Q2 2020 Arch Capital Group Ltd Earnings Call
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Before the company gets started with its update management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward looking statements under the federal Securities laws.
These statements are based upon management's current assessment 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 calls that are not based on historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1985.
The company intends to forward looking statements in the call to be subject to the safe Harbor created thereby.
And it's been 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 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 and Mr., France warmer in Thursday may be good.
Thanks Louise.
Good morning, and welcome to our second quarter earnings call.
On a reported basis.
Oh, that's had an acceptable quarter, despite quoted 19 related economic disruptions.
Our operating results were good from the underlying accident year ex cat combined ratio perspective.
Each segment that benefited from the recent rate improvements.
All three segments, we're poised to seize the opportunity to grow based on the underwriting returns outlook.
Consequently, this quarter rate improvements continued to enable us to expand all were writing you know property casualty unit as we increasingly achieved acceptable risk adjusted returns we know from experience that this environment.
The appropriate time to raise additional capital so that we can more significantly take advantage I'll just hardening PNC market.
As we have discussed in previous earnings call, we continuously rank order our capital allocation opportunity the long and within the units and today.
Since the insurance and reinsurance prospects have moved up the scale, even as EMI returns improved at the same time.
To be sure.
We are experiencing on person unprecedented times across our world and the insurance industry. There is still much uncertainty from the pandemic and its ultimate impact.
The PSC industry faces emerging claims trends the possibility of long lasting a lower investment returns and the strain from on model of cat losses, and chronic on the pricing from the soft market years.
This new reality points to the need for further a premium rate increases for the foreseeable future.
Well not all lines are fully attractive on an absolute basis.
The positive momentum is evident and has accelerated through the second quarter.
Turning to our operating segments I'd like to begin with the mortgage insurance segment.
Reported delinquencies were 5.1% at June Thirtyth, 2020, and came in better than our expectation last quarter, which was the early onset of the colder than 19 pandemic.
As you may recall from our call last quarter, given the uncertainty surrounding Cobiz 19, we were forecasting more pressure on the housing market and a more pessimistic view of the economics of the economy that is then as indicated by the latest delinquency data as we stand today, we believe that the U.S. semi industry has been that benefiting from.
A combination of.
Solid credit quality of the post 2008 crisis originations to favorable supply and demand imbalance in housing inventory as well as three strong and Swift government intervention to help homeowners.
As a result, we're seeing better than expected delinquency rates emerging this quarter, even as rates are at elevated levels, reflecting the rest of recessionary environment.
Our current incurred loss view equates to a claim rate slightly above 5%.
On newly reported delinquencies, while this claim rate is significantly higher than what we have seen from claim rates on the previous hurricane Forbearance program. It is also significantly lower than what the industry experience in the GFC and reflects the better underlying conditions I mentioned earlier.
Because of the current economic conditions.
The credit quality of our new insurance written business as measured by average FICO scores and loan to value is stronger than a year ago mortgage lenders have tightened underwriting standards and a higher quality of loans originated is a direct benefit to us we saw record mortgage originations fueled by the historically low mortgage rates.
And that has created a surges in both refinancing and purchase activity.
This favorable financing environment is supporting home prices, we see prices rising around 5% on an annual basis across the us.
Despite the weakened economy, we estimate that the mark to market homeowners equity in the vast majority of our policies is in excess of 10%.
The level of equity as a reminder has proven to be a strong indicator of it borrowers propensity to default.
The higher the equity the less likely a default will happen in turning to a claim.
Turning now to walk PNC businesses.
First let's talk about Colby 19, which is affecting many lines at the same time and developing much more slowly than and natural catastrophe.
Adding to the uncertainty is the fact that many coverage issues have yet to be resolved all of this informed.
How we approach to our reserving for corporate 19 within our PNC segments based on a bottom up approach to develop our view of ultimate losses Croswell will cover this in more detail in a few minutes.
Moving onto the PNC business environment, starting with insurance.
We see a growing number of opportunities as net premium written grew 7% in the quarter for the unit. Despite the fact that our travel premiums decreased materially due to the pandemic, excluding travel our insurance and BW growth would have been approximately 17%.
Most of our growth was generated in the DNS casualty DNS property professional lines and a specialty lines written out of London.
About two thirds of that increase came from exposure growth and the balance from rate.
Our overall insurance renewal rate change was plus 8.5% up significantly from plus 5.5% in the first quarter.
Earned premium that we wrote at higher rate levels over the last several quarters help lower our quarterly accident year combined ratio ex cat to 96.1% from 99.4 for the same quarter in 2019.
In summary.
Our insurance groups main mission right now is to grow in those lines where conditions improve enough.
To allow for an appropriate risk adjusted return and the market is allowing this evermore.
Over to the reinsurance segment now.
We had very strong premium growth at plus 50%, reflecting ongoing dislocations and improvements in the marketplace.
Growth opportunities presented themselves across the vast majority of our business lines property Cat NPW was up 153% other properties was up 70% in casualty was up 35%.
Partially offsetting this growth where declines in our motor quota share net premium written due to the impacts of corporate 19 exporter decreases.
Generally our reinsurance segment is able to seize on opportunities earlier than our insurance segment. We're also incrementally increasing our capital allocation to our property cat sector. However, our PML usage is still substantially below what we could deploy if return expectations were to get to levels. We saw in 2000.
And then six.
Our reinsurance accident quarter combined ratio ex cat improved to 87.5% from 92.2.
Over the same period in 2019, this partly reflects our opportunistic underwriting strategy and capital allocation over the last two years, but also is a reflection of the benign attritional loss experience relative to the prior years quarter.
