Q4 2020 Arch Capital Group Ltd Earnings Call

February 10, 2021

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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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Good day, ladies and gentlemen, and welcome to the fourth quarter 2020 Arch Capital Group earnings Conference call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.

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 assessments and assumptions and are subject to a number of risks and uncertainties.

Sequentially actual results may differ materially from those expressed or implied from.

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 SEC 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 on 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 SEC yesterday, which contains the company's earnings press release and is available on the company's website.

I would now like to introduce your host for today's conference Mr. Mark Grandison, Mr. Francois Morin, Sir you may begin.

Thank you Liz.

Good morning, and welcome to our fourth quarter earnings call.

Overall, we are pleased with the current market conditions on the opportunities available to arch.

As we close out 2020 on spring into 2021.

One of our from fundamental principles as debt achieving growth and book value per share above the cost of capital over the long run is the best way to create and sustain shareholder value.

We believe we delivered on that front in 2020.

Our disciplined underwriting and diversified business model enabled arch to grow its year end book value per share by five 4% over the third quarter and by 14, 7% from.

The last 12 months.

We've responded to broadly hardening market conditions and as a result, all three of our segments grew their premium writings on a quarter in particular the.

Hardly markets allowed for significant growth within our PNC units, increasing our net premium written for the P&C by 32% for the full year.

On the whole for 2020.

We achieved an operating profit of $557 million on group book value to $30 31 per share.

As most of you know cycle management is core to who we are arch lean strongly into improving markets. Because history has shown that times like these are when superior risk adjusted returns gradually compound and accelerate book value growth.

And arch is positioned to significantly expand as others derisk rethink their underwriting strategies or even retrench.

As we look at the opportunities ahead for arch.

I'm reminded of a situation in hockey that is exciting for any fan and hockey.

You get a one player advantage and the other team takes a penalty it's called a powerplay.

When that happens a few things need to be kept in mind as you deploy your specialty powerplay unit to try and improve the odds of scoring.

I need to have a clear five on four strategy you need to be defensively savvy enough to not forget to protect your own zone and you need to have a sense of urgency because they block will stick done and you will soon be back to even strength.

These are a few moments that make a difference in a hockey game.

The advantages position, we find ourselves in a similar to that hockey power play where the odds are in our favor.

I'm proud of how our team performed last year during the challenges of 2020 now after spending a good portion of the last several years on a defensive position, we're embracing a more offensive mindset here.

Here's what that looked like in the fourth quarter, let's begin with our insurance segment.

Across our worldwide insurance group renewal rate change was increased approximately 12% up 200 bps from the prior quarter's rate changes.

Our fourth quarter growth occurred in many lines with D&O property energy and marine all exhibiting strong advances E&S casualty and our alternative markets business also grew in this quarter.

We believe that rate momentum in these lines is healthy and we also see it building in other lines, albeit at a slower pace.

Increasing margins helped improve our insurance accident year ex cat loss ratio, which decreased by four six percentage points in the fourth quarter. As you may know the full effects of increased rate levels can take approximately five quarters to become 40 reflected in underwriting margin. So today, we are earning.

<unk>.

The higher rates from the past year. In addition, our operating expense ratio has benefited from rising production. This past year. We are pleased with the continuing progress achieved by our insurance group in the last two years.

Turning next to our reinsurance segment.

Underwriting results were significantly better than the fourth quarter of 2019, despite the impact of $94 million worth of cat losses.

While market conditions are not uniformly strong in the reinsurance sector dislocation from other carriers that are reducing their positions. He is creating pockets with hardening rates that arch is well positioned to capitalize on.

Reinsurance also benefit from the underlying insurance market rate increases through its clients for.

For 2020, we grew reinsurance net written premium by 53% were the two main areas of growth being non cat property and specialty.

January 2021 renewals, we saw continued rate increases in most areas. However, we agree with the market consensus debt property cat pricing moves were more subdued than expected or hoped as capacity for that risk still remains strong.

Accordingly, we maintain a cautious approach to this business.

Our mortgage segment delivered good returns in both the fourth quarter and for the entire year, despite the economic headwinds.

We are confident in our continued earnings strength of this segment and frankly the uncertainty we were facing during the early stages of Covid has been largely mitigated both.

Both premium rates and the credit quality of the new insurance written improved in 2020 and accordingly, the return on capital for our New U S. <unk> business is essentially back to 2018 level, which was a strong year.

Here's why am I is on well this past year first housing markets have remained strong despite the difficult economic conditions second.

The government Forbearance program achieved largely what it was intended to do which was which was to provide financial respire too many homeowners and third credit criteria in the mortgage sector tightened in 2020, and as you know credit quality is a critical factor in determining underwriting profitability.

On a side note just yesterday, the FHFA announced that a forbearance forbearance program has been extended an additional three months, which should help further mitigate the risk in our delinquency inventory.

The delinquency rate of our portfolio decreased by 50 bps sequentially in the fourth quarter at year end roughly two thirds of our delinquent loans were in the government sponsored forbearance program. We currently estimate debt, 89% of delinquent borrowers in our portfolio at year end have at least 10% equity in their home.

And as we have discussed on prior calls the amount of equity in a home is our single most important factor in determining losses as it plays a significant role in mitigating claim activity.

We are cautiously optimistic.

Delinquencies will continue to pure has vaccines enable the economies to reopen.

Importantly record home purchases in the U S. In 2020 supported a 5% price appreciation nationwide, while historically low interest rates accelerated housing and refining demand. This enabled arch U S to report record <unk> of $38 billion in the fourth quarter of 2020 up nerdy.

60% from the same period in 2019, our outlook for continued growth in 2021 remains positive.

Turning back to the current feed on the P&C cycle. There are three conditions that we believe will persist and help sustain the improved underwriting environment, one social inflation and reserving problems R&R starting to apply pressure for companies that haven't been prudent enough to anemic investment yields.

Require a sharper focus on underwriting profit and three a return to a post COVID-19 world should accelerate economic activity and increase the demand for insurance.

Each of these conditions will put pressure on results for the industry, our conservative approach to reserving over the past several years means that we are well positioned to drive results in P&C going forward since we expect our future returns to better reflect current and forward pricing.

Finally.

With better visibility into the overall economic conditions and with more clarity on our mortgage and P&C prospects along with our strong capital generation, we see a compelling opportunity to invest in our shares at very attractive returns profit will talk to it in a moment.

This risk. This recent share repurchase is a testament to our capital strategy.

Designed to enhance shareholder value over the long term, we still have ample resources to deploy towards new growth and feel confident in our team's ability to be creative in order to capitalize on the opportunities before us. This is a time in the game, where our cycle management strategy.

Allows us to play offense and deploy capital dynamically to generate above average returns and now I will turn on a game commentary over to Francois.

Thank you Mark and good morning to all we at arch Hope that you are in good health and debt 2021 is off to a good start.

Onto the fourth quarter results as a reminder, and consistent with prior practice. The following comments are on a core basis, which corresponds to arch is financial results. Excluding the other segment I E. The operations of Watford Holdings Ltd.

In our filings the term consolidated includes Watford.

After tax operating income for the quarter was $230 4 million, which translates to an annualized seven 7% operating return on average common equity and 56 per share.

For the year per operating return on average common equity stood at four 8%, while our return on average common equity stood at 11, 8% book.

Look value per share increased to 31 to $30 31 at December 31.

Up five 4% from last quarter, and 14, 7% from one year ago again, an excellent result, despite the strong headwinds from catastrophe losses. This year, which is a testament to the resilience of our operations and our superior diversification strategy.

Losses from 2020 catastrophic events in the quarter included including COVID-19, net of reinsurance recoverable and reinstatement premiums stood at $156 4 million.

Or nine four combined ratio points compared to $2 two combined ratio points in the fourth quarter of 2019.

The losses impacted both our insurance and reinsurance segments.

Primarily as a result of a series of natural catastrophes in the quarter.

Including Hurricanes Delta Zeta and other smaller events as well as adjustments to our estimates for events that occurred earlier in 2020.

Our best estimate of ultimate losses for COVID-19, four occurrences through December 31 remained essentially unchanged from prior estimates.

