you have a lag and recognition and our reinsurance company.

Been really really Adam and proactive and try to recognize some of the losses that may not be enough enough reported and that's also what made us bid more careful.

Current writings or lack thereof in the liability space, but it's clearly a lag in on the reinsurance site.

That's helpful. Thanks.

Thanks Ryan.

Thank you.

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

Thank you everyone happy Valentine's day make it a happy Valentines weekend, if you haven't yet but through 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.