To summarize for our PMC operations after several years of cycle managing our portfolio, we are well positioned to deploy more capital at attractive returns.
As respect our investment returns our outlook remains cautious as we believe to economic recovery could be slow and take several quarters to develop accordingly underwriting performance should be the driver of earnings for the industry in the near term, which we believe should help to sustain the momentum of increase.
In premium rates.
From a capital standpoint, we are in a strong position and we have room to grow with our clients. After many years of playing defense in other words, our core principle again of active cycle management exercised by our Tms position us to move much more aggressively into a growing number of improving lines last but not lease we want our.
Shareholders to know that our employees hard work in our clients strong relationships over the last three months.
We are critical in getting us through these tough times and for that a huge thanks to all of them.
With that profitable take you through the financials.
Thank you Mark and good morning to all we at arch Hope that you are in good health.
On to the second quarter results as a reminder, and consistent with prior practice. The following comments are on a core basis, which corresponds to arches financial results. Excluding the other segment.
The operations of Watford Holdings limited in our filings the term consolidated includes Walker.
After tax operating income for the quarter was 16.6 million, which translates to an annualized 0.6% operating return on average common equity and four cents per share.
Book value per share increased to 20 $27.62 at June Thirtyth.
Up 5.8% from last quarter, and 12.1% from one year ago.
The increase in the quarter was fueled by the strong recovery in the capital markets.
Outside of the losses related to the Coven 19 pandemic, our underwriting groups continued on their path of solid growth and improving results as we benefited from the generally improving property casualty markets.
Losses from 2020 catastrophic events in the quarter, including Coven 19, net of reinsurance Recoverables and reinstatement premiums stood at 207.2 million or 13.5 combined ratio points compared to 0.5 combined ratio points in the SEC.
One quarter of 2019.
The losses impacted both our insurance and reinsurance segments and include 173.1 million from the Kogan 19 pandemic as well as 34.1 million for other catastrophic events, including losses related to civil unrest claims across to you.
Yes.
The losses, we recorded in the quarter for Coven 19 across our PNC operations or split, 45% insurance and 55% reinsurance.
These loss estimates incorporate additional information that became available during the quarter and represent our current assessment and best estimate of the ultimate losses for occurrences through June 30.
Based on policy terms and conditions, including limits supplements and deductibles.
We are confident that the approach we took to develop these estimates as conservative and are comfortable with our estimates as they currently stand, but needless to say, we continue to monitor to Pan monitor the pandemic and its effects as they play out and we will adjust our estimates as necessary in the coming quarters.
As of June Thirtyth, the vast majority of our coven 19 claims are yet to be settled or paid as approximately 90% of the incurred loss amount has been recorded has IDN are incurred but not reported reserves or as additional case reserves within our insurance and reinsurance segments.
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In the insurance segment the loss reserves, we recorded this quarter for the pandemic were primarily attributable to exposures and our North American unit.
Our cross the national accounts programs and travel lines of business.
In the reinsurance segment the majority of the losses came from the property catastrophe accident and health and trade credit lines of business.
As regards the potential impact of KOVA 19 on our mortgage segment. It is important I mentioned that our estimates for our US primary mortgage insurance book are based only on reported delinquencies as of June 32020 has mandated by gap.
As we discussed on the last call.
Our expectation at the end of the first quarter was for the delinquency rate to progressively increase throughout the remainder of the year.
Where the resulting expectation that underwriting income for the overall segment would be minimal for the remainder of 2020.
While we did see such an increase in reported delinquencies in the second quarter. The current delinquency rate of 5.14% is approximately 30% to 40% lower than what we then what we expected it would be one we developed our forecast at the end of the first quarter.
While that is a positive sign for the ultimate performance of the book. We are also aware that many uncertainties remain including their rate the conversion from delinquency to cure or claim, which we expect to be different than under more normal conditions.
In addition.
It is extremely difficult to predict how reported delinquencies and forbearance, which represent approximately two thirds of total current delinquencies will behave overtime given the lack of historical data that is directly applicable to the current economic reality, which includes elevated unemployment rate.
Historically low interest rates solid home price levels and unprecedented government intervention.
As we look towards the remainder of 2020 for our us on my business.
In light of that developments, we have observed during the second quarter. Our current expectation is that pretax underwriting income for the remainder of 2020 for the entire mortgage segment will remain positive with a combined ratio in the 70% to 80% range slightly better than the result, we reported this.
This quarter.
In summary, while we are still faced with significant economic uncertainty.
Our expectations for the mortgage segment her definitely more positive than what we thought only a few weeks back.
In the insurance segment.
Net written premium grew 7.1% over the same quarter, one year ago. A strong result, given the material impact Coven 19 has had on some of our businesses so such as our travel and accident unit.
As Mark said, if we exclude this line the year over year growth in net written premium would have been 16.9%.
The insurance segments accident quarter combined ratio, excluding cats was 96.1% lower by 330 basis points from the same period, one year ago.
Approximately 90 basis points of the difference is due to our lower expense ratio primarily from the growth in the premium base from one year ago and reduced levels of travel and entertainment expenses this quarter.
The lower ex cat accident quarter loss ratio, primarily reflects the benefits of rate increases achieved over the last 12 months.
Prior period net loss reserve development net of related adjustments was favorable at 2.1 million generally consistent with the level of recorded in the second quarter of 2019.
As for our reinsurance operations, we had strong growth of 50.3% in net written premiums on a year over year basis, which was observed across most of our lines and includes a combination of new business opportunities rate increases and the integration of the Barbecuing reinsurance Bill.