As of December 31, the vast majority of our COVID-19 claims are yet to be settled or paid with approximately two thirds of the inception to date incurred loss amount recorded as incurred but not reported <unk> reserves or as additional case reserves within our insurance and reinsurance segments.

As regards the potential impact of COVID-19 on our mortgage segment as.

As Mark alluded to the delinquency rate at the end of the quarter was $4, one 9% down from $4 six 9% at September 30.

We are encouraged with the downward trend in delinquency rates over the last few quarters, which continued to come in significantly better than our earlier forecast.

Our latest assessment of the situation assumes a progressively improving economy in 2021, which should bode well for the housing sector and the performance of our book as we move forward.

In the insurance segment net written premium grew 21, 6% over the same quarter one year ago.

29, 6%, if we exclude the impact of the pandemic on our travel accident and health unit.

The insurance segment's accident quarter combined ratio, excluding cats was 93, 6% lower by 800 basis points over the same period, one year ago.

Approximately 360 basis points of the difference is due to a lower expense ratio.

<unk> from the growth in the premium base from one year ago, and continued lower levels of travel and entertainment expenses.

The lower ex cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business.

Prior period net loss reserve development net of related adjustments was favorable at $1 2 million.

As for our reinsurance operations, we had strong growth of 44, 9% and 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 Barbican reinsurance business.

Segment's accident quarter combined ratio, excluding cash stood at 82, 1% compared to 92, 3% on the same basis, one year ago.

The year over year movement is primarily driven by rate change activity over the last 12 months and a more normal level of large attritional losses compared to a year ago.

Most of the remaining difference is explained by operating expense ratio improvements, primarily resulting from the growth in earned premium.

Favorable prior period net losses.

Development net of related adjustments was $40 5 million or six nine combined ratio points compared to $4 nine combined ratio points in the fourth quarter of 2019. The development was mostly in short tail lines.

The mortgage industry had a second consecutive record breaking quarter in terms of mortgage originations, which allowed <unk> to produce $38 billion of ni W. In the fourth quarter.

Full 15, 9% higher than our prior high watermark.

With refinance activity on the leveling off from prior peaks, we we saw our insurance in force increased by two 5% across our mortgage segment the.

The combined ratio was 45, 1%, reflecting the lower level of new delinquencies reporting during the quarter.

The expense ratio was slightly lower over the same quarter over one year ago and prior period net loss reserve development was favorable at $8 $2 million this quarter, mostly from our second lien runoff portfolios.

Improving investor sentiment enabled arch to issue two bellamy transactions during the fourth quarter at terms that are getting closer to pre pandemic levels. You will recall that we discussed our 2020 debt three transaction on the last call and on the run deal covering our production.

<unk> from June through August of 2020.

Our latest transaction Bellamy 2024 provides additional protection on mortgages, we insured in the second half of 2019 and already covered by our 2020 dash one bellamy transaction by effectively reducing the original retention from seven 5% to one eight.

5% of the risk in force.

At year end, the Bellamy trucks structure has provided approximately $4 billion of aggregate reinsurance coverage.

Total investment return for the quarter was positive 246 basis points on a us dollar basis.

And we ended the year with our investment portfolio, producing a 777% total return.

While our fixed income portfolio generated an excellent return of 188 bps in the quarter contributions from our equity and alternative investments were also significant and represented approximately 40% of the total return for the quarter.

The duration of our investment portfolio decreased modestly to 3.01 years at year end, reflecting our ongoing positioning of the portfolio towards shorter term maturities.

The effective tax rate on pretax operating income was six 8% in the quarter, reflecting changes in the full year estimated tax rate.

The geography mix of our pretax income and a benefit from discrete tax items in the quarter. We currently estimate the full year tax rate to be in the 10% to 12% range for 2021.

Turning briefly to risk management, our natural cat <unk> on a net basis decreased slightly to $860 million as of June as of January one, which at approximately seven 4% of tangible common equity remains well below our internal limits at the single event one in 250 year return.

Level.

The decrease in our peak zone P&L. This quarter is mostly attributable to our E&S property unit within the insurance segment.

Where we reduced property aggregates in the Florida Tri County Peak zone, and made selective additions to our reinsurance purchases.

Our balance sheet remains strong and our debt plus preferred leverage ratio stood at 22, 1% at year end well within a reasonable range.

Finally on the capital front.

We repurchased approximately 251000 shares at an aggregate cost of $8 million in the fourth quarter of 2020.

It is worth noting that we have since repurchased an additional two 6 million shares at an aggregate cost of $83 6 million in the first quarter of 2021.

Under a rule <unk> five plan that we implemented during this quarter's closed window period.

Our remaining share purchase authorization currently stands at $833 million.

With these introductory comments, we are now prepared to take your questions.

Thank you Hey, do you have a question at this time. Please press the Star then one key on your Touchtone telephone.

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Your first question comes from Elyse Greenspan with Wells Fargo.

Hi, Thanks, Good morning, Mike wondering reported.

King.

On on.

Related to your return on Mark.

Third remark you.

Associated with mortgage business going back to return on capital levels from 2018, and I'm, hoping interest for all three businesses insurance reinsurance and mortgage can you give us a sense of the return profile of the business you're writing today.

Yes.

But you would have said if.

If I'd ask the same question 12 months ago.

Yes, I think the nice day talking to you at least I think.

The high level of 2018 sort of long term expected return on the EMI was roughly in the mid teens. So.

Going back to debt level, which is really a good place for us to be.

On the insurance I think debt, we had a bit of a decrease in on an expected expected returns, even though the combined ratio did not.

Get that much better for the industry, but right now if you factor in all the rate changes and everything we think we are in the.

The double digit and insurance return and we think that reinsurance is a little bit in between those two so we have a really really different.

Risk risk return risk adjusted return profile on our portfolio has improved and largely as a result of the price increase not solely as a result of the investment return as you as you know on these.

Yes, and then my second question on <unk>.

I think you alluded to this a little bit on your prepared remarks, Mark when you were mentioning on.

<unk>.

Issues that would help on the pricing momentum Si persisting from here a big question that I get is does this momentum through.

Through 2021, and perhaps beyond can you obviously different dynamics in the insurance and reinsurance P&C market, but can you just give us a sense based on what you know today do you think that the pricing momentum 10 per cent and with 2021 and insurance and also <unk>.

Your line.

We expect it to be the case at least because because of all the factors I've mentioned that social inflation is a lot of uncertainty in terms of loss ratio picks for years, specifically 2015 through 19 as we all know.

It sort of makes for correcting some of the ongoing pricing. So that's definitely sustainable we do not have as much.

Protection from the investment return so that puts a lot of pressure on the return.

The industry.

And uncertainty.

And lack of if you will coverage and we also have a fair amount of cat losses in the last three or four years. So there's a lot going on a lot more risk out there. So I think overall collectively as an industry.

We all collectively think and know and believe that we need to get better return better pricing because the risk is not being rewarded accordingly as in every hardening market.

The length of cycle, how long is a piece of string, but I think that our hardening market does not only last four or five quarters. I think that you have this initial stages of the initial reaction of rate increases than you get momentum building in the underwriters' mentality that brokers are sort of accepting as being sort of a new way to deal and do the business.

This eventually that builds upon itself.

I would fully expect to be lasting through 2021 and into 2022. This is what we believe at this point in time.

Okay and one last numbers question, you guys mentioned, the PMO going up a little bit.

In terms of your cash.

Thank you on the past arent used to talk to like $40 million on quarterly cash obviously leasing growth.

Cat reinsurance and other property related lines like you mentioned how.

How should we think about the cat load on from here.

Yes, I mean, no question that we've we've written a lot more property premium and the last the last.

I want to say four to six quarters, we've really ramped up our property exposures I mean, theres a lot of.

And different areas as you know a different lines of business U S and international et cetera.

Yes.

The cat load I think on a quarterly basis has definitely gone up from what we were on the old day thinking about like $40 million a quarter.

It's still evolving, but I'd say, it's probably more on the $60 million to $70 million range right now.

Okay. That's helpful. Thanks for the color.

Particularly welcome.

Our next question comes from Mike Zaremski with Credit Suisse.

Yeah.

Hey.

Good morning.

Follow up on me.

Mortgage insurance and <unk>.

Our leases.

Question.

On it.

Youre talking about kind of.

You are encouraged about the downward delinquency rates and assuming the economy progressively improves and you think you mentioned mortgage debt.

<unk> returns from our 2018 levels. So are you, saying kind of directionally.

We should be thinking about <unk>.

Combined ratio.

That continues to move.

South kind of towards shows 19 muscles or have in the <unk>.

Capital.

Yes.

Assumptions changed since then.

Mike in terms of combined ratio to capital is a different story, because it's a bit of a lagging indicator based on the delinquencies. We have on if you look at the combined ratio. Yes, we think that we are tending to go towards more.

So the run rate that we had in 2018 I would just caveat that there was some prior development favorable development and 2018, so I would probably adjust for that but certainly the the.

The long term range of 35% to 45 is not something that is out of the realm of real possibility. If you look at 2018, and I think depending on what how the economy recovers there could be in the lower end of that and it's a couple of things still develop on it.

Different direction, it might be a bit on higher side, but you're right. It should be getting closer to where we were in 2018 on terms of combined ratio.

Okay. That's helpful.

Hello.

Switching gears to the <unk>.

The non insurance segments you have.

Ben the expense ratio has been.

Better than expected for a number of quarters I know you guys had called out some some items, maybe you can kind of remind us on top to kind of watch what you think is kind of a cyclical.

And what's kind of structural in terms of the expense ratio improvements, yes, I think I think this is more structural I would say, Mike because right now you have to factor in the fact that our platform grew.

Both sides both in the sense of growing the top line for in our organic lines of business and we also had the acquisition in London, and Rudy pushed to be much more relevant much more bigger in London. So our international operations also gained scale. So if you now look at the overall structure.

The company has laid out in terms of top line and the way to the expense is constructed between two.

On the unit I think it's much more of a structural change.

I would say that it's probably 50 50, but the growth is Sony is something thats really important.

In terms of.

Helping that growth so that could also get presumably EBIT better over time, but I would also tell you that the growth in our operating expense on the instrument side has lagged the growth in our top line, which is what we should expect right because a lot of the increase if not more work, even though we are writing more business a lot of the increase in premium.

Right.

In of itself. So I think that the company is flexing itself in terms of top line growth and expense deployment very very nicely. So a bit more structural than I would have told you Bobby two years ago.

Thank you.

Our next question comes from year on Qunar with Goldman Sachs.

Hi, good morning, everybody.

On them.

I guess my first question from.

Of all surround EMI.

Do you have any comments or thoughts around the potential changes FHA fees and its potential for their potential impact on BMI business.

Yes, I can just on its still early on on that as the New administration changes a couple of things going on all over the place Washington, I'm sure, they're very busy right now China.

Changing things.

What we hear the same things that you guys here about 25 bps potential price cut to the FHA.

We've put in there and as a reminder for everyone. If you take a step back on the FHA was a large market share provider of insurance.

In the years, where the PMI that private mortgage insurers were non isn't that great of a shape and frankly that was needed to.

Phil the GAAP and fill the void if you will of the need for the homeowners and the mortgage provider. So this has changed I think that the FHA also ultimate rolling core role is to provide.

Mortgage insurance for the ones those are probably could be perceived a bit more risky.

For the private private sector.

And so we've done the analysis, which means that if you look at our portfolio are on.

On a high FICO very high quality.

Most of our borrowers that we have on our portfolio do not really need to consider FHA. So from our perspective will react obviously to whatever is out there but.

We believe that this if it come to fruition that 25 bps rate cut and FHA will help on the lower FICO and higher LTV.

Borrower, which is really not the ones affecting in the ones that we're currently having success with because our pricing is actually better if you kept our pricing versus the FHA in that sector on a pricing is better execution is cheaper for the borrowers. So we're not losing sleep over that.

Got it that's all.

Paul.

And then my second question.

You previously talked I think about shifting capital deployment from MRI more into P&C.

I think last call you use more of our basketball analogy that was easier for me to follow up then.

Thanks for explaining.

Yeah.

But I guess as market conditions kind of your views on market conditions change a bit.

Like reinsurance, maybe a little less exciting than maybe a quarter or two.

A quarter or two ago, and maybe a little better than the outlook was a quarter or two ago does your.

Appetite for capital deployment between the three segments has that shifted or will it shift into 2021.

I wouldn't say it shifts.

Any major way I think we see all three three segments with very good opportunities in front of them.

And maybe we'd argue somewhere overdo, especially on the P&C side. So we're bullish there mortgage has always been.

And basketball, our six from <unk> 706, six guy down-low in and ready for dogs and net Hasnt really changed in our view. So yeah. I mean, we got certainly have more visibility into what the ultimate or what the current market conditions are.

Especially in mortgage given what we owned the second half of the year, how things progressed and that's good I mean, that's something that we take.

I think from works in our favor so but in a big deal.

Big picture, we don't see major changes in how we deploy capital and Jan and one thing I would mention to you that it's always.

It's hard for people not to see us being in Bermuda as being a property cat writer on the reinsurance side, but I would argue that gets on the property cat side is not as good and you've heard it from other people and we certainly agree with that but we're still growing in areas are on non property cat exposed. So we're seeing a lot of other lines to be honest between United are actually better now or.

Prospects, we want better than they were.

In 2020 is just debt.

We're not.

Growing necessarily in the one that I would get the better headline if you will flow from your perspective, but by and large I think that our prospects are very very thin on the reinsurance side very much. So.

Got it thank you and thanks for translating hockey and basketball from it.

Okay.

Youre welcome. Thanks.

Our next question comes from Jimmy Buhler with J P. Morgan.

Hi, Good morning, I had a couple of questions first if you could just talk about your sort of comfort level with the RBI reserves given.

The development from the U S seem to be favoring the industry for the most part so do you feel like Youre overly.

Conservative on your reserves, and obviously internationally things haven't gone as well.

And then on default that another one as well.

Yes.

Or we never would say that we're overly conservative we want to be prudent and conservative for sure in how we set reserves I'd say, starting again with international which maybe has gotten a bit more headlight.

On the headlines a bit more.

On our position hasn't changed in the U K again, the book, we have as a small regional book.

Well protected by reinsurance protection, so we feel that the reserves we have there.

Even after the call it slightly adverse ruling from the courts in the U K were.

Are going to affect our bottom line. So no changes from our point of view there.

And in the U S for the most part as you said and all the rulings on kind of been in favor of.

In the of the industry.

Couple of places, where there is maybe some some some that didnt go as expected, but on those I mean, our view is that the.

The policies that were being challenged were managed per policy. So not the standard ISO form that we typically use without necessarily the strong wording around virus exclusions and property damage to trigger coverage. So on both those fronts that we get as we said before vast majority of our policy.

<unk> well north of 90% across our book debt has these both of these call. It protection. So we're we're very confident that our results on our reserves at this point won't develop adversely and we're we will keep looking at it but it's.

We're in a good spot.

And I think you said about two thirds or three thoughts where IBM.

As of last quarter.

Number now.

Two thirds of it went down a little bit.

Roughly from $75 67, roughly I mean, it hasnt changed much and Thats.

So and some of that is around as you can I expect mostly on the reinsurance side right where we.

A lot of our reserves are still on the reinsurance side with.

Significant <unk> and ACR is on that book.

And then on buybacks you did a decent amount and you've done a lot of this year, so what's driving your.

Sort of actions there or is it the stock price is it I'm, assuming there's decent opportunity to deploy capital on the near businesses given pricing, but what drove the big uptick in buybacks versus what you've done in the last few quarters.

Yes, it certainly more visibility right I think that we said that from the start.

At the end of the first quarter last year, we said listen we're going to take a little bit of a pause because we need to know where things are going to how things are going to play out then and mortgage being a major driver in that performance you've seen the results. So we were a lot more confident where the economy's going vaccines are rolling out.