Yes.
The segments accident quarter combined ratio, excluding cat stood at 87.5% compared to 92.2% on the same basis, one year ago, a 470 basis point reduction.
The year over year movement is primarily driven by a more normal level of large attritional losses compared to a year ago.
Which explains approximately 330 basis points of the difference and the impact of the Nonrenewal of a large transaction from a year ago, which contributed approximately 50 basis points.
Most of the remaining difference is explained by operating expense ratio improvements, resulting from the growth and earned premium.
Favorable prior period net loss reserve development net of related adjustments was strong at 28.9 million or six combined ratio points compared to 3.1 combined ratio points in the second quarter of 29 team.
The benefit was mostly in short tail lines.
The mortgage segments combined ratio was 80.9%, reflecting the increased level of reported delinquencies in the quarter as mentioned earlier.
The loss ratio in the quarter is based on an assumed claim late cream rate claim rate of on newly reported delinquencies for our US on my book up slightly above 5% combined with an average expected future claim value core severity that is approximately 50% higher than.
Claims that we settled and paid in the quarter.
This difference is explained by the fact that the distribution of the newly reported delinquencies carry a higher average outstanding loan balance as a higher proportion is for mortgages from the more recent origination years and from states that have higher loan values. So.
Just California, Florida, and New York.
The expense ratio was lower by 100 basis points over the same quarter, one year ago, reflecting lower operating costs, including reduced levels of travel and entertainment expenses.
Prior period net loss reserve development was minimal this quarter had 0.2 million favorable.
Total revenue total investment return for the quarter was positive 372 basis points on the U.S dollar basis as the strong recovery in the capital markets produced healthy returns across our entire portfolio.
The duration of our investment portfolio remained basically unchanged from the prior quarter at 3.18 years.
The effective tax rate on pretax operating income resulted in a benefit of 0.9% in the quarter, reflecting a change into full year estimated tax rate that geographic mix of our pretax income and 110 basis point expense from discrete tax items in the quarter.
As always the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction.
We currently estimate the full year tax rate to be in the 9% to 12% range for 2020.
Turning briefly to risk management.
Our natural cat PML on a net basis increased to 832 million as of July one, which had approximately 8% of tangible common equity remains well below our internal limits had the single event, one and 250 year return level.
The growth in the PML. This quarter is attributable to both Ns property within our insurance segment and property lines within a reinsurance segment, reflecting our ability to deploy more capacity to opportunities at safely exceeded our return thresholds some of which were slightly tempered by additional reinsurance purchases.
As you know we issued $1 billion, a 30 year a senior notes at the end of the second quarter enhancing our capital base and furthering our objective on me of maintaining a strong and low liquid balance sheet.
Our debt plus preferred leverage ratio of 23.8% remains within a reasonable range.
As discussed on the prime recall, we paused or share repurchase activity since the start of the pandemic and we do not expect to repurchase shares for the remainder of 2020.
At U.S. semi our capital position remained strong with our Pmires sufficiency ratio at 161% at the end of June.
Which reflects the coverage afforded by our Bellamy mortgage insurance linked notes.
In late June we were able to obtain 528 million of coverage on our in force booked for the second half of 2019.
Our ability to execute this transaction highlights the credit quality of our in force book and further protects our balance sheet should an extreme tail event materialize.
The Bell Amit structure is provide approximately 3.1 billion of aggregate reinsurance coverage at June at June 32020.
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 then the one key on your touched on telephone.
With your question has been answered we streamed live yourself from the Q. Please press the pound Keith.
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Our first question comes from at least Greenspan with Wells Fargo.
Hi, Thanks, Good morning on my first question on property casualty side you guys.
Seem pretty optimistic and.
Starting to see if you saw a continuation of pretty good growth in the quarter.
And so we.
Don't disclose on the capital supporting on your property casualty versus the mortgage business, but if we're sitting outside the company, we just want to get it Ben.
The opportunity.
Capital that you have.
Kevin.
We could you potentially if there really has a strong market double the size of your insurance book of business on your current capital base.
I think it's a fair assessment I think in general you could think of capital allocation on premium from the PNC as a one to one that sort of gives you a range for capital usage, but certainly the ability is then I would say that is also informed by how you develop at least if you.
Property Cat is a different annual capital.
Capital requirements than than other lines of business such as you know.
Quota share, let's say on the region side on on liability. So there's a lot has plenty of room for us to growth.
Great and then on that side of thing on you guys see some pretty helpful color that the current delinquency rate.
About 30% to 40% lower than what you thought it would have been you set the new guide.
For the outlook for the underwriting positive underwriting mortgage income for the rest of year, 70% to 80% combined ratio can you give us it Ben.
Thats delinquency rate trend.
In the third and fourth quarter.
Well, we don't really.
We had the quarterly movements are a bit harder to predict but I mean, we had forecasted.
Last quarter somewhere around that 10% or so delinquency rate by the end of the year, We think new right. Now we were thinking that there will be more like around 8%.
So obviously, we're we're monitoring weekly and when we get data that comes in from all our Servicers et cetera, but thats kind of where we're at there's about 8% delinquency rate by the end of the year.
Yes, I think to address this at least I would add to this at least I would say that this is I know, it's a one quarter data points. So it will take us and we still take a longer term view and on a fully all reflecting.
The decrease of the lesser.
Delinquency that we had.
You had reported versus what we expected by you had 30 to 40, and then profitable yet to 20% decrease hotels, you sort of at levels, where we're thoughtful and measured in the way we want to recognize in.
Any immediate improvement.