So there is a lot of things that yes, we will take some time, but.

We look forward I think that gives us a lot more comfort that.

The worst is behind us and debt gives us more clarity on how do we deploy capital we're still in our mind we're.

We're fully capable of doing both we want to grow the book and also buy back shares. There is no reason why they are they have to be exclusive we think our growth is still very strong we expect to keep growing in 'twenty, one and across our book, but we also see a good.

Opportunity at the current level pricing levels for the stock to buyback at this point.

Thank you.

Youre welcome so before we go to the next one I think I have to stop the broadcast I think I believe we have breaking news.

Does it hit the wire. So I think we have to go to Francois for some commentary that you want to share with us on hold.

Long overdue mortgage book just wanted to take advantage of the opportunities to fill everybody on the call on the latest developments with our proposed acquisition of a 29, 5% ownership stake in Colfax.

Global trade credit insurer to confirm what some of you may have seen across the business wire over the last few minutes.

We're paying attention to what we were saying but.

We closed on this transaction with Natixis earlier today.

And the reason for the timing is that we have to wait for their markets to close which they have so the consideration paid by arch was $909 95 per share for an aggregate 453 million euros.

In aggregate, including related fees in connection with our minority stake in the company arch now has four representatives on the <unk> Board of directors as we stated before we continue to view this transaction as an investment and we currently do not intend to increase our ownership position in Colfax.

From a financial reporting perspective, you should all expect US to include our proportionate share of <unk> results in our financials, starting next quarter, we intend to report the contribution and a new separate line titled Equity method earnings from operating affiliates, which will be included in our definition of <unk>.

Operating earnings. This line will also include the contributions from other non consolidated affiliates such as Premier Holdings. So that's breaking news margin. Thank you for on top of the update and let's see if we can go back to Mr. Don who is waiting in line I believe.

Jeff Dunn with Dowling <unk> partners. Your line is now open.

Thanks, Good morning.

Couple of questions on <unk>.

First of all.

What was the incidence assumption from the current period provision as well as the average severity factor this quarter yes.

So on a nine 4% for the new annuities in the quarter.

And the average reserve per <unk> was little bit over 5000 pretty much in line with the third quarter, Jeff because the risk that came in were a little bit less less coverage in this in this quarter. So that would explain the average being a bit lower or a bit more in line.

Okay, and so as you think about 20 or the first part of 'twenty one.

To my knowledge.

Extended the forbearance period out to 15 months, but you can't enter new forbearance activity.

So what did your provision for non forbearance loans on your incidence assumption for non forbearance loans it looks like in the fourth quarter.

I don't think we did not the way we reserve if we sort of trying to make on overall, all encompassing assessment and put that in that number. So I think that's what you might've said might have thought in the past on number of it could have been a bit higher. So we think that we have in <unk>.

Often they're reserving.

In totality based on the factors we've used.

Okay, but with forbearance options going away fair to assume that that interest assumption will probably climb and yep, Jeff we might well have to evaluate when we get there I think you're right I mean from you have to until February 28, two actually.

Therefore, this will be under the forbearance programs, but we'll see how that develops and we have a surge in a couple of weeks of people asking for forbearance on my help.

Again, more well have to readjust, Jeff as we see the end of the quarter, we will have another month of non forbearance.

Effective not new for bearing on so we'll have to reevaluate when we get there.

Okay, and then within the P&L can you talk a little bit about what drove the pretty notable sequential drop in earned premium.

As well as some of the movement on both the expense line was there any reallocation on makes sense to us.

Specific to any segment.

<unk>.

Okay.

All right Jeff.

All of them.

Premium line was down $15 million sequentially and then you had some just what's the weighted a little bit of abnormal movement, particularly in the acquisition expense line.

Relative to third quarter, but just a little bit more volatility than I would tend to flow.

The first one I would say a was a call it a an accounting catch up on true up on our Australian business, how we on the <unk>.

Written side.

So that I'd say, that's more of a one off kind of blip that we we we had to adjust.

Just for.

Or what was actually was present last quarter and more than this quarter. So thats how thats how are we the.

That explains that movement on the.

On the acquisition.

There is.

We entered into a quota share agreement starting last.

At the middle of the year, covering our U S <unk> book and that actually gives us.

On a benefit in terms of the acquisition Thats a reduction towards the acquisition during the ceding Commission. So that that is what is starting to flow through in our numbers.

Alright, great. Thank you.

Sure Youre welcome.

Sure.

Our next question comes from Phil Stefano with Deutsche Bank.

Yes. Thanks, I just continuing on my questions. I guess, so you had mentioned that roughly two thirds of debt defaults on forbearance I was hoping you could give us a flavor for how many people are nearing the end of their forbearance window and how many people in forbearance does it feel like our current on their mortgages.

Yes so.

The numbers. We report to you are those are in forbearance and then.

Skip two payments at least so we have a few more as you could appreciate that are in forbearance on are still current.

The data is coming in very very haphazardly. So it's very I wish I and we are constantly asking in process for that kind of information I think that most of the forbearance that are still.

Still there are lower in the year most of the forbearance debt were declared early in April May June.

The vast majority of them are cured by now so it seems to be the pattern of getting to forbearance and sort of staying in there for 545 months in and eventually things get back to normalcy so debt.

What we would expect it to be the case going forward.

So I don't have a definite.

But no no no.

I think the one question that we're trying to get to and I get a lot of questions about you had mentioned 89% of the delinquents have at least 10% on equity in the home.

And you had talked about the visibility, allowing it to repurchase shares.

What point do we get visibility that maybe the <unk> reserves are a little more redundant and we can start to see a relief there.

How do we think about what you are looking for it and the visibility.

Yes.

Okay.

Adjusted that.

So from your lips to God's ear, I hope you're right that it's going to be redundant. We will see only time will tell for us I think the way we look at reserve.

Philly is very simple is just we have to wait till we get the data that we feel confident.

We're going to get there and as you know you've seen us do the reserving on MRI and P&C for a long time.

You tell me one day Forbearance program is done and when the unemployment rate goes on to three or four and the economy picks up again, then I'll have a better sense for what it is so we're hope, but all having said all this I hope that by the summer. After the vaccines have been rolled out that will have a much much much better visibility as to what if any.

The reserve needs to be released or it's not necessary to pay claims.

Understood, Okay and switching gears.

On the reinsurance business.

I appreciate the remarks, you made in response to an earlier question is there any way you can help frame for us what the opportunity is for premium volume on that so maybe it's.

One ones go versus last year, or how should we be thinking about the growth potential in 2021.

I think the growth in 2021 should be more in line at least with what we've seen last year I think the opportunities on the reinsurance side.

On an equity I think the reinsurance opportunities are still very very solid very strong.

As we get into harder market right and a lot of people on some of our clients are looking for capital at least looking for for validation of their plan going forward and want to make sure that they had the re underwrite and re.

Repurpose their book of business that we're there to help them and we're able in that case too to help them get through that transition period. So the opportunity in reinsurance. It was great last year and I think it's actually very very good again as we go this year one interesting fact for everyone that one of the key leading indicator to us to me at least first me based on my history.

As to what is a leading indicator of the treaty reinsurance.

Conditions are the profit.

Facultative industry is still a really really strong and it's typically you would see.

If you have a.

Hard market or hardening market for as long as affect market goes.

You'll have a treaty market no staying strong well beyond that the year to two years beyond that so we expect that too to be yet again, a strong leading indicator on our facultative team is telling us that it's a really good market for them at this point in time, which is encouraging.

Great. Thank you.

Yes.

Our next question comes from Meyer Shields with K B W.

Great. Thanks, So two questions on the P&C side.

First.

Arch is confidence in the pricing cycle was clearly borne itself out but is it safe to say that.

Maybe this is as good as it gets on the property cat side, because there is this level of capital available. So.

So that cycle will play out along historical line.

All I will tell you Meyer is my experience, we did a lot of property cat, writing an old one or two.

And if you remember at arch, we were not heavily focus on property cat XL XL at the time, where more and more on the.

<unk> side and the market was going on I know for willing to five and we thought we'd net and we thought we had seen the last of the hard market for a little while and Katrina Rita Wilma happen to change the whole thing. So my question. My answer to you is I don't know I don't know is the short answer I think that.

There's clearly a lot of capital debt again found its way over the last four or five years and once capital finance went to a net it gets sticky right. It wants to stay there for a while and we'll sort of justify itself for a while longer per hasnt. It should.

But I think we're always on.

Hopefully it doesn't happen but.

Would be one major event away from changing the perception of risk in that area and that I think will mean actually probably a much harder market and you would expect minor because the volatility in the knee jerk reaction that we would be like an elastic right. When this happens I think youll have a you may have a massive exit of capital out of the door and Mike <unk>.

More opportunities for us I'm, not saying it will happen Meyer, but I could see some day aware your premise does that does not actually hold through so there's always it's always a channel.

Okay, No I just wanted to understand what youre thinking there.

Second you talked I think on the insurance segment about market dislocation and I.

Maybe the sense is out there that that has been a major factor or wasn't a major factor in 2020, but now most companies are kind of settling down.

They're comfortable with their books of business.

Are you still seeing like today debt.

Level of market dislocation.

Dislocation is youre right Theres. Some from re realignment is a couple of people going back to the market. It is this is truly happening, but it's not across the board and there are still we believe.

Bad news that needs to come their way through the system at that might make somewhat of a difference as we go forward.

But again if you if you had if you had a 20% rate increase on one transaction on the instrument side this year.

And you had this is on top of a 10% last year.

Read on rate on rate, perhaps three times its not a bad place to be and plus I think what we hear Meyer for what its worth and its actually not insignificant. We are hearing in terms and conditions funding changing and moving in the right direction. So rates will move first in terms and conditions sort of follow right behind and we're hearing that this is what's happening in market base. So even though we may not have a headline.

Growing as high in terms of rate change as much as it was two or three years, that's on the underlying conditions in their policies.

Could actually help improve it beyond the number that we see on that.

The headline number.

Okay understood. Thank you so much.

Our next question comes from Brian Meredith with UBS.

Hey, Thanks, a couple of them for you here. The first one mark first of all I Wonder if you could just confirm it used to be that youre determination on whether you buy back your stock or not is that if you could actually recoup the premium you pay relative to book value over a three year period.

Is that still the case and if it is does that basically mean that you could continue to be pretty aggressive with your share buyback given where your stock is trading right now.

Yes, I think that rule of thumb still is still in place I mean, obviously, it's not a black and white I mean theres always.

Factors, we consider around deploying whether theres business opportunities and et cetera, but yes, we still think in those terms of the buyback.

And when we bake in that we want to earn it back over.

No more than three years.

And Youre right I mean, I think the fact that on a price that the stock price is not as is.

Is below that level.

Suggests that maybe will be will be out there buying more stock as we go through the year.

We'll assess.

Obviously as we every day every quarter, we will look at what's in front of us, but for the time being I think we're.

Certainly something were considering and we probably will do more of.

Got you and then just on that on that topic. So just maybe a little bit on usage of capital or cash kind of here going forward. The next 12 months. It sounds like you've got $453 million, that's going out here. We've got Watford did I think as you got to get to close is that is all going to be constraining to your ability to actually buy back stock. Given you also capital you need to fund your growth.

On your business and particularly with what Mark just said on the reinsurance business is going to be very capital kind of generated type transactions.

No because we I mean, we raised $1 billion on capital as you know last summer we didn't deploy fully until it was all part of that kind of 101 looking ahead towards the one on ones would do we know these transactions were.

On the horizon.

And we have a lot of faith in our ability to generate earnings moving forward on our own.

So self funding the growth I think is something that is part of our plan and.

We don't really have a whole lot of constraints on the net and Brian on both these acquisitions as you mentioned, we will actually be accretive and grow book value for us So their capital positive for US Gotcha that makes sense and then last question I guess now that it's closed <unk>, maybe you can give us a little bit of color.

Color on what the title insurance market looks like on Europe kind of return profile.

Should we expect here.

It's been about what 20 minutes that we announced this so we're going to have to give me a couple more reported.

But on mileage is challenging.

We have it but listen we got out we're going to think it through what we got we are going to have directors on there are going to be working very closely on hand in hand with co faster. We're very excited as you know Brian.

I think there's more than meets the eye on this one I think strategically.

It's going to be a very very valuable thing for us way beyond just the initial investment I think it's a mistake.

Formidable establish.

Company across so many countries with so many client context, where we're really excited about debt.

Great. Thank you.

Thanks, Brian.

I am not showing any further questions I would now like to turn the conference over to Mr. Mark Anderson for closing remarks.

Thank you very much everyone have a next a nice to know several months ahead.

For the first quarter return is an exciting time to be at arch and we're very pleased that you are there with us to enjoy it. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.

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Good day, ladies and gentlemen, and welcome to the fourth quarter 2020 Arch Capital Group earnings Conference call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time.

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

As a reminder, this conference call is being recorded.

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

Consequently, actual results may differ materially from those expressed or implied.

For more information on the risks and other factors that may affect future performance investors should review periodic reports that are filed by the company with the SEC from time to time.

Additionally, certain statements contained on 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 on the call to be subject to the safe Harbor created thereby.

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

The reconciliation to GAAP and definition of operating income can be found in the company's current report on form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website.

I would now like to introduce your host for today's conference Mr. Mark Grandison, Mr. Francois Morin, Sir you may begin.

Thank you Liz.

Good morning, and welcome to our fourth quarter earnings call.

Overall, we are pleased with the current market conditions on the opportunities available to arch.

As we close out 2020 on spring into 2021.

One of our from fundamental principles is that achieving growth and book value per share above the cost of capital over the long run is the best way to create and sustain shareholder value.

We believe we delivered on that front in 2020.

Our disciplined underwriting and diversified business model enabled arch to grow its year end book value per share by five 4% over the third quarter and by 14, 7% for the last 12 months.

We've responded to broaden the hardening market conditions and as a result, all three of our segments grew their premium writings on a quarter and particular the hardening market has allowed for significant growth within our PNC units, increasing our net premium written for the P&C by 32% for the full year.

On the whole for 2020.

We achieved an operating profit of $557 million on group book value to $30 31 per share.

And arch is positioned to significantly expand as others derisk rethink their underwriting strategies or even retrench.

As we look at the opportunities ahead for arch.

Minded of our situation in hockey that is exciting for any fan in hockey.

If you get a one player advantage and the other team takes a penalty it's called a powerplay when that happened a few things need to be kept in mind as you deploy your specialty powerplay unit to try and improve the odds of scoring you need to have a clear five on force strategy, you need to be defensively savvy enough to not forget.

To protect your own zone, and you need to have a sense of urgency because they block will tick down and you will soon be back to even strength.

These are a few moment that make a difference and a hockey game.

The advantages position, we find ourselves in a similar to that hockey power play where the odds are in our favor.

I am proud of how our team performed last year during the challenges of 2020 now after spending a good portion of the last several years on a defensive position, we're embracing a more offensive mindset here.

Here's what that looked like in the fourth quarter, let's begin with our insurance segment.

Across our worldwide insurance group renewal rate changes increased approximately 12% up 200 bps from the prior quarter's rate changes.

Our fourth quarter growth occurred in many lines with D&O property energy and marine all exhibiting strong advances E&S casualty and our alternative markets business also grew in this quarter.

We believe that rate momentum in these lines is healthy and we also see it building in other lines, albeit at a slower pace.

<unk>.

Turning next to our reinsurance segment.

Underwriting results were significantly better than the fourth quarter of 2019, despite the impact of $94 million worth of cap losses.

While market conditions are not uniformly strong in the reinsurance sector dislocation from other carriers that are reducing their positions is creating pockets with hardening rates that arch is well positioned to capitalize on.

Reinsurance also benefits from the underlying insurance market rate increases through its clients for.

For 2020, we grew reinsurance net written premium by 53% with the two main areas of growth being non cat property and specialty.

As of January 2021 renewals, we saw continued rate increases in most areas. However, we agree with the market consensus debt property cat pricing moves were more subdued than expected or hoped as capacity for that risk.