That's helpful and then my last question.
You guys it exceeded two geraghty claim.
You said was about 50% higher than from the claims you settled in the quarter just given higher housing values I believe if I look in your supplement on the mortgage page. The average case reserve heard to follow up went down to 6.9 thousand in the quarter and it had been 14.4.
Sure why would that number has gone down if you're actually.
That is more for the current client and just trying to reconcile those numbers.
Yes. The average is very much a function of the percentage of the delinquencies that effectively in early stages of delinquency. So if you think of all these newly reported delinquencies in the quarter.
They carry again effectively a five or so percent.
Claim rate versus the older stage delinquencies and the percentages go up as the did the more mature. The later stage mature delinquencies. We have so so it's really there is no changes in assumptions I'd say, it's really just the way the mix of the portfolio that mix of the delinquencies that week.
Currently have.
Changes over time and this this was really as you know the first quarter, where we had a large surge of delinquencies coming from the pandemic.
Okay. Thanks, I appreciate all the color.
Equally.
Our next question comes from Mike Zaremski with Credit Suisse.
Hey, good morning.
I guess sticking with that my.
So clearly there feels like there's some conservatism built in it you expect delinquency rates.
To continue moving north is the.
It is the government stimulus kind of a big X factor in terms of like.
How the 600, our weekly unemployment insurance subsidy, whether that continues or not trying to think about.
I mean, it could just should we just probably be looking at unemployment levels as well, it's trying to think about how to gauge because clearly results have been good so far much better than expected which is great.
So Mike I think there Dude easy question is unemployment matters. It is a contributing factor that precipitate if you will it delinquency and claims ultimately the number one the leading indicators I said in my notes that will tell you whether it is no.
Heighten increased risk of delinquencies is really the house price index. So to the extent of the house prices are stable keep on going up or that there, which is another way to say as long as there is a reasonable amount of equity in the house. We saw the borrowers do not tend to walk away from from their obligation the mortgages and.
No. So if you if you sort of great financial crisis. What happened is we had a combination of house price decreases and unemployment. So we sort of contributed to the acceleration and in a more and more of an acute delinquency rate that we still think refunds crisis, which were not seeing right now so what we're focusing our.
Of course, we look at what the government is doing that's going to be helpful. And I think we'll see more of this impact at the end of the forbearance period, but for now the house price index is extremely encouraging to us and really is a leading indicator on the propensity for homeowners to default.
Okay that makes sense and its helpful.
Then.
In terms of get a number of questions about.
The court cases in the in the United Kingdom.
The FDA is kind of been been writing about.
About that.
Is that contemplated in your co bid.
In our whether.
Whether those court cases go for or against the industry.
Yeah, we've taken a conservative approach and we actually had reserved for it as the end of March So we have.
Reserve for it appropriately with.
A fairly good level of reinsurance against that so we're we've pretty much reserve there.
If things like known before it's Nick could hopefully there'll be could be good news going forward for us there.
Okay, and just lastly quickly and Charlotte people ask about Canada, let's segments.
Any thoughts on new capital antique entering the broader.
Insurance and reinsurance marketplace is steel.
Do you feel that capital will continue then or is it having an impact on your ability to to play offense at this point or is it still just a drop in that bucket any color would be would be helpful. Thanks.
So Mike it's a little bit of everything you mention I would say that the capital needs that are out there that we see in terms of clients in fund trying to find solutions and towers of coverages, meaning a place a new plays to the new home.
We would need a significant amount of capital to neutralize that impact. If you will so we're seeing actually acceleration, even though there are there is more capital being raizen and new entrants as we speak thinking about coming in we're not seeing.
Any.
Adding of the rate pressure that we see right now and I think you know the demand for capital are pretty pretty high to know if there's a couple of large players that were really providing a lot of capacity acute capacity.
In very very high cap capacity mongers in the industry I pulled out significantly so that means that there's a lot of lot of other capital that needs to find its way around to support it. So I would say that we're not seeing we hear what's out there what's happening.
We're encouraged by we raise some more capital and other folks set ourselves or will have access to the business access the declines and relationships.
We're able to raise capital it bodes well for the health of dose of those companies, but any new entrance.
We'll take a while to to get ramped up and nothing it's impossible I think is totally doable, but it's certainly not something in a we're losing sleep over.
Thank you.
Our next question comes from Yaron Kinar with Goldman Sachs.
Hi, good morning, everybody.
First question Hi, first question on semi in and then a couple of on on the covered losses. So am I.
I haven't really seen any significant pull back from that market. So I guess should I take that can mean that even with all the total at an economic uncertainty you still viewed as a pretty attractive business.
Yes. It is still very attractive I would even argue or on the production in the second quarter and as we speak I was actually better than it was six month or a year ago were.
The rate that's been rate pressures and also quality of underwriting quality of the originations that isn't a lot better than it was even in a year ago. So yes, there is a lot more.
Activity as the activity onto the to be fair has also driven by to read the refinancing market right, which was not there and in by dropping the mortgage rate below 3% that does create more business back into the in the market as a result of that there's a lot of prepay right is a higher level to the lower level of persistency.
Which means that is more churn if you will in a portfolio of business. So I think is as a reflection of people coming out of their their current they're coming out of there a higher mortgage rate and is this refinancing or whatever we still the makes economic sense that we're on the receiving into to grow that's what we have such we believe in a much higher and I double you than otherwise.
It had been in a more stable.
Marketplace.
Got it that's helpful.
And then with regards to the covered losses, maybe a couple of questions. There one when you talk about IB and our.