Remained strong accordingly.

Accordingly, we maintain our cautious approach to this business.

Our mortgage segment delivered good returns in both the fourth quarter and for the entire year, despite the economic headwinds.

We are confident in our continued earnings strength of this segment and frankly the uncertainty we were facing during the early stages of Covid has been largely mitigated.

Here's why am I is on well this past year first housing markets have remained strong despite the difficult economic conditions second.

On a side note just yesterday, the FHFA announced at the full fare on Forbearance program has been extended an additional three months, which should help further mitigate the risk in our delinquency inventory.

<unk> and as we have discussed on prior calls the amount of equity in a home is our single most important factor in determining losses as it plays a significant role in mitigating claim activity.

We are cautiously optimistic that delinquencies will continue to cure is vaccines enable the economies to reopen.

60% from the same period in 2019, our outlook for continued growth in 2021 remains positive.

Turning back to the current phase on the P&C cycle. There are three conditions that we believe will persist and help sustain the improved underwriting environment, one social inflation and reserving problems R&R starting to apply pressure for companies that haven't been prudent enough to anemic investment yields.

Require a sharper focus on underwriting profit and three a return to a post COVID-19 world should accelerate economic activity and increase the demand for insurance.

Each of these conditions will put pressure on results for the industry, our conservative approach to reserving over the past several years means that we are well positioned to drive results in P&C going forward, we expect our future returns to better reflect current and forward pricing.

Finally.

This risk. This recent share repurchase is a testament to our capital strategy.

Allows us to play offense and deploy capital dynamically to generate above average returns and now I will turn on a game commentary over to Fastweb.

Thank you Mark and good morning to all we at arch Hope that you are in good health and debt 2021 is off to a good start.

In our filings the term consolidated includes Watford.

After tax operating income for the quarter was $230 4 million, which translates to an annualized seven 7% operating return on average common equity and 56 per share.

For the year per operating return on average common equity stood at four 8%, while a return on average common equity stood at 11, 8%.

Book value per share increased to 31 to $30 31.

At December 31.

Top five 4% from last quarter, and 14, 7% from one year ago again, an excellent result, despite the strong headwinds from catastrophe losses. This year, which is a testament to the resilience of our operations and our superior diversification strategy.

Losses from 2020 catastrophic events in the quarter included including COVID-19, net of reinsurance recoverable and reinstatement premiums stood at $156 4 million.

Or nine four combined ratio points compared to $2 two combined ratio points in the fourth quarter of 2019.

The losses impacted both our insurance and reinsurance segments.

Primarily as a result of a series of natural catastrophes in the quarter.

Including Hurricanes Delta Zeta and other smaller events as well as adjustments to our estimates for events that occurred earlier in 2020.

Our best estimate of ultimate losses for COVID-19, four occurrences through December 31 remained essentially unchanged from prior estimates.

As regards the potential impact of COVID-19 on our mortgage segment.

As Mark alluded to the delinquency rate at the end of the quarter was $4, one 9% down from $4 six 9% at September 30, we are encouraged with the downward trend in delinquency rates over the last few quarters, which continued to come in significantly better than our earlier forecast our latest.

The assessment of the situation assumes a progressively improving economy in 2021, which should bode well for the housing sector and the performance of our book as we move forward.

In the insurance segment net written premium grew 21, 6% over the same quarter one year ago.

Nine 6%, if we exclude the impact of the pandemic on our travel accident and health unit.

The insurance segment's accident quarter combined ratio, excluding cats was 93, 6% lower by 800 basis points over the same period, one year ago.

Approximately 360 basis points of the difference is due to a lower expense ratio primarily from the growth in the premium base from one year ago.

And continued lower level of travel and entertainment expenses.

The lower ex cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business.

Prior period net loss reserve development net of related adjustments was favorable at $1 2 million.

Segment's accident quarter combined ratio, excluding cats stood at 82, 1% compared to 92, 3% on the same basis, one year ago.

The year over year movement is primarily driven by rate change activity over the last 12 months and a more normal level of large attritional losses compared to a year ago.

Most of the remaining difference is explained by operating expense ratio improvements, primarily resulting from the growth in earned premium.

Favorable prior period net losses.

The mortgage industry had a second consecutive record breaking quarter in terms of mortgage originations, which allowed <unk> to produce $38 billion of ni W. In the fourth quarter, a full 15, 9% higher than our prior high watermark.

With refinance activity leveling off from prior peaks, we shot we saw our insurance in force increased by two 5% across our mortgage segment the.

The combined ratio was 45, 1%, reflecting the lower level of new delinquencies reporting during the quarter.

Improving investor sentiment enabled arch to issued two bellamy transactions during the fourth quarter at terms that are getting closer to pre pandemic levels. You will recall that we discussed our 2023 transaction on the last call and on the run deal covering our production.

From June through August of 2020.

Our latest transaction Bellamy 2020 Dash four provides additional protection on mortgages, we insured in the second half of 2019 and already covered by our 2021 Bellamy transaction by effectively reducing the original retention from seven 5% to one eight.

5% of the risk in force.

At year end, the Bellamy trucks structure has provided approximately $4 billion of aggregate reinsurance coverage.

Total investment return for the quarter was positive 246 basis points on a us dollar basis.

And we ended the year with our investment portfolio, producing a 777% total return.

The duration of our investment portfolio decreased modestly to 3.01 years at year end, reflecting our ongoing positioning of the portfolio towards shorter term maturities.

The effective tax rate on pretax operating income was six 8% in the quarter, reflecting changes in the full year estimated tax rate.

The geography mix of our pretax income and a benefit from discrete tax items in the quarter. We currently estimate the full year tax rate to be in that 10% to 12% range for 2021.

Level.

The decrease in our peak zone P&L. This quarter is mostly attributable to our E&S property unit within the insurance segment.

Where we reduced property aggregate in the Florida Tri County Peak zone, and made selective additions to our reinsurance purchases.

Our balance sheet remains strong and our debt plus preferred leverage ratio stood at 22, 1% at year end well within a reasonable range.

Finally on the capital front.

We repurchased approximately 251000 shares at an aggregate cost of $8 million in the fourth quarter of 2020.

It is worth noting that we have since repurchased an additional two 6 million shares at an aggregate cost of $83 6 million in the first quarter of 2021.

Under a rule <unk> five plan that we implemented during this quarter's closed window period.

Our remaining share purchase authorization currently stands at $833 million.

With these introductory comments, we are now prepared to take your questions.

Thank you.

You have a question at this time. Please press the Star then the one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key if.

If you are using a speaker phone please lift the handset.

Your first question comes from Elyse Greenspan with Wells Fargo.

Hi, Thanks, Good morning, Mike.

<unk>.

He is on.

Related to your return.

Mark.

<unk> remarks you.

Associated with mortgage business going back to return on capital levels from 2018, I'm, hoping just about all three businesses insurance reinsurance and mortgage can you give us a sense of the return profile of the business you're writing today.

<unk>.

If.

If I'd ask the same question 12 months ago.

Yes, I think the nice day talking to you at least I think.

The high level of 2018 sort of long term expected return on the <unk> was roughly in the mid teens. So.

Going back to debt level, which is really good place for us to be.

On the insurance I think debt, we had a bit of a decrease in on an expected expected returns, even though the combined ratio did not.

Get that much better for the industry, but right now if you factor in all the rate changes and everything we think we are in.

The double digit and insurance return and we think that reinsurance is a little bit in between those two so we have a really really different.

Risk risk return risk adjusted return profile on our portfolio has improved and largely as a result of the price increase not solely as a result of the investment return as you as you know release.

Yes, and then my second question on <unk>.

You alluded to this a little bit on your prepared remarks, Mark when you were mentioning on.

Yeah.

Issues that would help on the pricing momentum side that persisting from here a big question that I get is does this momentum through.

Guidance.

We expect it to be the case at least because because of all the factors I've mentioned, the social inflation. There is a lot of uncertainty in terms of loss ratio picks for years, specifically 2015 through 19 as we all know.