Do you include only event or losses from a bench that up already occurred or do you also include advance in the future that are probable very pago whatsoever.
Well.
That's a good question, which I do know people are I think companies or maybe answering that.
I will say differently you bought I think awards, we have to be careful with how we used the words right. So I'd say no question that we can only reserve for incidence or occurrences that have happened before June thirtyth I mean, that's under GAAP and anybody at tells you that reserving for occurrences that are going to happen in the third or fourth quarter I. Just don't know how you can do.
Yep.
What we have gone is set again, a high level I think a prudent level of IDR on.
Both insurance and reinsurance on things that we know happened or think have happened right I mean that the whole concept by by DNR. So we have certain claims that ever been reported we don't know and certainly when you get into.
Structure is a when you're in the next us position, you're somewhat making a judgment on whether or that the claim will attach in your layer et cetera.
And Thats, where you know that theres a bit more theres a bit of art that goes on and not necessarily tons of data science around it. So I think the answer to US is we've reserved for everything through June 30, and we'd say guys had ultimate right. So the truly our best estimate of what we think the exposure is and you know.
That's where we are I mean, we can't really do more than that at this point, given the accounting rules and guidelines.
And then final question also investor calls that.
Between first quarter in second quarter.
The increase in loss and coated losses as as some of that coming from.
I'd now or is that he had already set up and one Q, but then took a second market and realize they need to be higher or or is that from really new lines of business and new news.
Areas had not been not previously.
Reserve for well I'd say, it's a bit of both on the I would say uninsured side. For example at Q1, we had reserved primarily in set IDN are primarily in our international book, because again back to the in the UK in particular property book or regional property book, There. We we worthy opinion that there was exposure there.
And we took action and we booked IB enter on that I'd say in the second quarter. For example, we booked and I mentioned it down national accounts, Thats, where we have workers comp exposure you know again, if you want to be very technical at one point you to me that the depths are that.
The occurrences Adam happen at the end of March they started to take place spectra, especially with healthcare workers. As an example in April and May So thats. When we that's what we reserved for in the second quarter I'd say on on the reinsurance side, it's a bit it's a bit murkier, it's not we're somewhat at the mercy.
To your or have to have discussions with our.
Our seems and on the property Cat book for example, we had booked a little bit of again, our at the end of Q1, but through additional discussions and investigations and and file reviews in the second quarter, we booked a bit more on that front than the same is true in trade credit so hopefully that answers that but it's a bit of both I'd say.
That is helpful. Amazing maybe one other one if I could speak again on the BDI funds and reinsurance alright the increases in.
And co philosophy your reserving for today are those coming more from international accounts or more from from megawatts correct more international absolutely, whereas you know we have exposure I mean, all I'll Continental Europe in particular, there's brands here there is certain countries, where the VI coverages as more and plus it.
And provided by the primary policies. So that those are the some of the examples that we are policies that we are treaties that we're reserving for this point.
Thank you very much.
Our next question comes from Josh Shanker with Bank of America.
Can we talk little about July and out impaired.
Noticing for for more difficult.
Could you repeat the question please Josh.
Yes, when we talk about compare May June July.
Have you receiving mistresses from forbearance and default up yes, I think no. We think the one plays to the one thing that we could say I mean, it's the data is is probably lagging a little bit phone from our perspective, but the good ones to look at as the.
This does information back not I think in the MBS, providing inflammation as to what is their estimate serving the market than declined their clients, who what the forbearance percentage I think it was pretty much flat going as we got into made towards the end of may into June and through the second first or second week of July and is it.
Button down since then so were about 6.1% behind that metric.
In presented forbearance.
On the GFC portfolio from the industry data and now it's at 5.49% as of July 13th I believe this last week. So we've seen.
The increase right now just whether it's it continues that way or goes back up again, you know as you know a lot of people pay on the first in the month of we'll probably have more information into the clear picture as to what obviously July looks like in the middle of August.
Okay. Thank you and if youve any evidence one way or the up.
Well.
Star.
Has had any.
Discernible difference in clean behavior options they claim noticing behavior.
Compared to how a lot of your competitors reported prior to your.
Through adopting your methods.
Yes, I think I think it does it has had an impact I think we talk about cycle management. We we also were doing it possibly a little bit more under the radar screen on them I think that are ratestar approach with all the parameters actually took us away from from the higher 95, LTV higher DTR wise in certain gene.
Radical area. So yes, we do believe if we adjust for all the variation I mean, it's not huge differential but there is a slight.
Aside improvement or slight difference going to our advantage in terms of our delinquencies based on our portfolio and the risk that we underwrote for the last four five years.
All right and one last one I think this seems to al I think you mentioned, the EPS change or maybe I missed whereas rds as a percent.
Correct, we adds about ended the quarter.
Still still right at 8% pretty flat.
We didnt couple of moments across that kind of contributions by 8% of tangible book.
Thank you probably answers.
Youre welcome.
Thanks.
Our next question comes from Ryan Tunis with Autonomous research.
Hey, thanks.
I appreciate the my guidance I realize all initiatives like literally impossible to.
Nail down on the all go out and Oh, pushing a little bit more because it it is interesting.
So when you think about going on in the full year delinquency rate in your mind. What are you thinking the percentage of Forbearances, you're going to be of I think you said.
8%.
How much that is still Barents versus what you think our lives and I got it.
Our real delinquency.
Well the forbearance that we will declared the will report that we're reporting to you our delinquencies by definition right. So it's very hard to see I know, what you're asking and I think a one thing that we will tell you about projecting forbearance rates in delinquency rates in this forbearance world is a data is really hard to get an is lagging a fair amount so very good.
Nickel for us to tell you.
And I guess my follow up two is.
How are you planning on treating the delinquencies engineered age. So you obviously using a pretty conservative.
Incidence rate of 5%.
As those move into the those aged six loans. So whatever like are you going to keep it at 5% or even to.
You can assume something bigger than that.
I think two moving parts of that 5%, Brian one is the it comes up really out of as our pre coal bid.
I know these to ultimate which was 7.9 and we gave a discount about 33% haircut by virtue of being a four behrman. So as we move forward.
You know that 7.9% which has.
Claimed thats, a three month for us to clean up eight two years or.
Nine months, even though it's a forbearance we might have to increase those those rates, but at the same time, if the forbearance programs are getting better.
We might we might get a bit more discount or less discounts as a really really on and you're right. You just pointed at the beginning of you'll comment I think I should probably that you answered your own question, which is is pretty much impossible to answer at this point in time, but right and the four and we have all we have is a seven point on prequalified ultimate and it would be that we saw a starting point being so.
I am discount recognizing that the regular forbearance program on Hurricanes, which is not right now.
Is as low as 2%. So we're trying to funnel we around that environment also recognizing that the delinquencies out of this crisis discover 19.
We'll be longer to resolve because the forbearance program as we all know will last for 12 months.
So we're going to be it's going to take us a while to really understand the underlying fundamental characteristics of those risk and to add all this to all the if that wasn't enough no. We'll have remediation programs put in place that gses, which presumably should help a tremendous amount, but but again it remains very already to see to say.
Understood and then lastly.
Mark this is truly a hypothetical but.
If you on a dollar of capital for the next year or two years and you could only allocated to reinsurance or primary insurance is very clear preference for which when you get allocated to how many years.
Two years.
Man.
To me you asking me to choose among my kids in like a three kids have differently.
I would I would split it in 303 ways off highway, which Rick I would like to now I mean to me to me. It's an all in all its not an all or nothing but I do believe right now at this point in time, which is I think what you're getting into which I mentioned in my comments the returns on the reinsurance.
Our quicker to a high level quicker, but in terms of value creation over longer time insurance, we'll get there and get traction is just it just takes a longer time to accumulate business at a higher level, so but the problem with the reinsurance is great for a couple of years, but then you might lose that business. So it's not it's not at all or nothing kind of situation I wouldn't want to go.
That's the all in reinsurance, even though they have higher we are always sooner the cost of losing long term value creation from the insurance unit.
Thanks for the Fox.
Good.
Our next question comes from Meyer Shields KBW.
Thank you I wanted to follow up on that question, but in the different direction, you talked about reinsurance maybe recovering.
Faster than insurance.
How is the current Harding cycled playing out in terms of speed to relative to past cycles any observable difference.
Not really I would say that.
You know we might we have that the discussion before how hard market never happens overnight. It takes five signal two three quarters losses. After develop management team have to figure out what do you want to do when put pressure on their underwriting team. So it's no it's not it's not unlike.
Others, though that we've seen before I would say that we were going to a strengthening of the market conditions, even before coded 19, I think that Colby this probably accelerating the reaction and the willingness and the bonus.
We see in the underwriting teams around the industry, but they're still pockets my aware people seem to be little bit aloof and what's going around the nested. These it. These are the areas. We're not we're not going as much as we said, but I know at every cycle turn is different.
But I am not seeing.
Significant different it does take up and.
One last thing I will tell you. The one thing about this when that that we have yet to see is the one one renewal and reinsurance is a really important renewal date. So we'll have a lot more sense as to how quickly in how we active the market will be as we head into this one.
Okay. That's very helpful. Thank you.
In the past, we've been I get targeting improvements within insurance that would get to 95% combined and when we look to the lens that current pricing is there an update in terms of wasn't at 95 can you can become.
I hope it's lower.
But.
All kidding aside my I think that the.
The 95 was put in place as a as an aspirational number.
Two three years ago now two years ago now.
And then into interest environment that was different so I think.
Right now what we're passing it through this was sort of an aspirational of as a guiding.
Sort of target for it for insurance group I think right now what we're seeing is we're going through every different line of business in business unit and attributing capital and return on investment and were pitching everything to get to the right level. So 95 is is that over simplistic way of looking at this but all things being equal at.
Like that to be lower by for the industry and that's also why you'll probably see a bit more pressure.
On the pricing around us in the industry.
Okay Perfect and then final question if I can just in terms of whether youve had to taking into account, whether it's cold or something like that that so remote or other pressures, whether you dialed up your overall loss trend numbers in insurance or reinsurance.
Not in a meaningful way I think I mean, we we've been pretty cautious and I think I've been I'd say realistic about what the loss trends have been and what we expect them to be going forward.
We as you know, we havent relied exclusively on on.
The last five or 10 years of data we Super bowls are owned views on what a more normalized view of loss trends is or should be and we we I think we're still very comfortable with where we were asked and recognizing that yet cobot is a bit of an outlier, but at this point haven't really factored in any material changes.
In our loss trends in how we price of business.
Okay fantastic. Thank you so much.
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Our next question comes from Brian Meredith, Yes.
Yeah. Thanks, a couple of here for you first when I don't think you mentioned it but was there any benefit at all in the quarter from just lower frequency of economic activity kind of claims perspective any lines of business.
I mean, there's some indications that in some places, yes, there's lower economic activity, which will translate to lower losses or claims.
Really haven't reflected that yes, I mean, we want to take a cautious approach on that so I'd like to think that maybe there is some to come down the road, but for now at that having haven't factored that in anywhere in our numbers.