I sort of mix for correcting some of the ongoing pricing. So that's definitely sustainable we do not have as much.

Protection from the investment return so that we put a lot of pressure on the returns for the industry.

And uncertainty.

We all collectively think and know and believe that we need to get better rate and better pricing because the risk is not being rewarded accordingly as in every hardening markets.

On the length of cycle, how long is a piece of strength, but I think that our hardening market does not only last four or five quarters. I think you have this initial stages of the initial reaction of rate increases than you get momentum building in the underwriters' mentality that brokers are sort of accepting as being sort of a new way to deal and do the business.

This eventually that builds upon itself.

I would fully expect to be lasting through 2021 and into 2022. This is what we believe at this point in time.

Okay and one last numbers question, you guys mentioned, the PMO going up a little bit.

In terms of your cat load.

<unk> argued to talk to like $40 million of quarterly cash obviously, we've seen growth in.

Cat reinsurance and other property related lines like you mentioned how.

How should we think about the cat load from here.

Yes, I mean, no question that we've we've written a lot more property premium and the last the last.

I wanted to say four to six quarters, we've really ramped up our property exposures I mean, theres a lot of.

On.

And different areas as you know a different lines of business U S and international et cetera.

Yes.

The cat load I think on a quarterly basis has definitely gone up from what we were on the old day thinking about like $40 million a quarter.

It's still evolving, but I'd say, it's probably more on the $60 million to $70 million range right now.

Okay. That's helpful. Thanks for the color.

Particularly welcome.

Our next question comes from Mike Zaremski with Credit Suisse.

Hey.

Good morning.

Follow up on me.

Mortgage insurance and <unk>.

Our leases.

Question.

On it.

Youre talking about kind of.

We are encouraged about the downward delinquency rates and assuming the economy progressively improves and you think you mentioned mortgage debt.

Profit turns from our 2018 levels. So are you, saying kind of directionally.

We should be thinking about <unk>.

Combined ratio.

That continues to.

To move.

South kind of towards shows 19 muscles or have the capital.

Assumptions changed since then.

No Mike depends on a combined ratio of debt capital is a different story, because it's a bit of a lagging indicator based on the delinquencies. We have on if you look at the combined ratio. Yes, we think that we are tending to go towards more.

So the run rate that we had in 2018 I would just caveat that there was some prior development favorable development and 2018, so I would probably adjust for that but certainly the.

On a different direction it might be a bit on higher side, but you're right. It should be getting closer to where we were in 2018 on terms of combined ratio.

Okay.

Paul.

Switching gears to the.

The non insurance segments.

Ben the expense ratio has been.

Better than expected for a number of quarters I know you guys had called out some some items, maybe you can kind of remind us on top to kind of what you think is kind of cyclical.

On both sides both in the sense of growing the top line for in our organic lines of business and we also had the acquisition in London and really pushed to be much more relevant much more bigger in London. So our international operations also gained scale. So if you now look at the overall structure.

The company has laid out in terms of top line and the way to the expense is constructed between.

On the unit I think it's much more of a structural change.

I would say debt is probably 50 50, but the growth is certainly something that's really important.

In terms of.

Helping that growth so that could also get presumably a bit better over time, but I would also tell you that the growth in our operating expense on the instrument side has lagged the growth in our top line, which is what we should expect right because a lot of the increase if not more work, even though we are writing more business a lot of the increase in premium.

Right.

In and of itself. So I think that the company is flexing itself in terms of topline growth and expense deployment and very very nicely. So a bit more structural than I would've told you Bobby two years ago.

Thank you.

Our next question comes from Euro on Qunar with Goldman Sachs.

Hi, good morning, everybody.

On it.

I guess my first question.

Revolves around MRI.

Do you have any comments or thoughts around the potential changes FHA fees and its potential for their potential on back on BMI business.

Yes, I can just on its still early on Rmi is a new administration changes a couple of things going on all over the place Washington, I'm sure, they're very busy right now China.

Changing things.

What we hear the same things that you guys hear about a 25 bps potential price cut at FHA.

We've put in there and as a reminder for everyone. If you took a step back on the FHA was a large market share provider of <unk> insurance.

In the years, where the PMI to profit private mortgage insurers were not in that great of a shape and frankly that was needed to.

Phil the GAAP and fill the board if you will of the need for the homeowners and the mortgage provider. So this has changed I think that the FHA also ultimate rolling core role is to provide.

Mortgage insurance for the one those are probably could be perceived a bit more risky.

The private private sector.

And so we've done the analysis, which means that if you look at our portfolio are on.

On a high FICO very high quality.

Most of our borrowers that we have on our portfolio do not really need to consider FHA. So from our perspective will react obviously to whatever is out there but.

We believe that this if it come to fruition that 25 bps rate cut and FHA will help on the lower FICO and higher LTV.

The borrower, which is really not the ones affecting in the ones that we're currently having success with because our pricing is actually better if you kept our pricing versus the FHA in that sector on pricing is better execution is cheaper for the borrowers. So we're not losing sleep over that.

Got it that's helpful.

And then my second question.

You previously talked I think about shifting capital deployment.

My more into P&C.

Last call you use more of our basketball analogy that was easier for me to follow them then thank you for explaining.

But I guess as market conditions kind of your views on market conditions change a bit.

Seems like reinsurance, maybe a little less exciting than maybe a quarter or two the outlook a quarter or two ago, and then maybe a little better than the outlook was a quarter or two ago does your.

Appetite for capital deployment between the three segments has that shifted or will it shift into 2021.

I wouldn't say it shifts in any major way I think we see all three three segments with very good opportunities in front of them.

And maybe we'd argue somewhere overdo, especially on the P&C side. So we're bullish there mortgage has always been.

And basketball or six from <unk> 76, Guy down-low in and ready for dogs and that Hasnt really changed in our view. So yeah. I mean, we got certainly have more visibility into what the ultimate or what the current market conditions are.

Especially in mortgage given what we know the second half of the year, how things progressed and that's good I mean, that's something that we take.

I think it works in our favor so but in a big big.

Big picture, we don't see major changes on how we deploy capital and Jan and one thing I would mention to you that it's always.

It's hard for people not to see us being in Bermuda as being a property cat rider on the reinsurance side, but I would argue that yet on the property cat side is not as good and you've heard it from other people and we certainly agree with that but we're still growing in areas that are non property cat exposed. So we're seeing a lot of other lines to be honest between United are actually better now or.

Prospects, but we want better than they were.

In 2020 is just debt.

<unk>.

Not.

Growing necessarily in the ones that get the better headlines if you will flow from your perspective, but by and large I think that our prospects are very very good on the reinsurance side very much so.

Got it thank you and thanks for translating hockey and basketball from it.

Sure.

Youre welcome. Thanks.

Our next question comes from Jimmy Buhler with J P. Morgan.

Hi, Good morning, I had a couple of questions first if you could just talk about your sort of comfort level with the RBI reserves given.

The development from the U S seem to be favoring the industry for the most part so do you feel like Youre overly.

Conservative on your reserves, and obviously internationally things haven't gone as well.

And then on default that another one as well.

Yes, I think we're or we never would say that we're overly conservative we want to be prudent and conservative for sure in how we set reserves I'd say, starting again with international which maybe have gotten a bit more headlight.

Made the headlines a bit more.

Our position hasn't changed in the U K again, the book, we have as a small regional book.

We are well protected by reinsurance protection. So we feel that the reserves we have there.

Even after the call it slightly adverse ruling from the courts and the UK were.

Are going to affect our bottom line. So no changes from our point of view there.

And in the U S for the most part as you said on all the rulings on kind of been in favor of.

In the of the industry.

Couple of places, where there is maybe some some some that didnt go as expected but on those.

Our view is that the.

The policies that were being challenged were managed per policy. So not the standard ISO form that we typically use without necessarily the strong wording around virus exclusions and property damage to trigger coverage. So on both those fronts. We GAAP as we said before a vast majority of our policy.

We're in a good spot.

And I think you said about two thirds or three thoughts where IBM.

As of last quarter.

Number now.

Two thirds of it went down a little bit.