Great and then second question just curious Mark as you look at I guess the deals active there so component to it.
Liability calling identification.
As you think about it if that doesn't go through is that a potential issue here for you in the insurance industry and how do you think about it from an underwriting perspective, you're going forward.
I missed the word you said Ron could you repeat had already part questions well it's basically.
Curious about protection or would you think about as far as the economy reopening here and potential liability associated with kind of could be 19th the current I think it's called the heels actually the cure to act is got some language in there trying to great businesses meeting before right.
Just curious your thoughts around that.
While it's not good returns.
That is going to allocate more liability to us or presumption to us is not good but I think you listen these these laws.
Our always there is always.
Things that happening, we're going out to react to what we see when we see it that's all I can tell you, Brian it's very hard to to sit here and go through.
What impact it is if we were to react and good is full a drill about everything that goes in that has a bill Thats proposal would would take a love our time, so we'll react when we react to it.
And Mark I think I didn't get it wrong I think just taking my question. My question more is from your insurance policies perspective, as you look going forward is decline as it is economy reopen Jeff is clearly you PL.
Exposures as GL exposures, all sorts of exposures to potentially present themselves a benefit how do you. How are you thinking about that from an underwriting perspective.
Well, we have written you know policy that have PPI Ela exposure, we have you got exposures, but we're not.
A large large risk writer, we don't write a large insurance, where that's certainly something that would be helpful to us.
We would we would argue that a lot of the larger claims a lot of one of the focus from the lowers plaintive bar would be focused on the larger deeper pockets insured. So thats one thing that for US we will have a fairly amount of good healthy amount of reinsurance. So we don't overly concerned with his sideways.
No.
We havent changed yet not yet okay and then another just quick one here that you're travel insurance I'd be curious how big of a book is that and obviously, we're probably going to see some continued pressures there for the rest of the year.
Yes. It was originally about a couple of hundred million dollars of premium and now it's down I mean, you could to numbers you can multiply by four idle need to 250 actually for the year. So thats, it's been it's taken a.
Big Big tent and Thats also explains why the growth was 10 more tested this quarter than otherwise could have been.
Great and then one of the just quick one here for yet I.
I know you guys launch the site targets was in the first quarter any thoughts about additional kind of alternative capacity here to it to potentially capture some of the.
Good good attractive opportunities in reinsurance.
Good question, Brian you know you're trying to get us to see something we don't want to say, we can't say, we won't say and we don't we don't mention about we certainly always on a look out to raise capital to deploy with third party.
Lot of discussions are happening all over.
We will have probably more update as we as we see it happen and will be communicating to you to the extent as appropriate but.
But a much greater clarity yeah, great great and last one just just quickly.
Any any updates on.
Covestor no strategically still something we very much.
I think is valuable for the shareholders lot going on.
We're still going through the process of approval process and we're we're keeping a keen on whats happening I think there we reported results yesterday, which were better than the ministry to expected. So we'll see how that goes historical there as well a developing situation with them. So.
Great. Thank you.
Our next question comes from gel Stephano. Please state your bank.
Yes. Thanks, a quick one on the Bellamy transaction in bringing about the potential for these moving forward I guess.
It seems like the.
Well, let me deal that was done in the past quarter, just given the detachment was probably more for S&P capital credit then in P. Myers and when we saw an M&A.
Cure play come out with their own idling transaction looking.
In my mind more of a traditional attachment point in the low single digits.
The spreads on of the pipeline was significantly higher up how are you thinking about the good managing the tail risk, but let me provide.
Versus just the capital credit, but could be from playing I would think something that could be considered well above book that they're working layers for the for the EMI reinsurance coverage and the capital relief or something like that might provide.
Yes. Good question I think it's always something we evaluate when and if we place or look at that options that are in front of us.
You are correct. This one attaches the last one attaches above the Pmires credit.
But we're still very much and we have a healthy pmires ratio so at that didn't really.
Concern us too much at this point not to say that next time are down the road, we may not go back to a lower attachment point.
But the focus was really yes, it's a it's an available source of capital that from a rating agency point of view S&P, you're correct that.
It covers that it provides us coverage there and also we felt as being the first one out of the gate.
Even before the Gses to go back and access to capital markets was we thought a very strong message.
Demonstrated the again I touched on it the quality to book and the Investor base is still very has a lot of interest an appetite for the product. So I think we were happy with a placement.
No question, it's always too expensive, we'd like does unit price to come down we hope they do down the road.
For the time being you know given the economics in front of US we were I think as it was a good move on our part.
Got it thanks to the extent that you guys have a disclosure whistling you keep in the background.
I think it might be helpful to see the USA might.
It does aggregated from the international in the mortgage reinsurance books just given.
The significant differences in how those combined business as it was excellent.
But thanks appreciate it definitely back thank you.
Our next question comes from Geoffrey Dunn with Dowling and partners.
Thanks, Good morning.
I guess first just a quick number question can you quantify the impact of the accelerant to singles in the quarter.
So we do this I think it's about 50 million.
Okay and then.
Well I think forward path the end of new forbearance. So early next year.
So.
Given what you know about the economy now obviously very different from a couple of months ago.
How would you think about.
Claim rates on new notices without forbearance, because it again as you pointed out it's very different with home prices.
Greetings, we've seen if we're going into recession or not and I think mark last quarter. You suggested we might be looking at 13 14.
What you knew them. So what do you think about that type of number as you get into early 2021 based on what you know today.
I think the 5% is probably.
This is like on any of these what you're talking about ultimate claims rate for the portfolio.
On on anybody new notices come into forbearance go yet.
Right I think what were seven point not recorded I think that the forbearance would be.
Pretty pretty helpful and to bring it up not bring up to the 13 14, you just mentioned I mentioned first quarter. This Bobby My gut would tell me a slight increase for the while until we see things shake out and things getting back to more normal season, I think no reverting back to some kind of level, let into four into forbearance program were to play out.
Which of the out is still very uncertain as you as you know Jeff.
I think that we should get back to it might the elevated for while maybe 12, 13% no for the wild but it should go back down at some point.
Our next year I would say okay.
All right, but you do think given what you know about the economy and built up equity that you could still again.
12% type of incidents assumptions.
Yes, the yes annuities right on the window. These for regular DQ not for the forbearance piece. The forbearance beef. We gave we did give a discount right right. There is a discounted that Greg. So yes, it's kind of from Mike you back again.
Alright, thank you.
Thanks, Jeff quick I mean before you go on X. One just quick quick update for you. The the actual impact to the singles was $27 million in the quarter just progression to March 50 million.
Thanks again.
Okay that was 51.
You're welcome.
Our next question comes from Jimmy Bhullar with JP Morgan.
Hi, I just had a question on pricing and just how you think about the interplay between.
Decline in exposure that the economy domain speak.
And how that could affect demand and pricing and relatedly what else is out there that you think potentially do wheeldon momentum that you've seen in pricing both in.
Sure and reinsurance.
I mean, it's hard to predict the future as as you know.
Oh My God.
I think if everything resolved at everything resolved I mean, even if things resolved for the better I think the momentum that we've seen in the first quarter late 2019 early 2020.
We we still see some momentum I think it would be just a matter of degree how much much much higher order rates.
Could go.
But I do believe the momentum was there for turnover market, we before corporate 19, coughing I'd like I said before exacerbated the need for rate and accelerate the need for rate.
And then there's been a lot to talk about sort of.
Hi, unless and trapped capacity and what do you think about when either some of the capacity.
It gets relieved or potentially gets absorbed and on theres clarity on that.
Do you think by this time next year.
Like a lot of the top capital would actually be out.
It's a possibility I mean thats also assuming there is no more cat occurring this year.
But this is a long lasting a cat events. So it's not as clear as having a quake, let's say in March.
And I guess in a year out you know, it's still developing will you have a better sense for.
Wanting to a would be willing to release capital. This one will take a bit longer to process through ripe for instance, you could have arguments in course in new new ways and you push back on the insurance industry to pay claims property type.
Bake that could take you know another year and a half of two years as a result, so there's a lot more certainty in terms of timing.
Funding resolution of the ultimate prices. So it's a lot less certain that it will take on a year to get through it.
Thank you.
Our next question comes from Jamie English you know Smith.
Hi, good afternoon.
I wanted to follow up on the comes as we model about forbearance programs and to what extent delinquencies get cured get claims.
Turning to claim sort of et cetera.
And I appreciate that we don't know what's going to happen going forward.
But I wanted you to speak to what.
You learned in previous forbearance programs in.
How that how that affects you were thinking about your current book.
And it's what you learned there was it usually think about LTV is geography sort of et cetera, and how does that apply to your.
Shifting but today.
I think we have done reserving and the pass on considering all the dimensions. You you you just talked about.
I think that we had the that beautiful thing about that prior hurricanes or the beautiful thing in a ways that we had prior hurricanes and prior events that we can go back to and look at the experience.
This does definitely help us but I.
I guess boundaries around what could happen, but this one is very unusual.
In the length of the forbearance program and the breadth and how widely spread it is.
And I think we also have to throw in there the $600 per week unemployment benefits.
And the distribution that we talked about you know some regions are more heavily affected than others. So I think everything gets in the mix to me.
Team is not just one dimension and I think what we've learned is.
Yes, we sort of can use the historical forbearance experienced I sort of as he has a the range of plus possible outcome, but we actually are digging heavily heavily into developing a much more refined view of the forbearance specific programs such as the one we're facing right now and we may never use it again, but these were.
In the process of we adjusting our development claims model called armor that we have in currently so well, we're it's still very much developing and we're learning on the fly.
Two things I'll add quickly to that as Mark mentioned the historically.
Forbearance delinquencies most of them Q or I mean that then we made comment that the 2% kind of claim rate. So that's that's obviously a very positive sign but thats again more localized and it's a short term issue. So I mean understandable that these delinquencies most of them with Q or.
So that would be one extreme that'd be very good result in this situation.
Maybe a little counter to that as you may know.
Many of the claims and for the mortgages are loans and forbearance up to 40%, we're actually still at current up until recently so in the early days of the the second quarter. Many loans I had access to forbearance programs, but remain current that made their mortgage payments.
Data us now suggests that that percentage has come down so the reality is.
Now, we'll get a few more loans that have turned delinquent that were historically current or have been current and forbearance, but now turned delinquent. So that's a bit of a data point that we're monitoring but that kind of gives us a.
But not necessarily concerned, but we have to understand better so that we can.
Refined our estimates as we move forward because the 2% ultimate claim rate may not be achievable or probably won't be what we end up with in this current situation.
Okay, great appreciate it.
Good luck on teaching.
Okay. Thanks, Jamie.
I'm not showing any further questions I would now like to turn the conference over to Mr., Marc Grandisson for closing remarks.
Thanks for joining us this quarter of these stay safe have a nice rest of the summer we'll talk to you in the fall again. Thank you.
Ladies and gentlemen, thank you for your participating in today's conference. This concludes the program you may all disconnect.
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