Roughly from 75% to 60, roughly I mean, it hasnt changed much and Thats.

So and some of that is around as you can I expect mostly on the reinsurance side right where we.

A lot of our reserves are still on the reinsurance side with.

Significant <unk> and ACR is on that book.

And then on buybacks you added a decent demand and you've done a lot of this year, so what's driving your.

Sort of action there is it the stock price is it I'm, assuming there's decent opportunity to deploy capital on the near businesses given pricing, but what drove the big uptick in buybacks versus what you did on the last few quarters.

Yeah, certainly more visibility right I think we said that from the start.

At the end of the first quarter last year, we said listen we're going to take a little bit of a pause because we need to know where things are going to how things are going to play out in <unk> and mortgage being a major driver in that performance you've seen the results. So we were a lot more confident where the economy is going vaccines are rolling out.

So there is a lot of things that yes, we will take some time, but.

We look forward I think that gives us a lot more comfort that.

The worst is behind us and debt gives us a more clarity on how do we deploy capital we're still in our mind. We're we're fully capable of doing both we want to grow the book and also buy back shares. There is no reason why they are they have to be exclusive we think.

Our growth is still very strong and we expect to keep growing in 'twenty, one and across our book, but we also see a good.

Good.

Opportunity at the current level of pricing levels for the stock to buyback.

A buyback at this point.

Thank you.

Youre welcome so before we book their next one I think I have to stop the broadcast I think I believe we have a breaking news.

Does it hit the wire. So I think we have to go to Francois for some commentary that you want to share with us on tour flow.

Long overdue marked book just wanted to take advantage of the opportunities to fill everybody on the call on the latest developments with our proposed acquisition of a 29, 5% ownership stake in Colfax.

Global trade credit insurer to confirm what some of you may have seen across the business wire over the last few minutes.

They weren't paying attention to what we were saying but.

We closed on this transaction with Natixis earlier today.

And the reason for the timing is that we have to wait for their markets to close which they have so the consideration paid by arch was $909 95 per share for an aggregate 453 million euros.

A financial reporting perspective, you should all expect US to include our proportionate share of <unk> results in our financials, starting next quarter, we intend to report the contribution and a new separate line titled Equity method earnings from operating affiliates, which will be included in our definition of operating.

<unk> earnings. This line will also include the contributions from other non consolidated affiliates such as Premier Holdings. So that's breaking news market and coupon on top of the updates unless if we can go back to Mr. Don who is waiting in line I believe.

Jeff Dunn with Dowling <unk> partners. Your line is now open.

Thanks, Good morning.

On a couple of questions on <unk> first of all.

What was the incidence assumption from the current period provision as well as the average severity factor this quarter.

Yeah, so on nine 4% for the new annuities in the quarter.

And the average reserve per <unk> was little bit over 5000 pretty much in line with the third quarter, Jeff because the the risk that came in were a little bit less less coverage.

In this quarter, so that would explain the average being a bit lower or a bit more in line.

Okay, and so as you think about 'twenty.

First part of 'twenty, one to my knowledge.

They extended the forbearance periodic 15 months, but you can't enter new forbearance activity.

So what did your provision for non forbearance loans on your incidence assumptions on non forbearance loans it looks like in the fourth quarter.

Yes, I don't think we did not the way we reserve if we sort of trying to make on overall, all encompassing assessment and put it in that number. So I think that's what you might've said might have thought in the past on number of it could have been a bit higher. So we think that we have enough in our reserving.

<unk> based on a number of factors we've used.

Okay, but with forbearance options going away fair to assume that debt incidence assumption will probably climb in the fourth yep, Jeff we might well have to evaluate when we get there I think you're right. I mean from you have to until February 28, two actually ask for this fall under the forbearance programs, but we'll see how that develops and we have a surge in a couple of week.

<unk> of people asking for forbearance on my help again more well have to readjust, Jeff as we see the end of the quarter. We will have another month of non forbearance.

Effective not new for bearing on so we'll have to reevaluate when we get there.

Okay, and then within the P&L can you talk a little bit about what drove the pretty notable sequential drop in earned premium.

As well as some of the movement on both the expense line was there any reallocation on the expense stuff.

Specific to any segment.

<unk>.

Good day.

Okay.

All right Jeff.

All of them.

Premium line was down $15 million sequentially and then you had some just looked like a little bit of abnormal movement, particularly in the acquisition expense line.

Relative to third quarter, but just a little bit more volatility than I would tend to flow.

The first one I would say a was a call it a an accounting catch up on true up on our Australian business, how we on the written side.

So that I'd say, that's more of a one off kind of blips that we we we had to adjust for.

Or was actually was present last quarter on more than this quarter. So thats how thats how are we the.

That explains that movement on the.

On the acquisition.

There is.

We entered into a quota share agreement starting last.

At the middle of the year, covering our <unk> book and that actually gives us.

A benefit in terms of the acquisition Thats a reduction towards the acquisition during the ceding Commission. So that that is what is starting to flow through in our numbers.

Alright, great. Thank you.

Youre welcome.

Our next question comes from Joseph <unk> with Deutsche Bank.

Yes, so the.

The numbers. We report to you are those are in forbearance and then.

Have skipped two payments at least so we have a few more as you could appreciate that are in forbearance on our still current.

The data is coming in very very.

So it's very I wish we are constantly asking and <unk> for that kind of information I think that most of the forbearance that are still <unk>.

There are lower in the year most of the forbearance debt were declared early in April may and June.

The vast majority of them are cured by now so it seems to be the pattern of getting to forbearance and sort of staying in there for a $5 four or five months in and eventually things get back to normalcy.

That's what we would expect it to be the case going forward.

So I don't have a definite answer for you yet, but no no no.

So I think the one question that we're trying to get you on I get a lot of questions about you had mentioned 89% of the delinquents have at least 10% on equity in the home.

And you had talked about the visibility, allowing it to repurchase shares I mean at what point do we get visibility that maybe the <unk> reserves are a little more redundant and we can start to see a relief there I mean, how do we think about what you are looking for it and the visibility.

Yes.

Adjusted that.

So from your lips to God's ear I hope you're right that it is going to be redundant will see only time will tell for us I think the way we look at reserve.

Phil is very simple is just we have to wait till we get the data that we feel confident.

We're going to get there and as you know you've seen us do the reserving on MRI and P&C for a long time.

You tell me one day Forbearance program is done and when the unemployment rate goes on to three or four and the economy picks up again, and then I'll have a better sense for what it is so we would hope, but all having said all this I hope that by the summer. After the vaccines have been rolled out that we will have much much much better visibility as to what if any.

The reserve needs to be released or it's not necessary to pay claims.

Understood, Okay, and switching gears on the <unk>.

Reinsurance business.

Appreciate the remarks, you made in response to an earlier question is there any way you can help frame for us what the opportunity is for premium volume on it so maybe it's.

One ones go versus last year, or how should we be thinking about the growth potential in 2021.

I think the growth in 2021 should be more in line at least with what we've seen last year I think the opportunities on the reinsurance side.

We have an equity on that I think the reinsurance opportunities are still very very solid very strong.

They're not necessarily as I mentioned earlier in the traditional property Cat arena, but we're definitely definitely looking at a lot of transactions on a lot of them will have to do with what you would expect a reinsurance company to be providing which is capital as we get into in a harder market right a lot of people on some of our clients are looking for capital at least looking for.

For validation of their plan going forward and want to make sure that they had the re underwrite and re.

Repurpose their book of business that we're there to help them and we're able in that case too to help them get through that transition period. So the opportunity on reinsurance. It was great last year and I think it's actually very very good again as we go this year one interesting fact for everyone that one of the key leading indicator to us to me at least personally based on my history.

As to what is a leading indicator of the treaty reinsurance.

Conditions are the profit.

The facultative industry is still a really really strong and it's typically.

You typically have.

A hard market or hardening market for as long as affect market goes youll have a treaty market, new staying strong well beyond that the year to two years beyond that so we expect that too to be yet again, a strong leading indicator on our facultative team is telling us that it's a really good market for them at this point in time, which is encouraging.

Great. Thank you.

Our next question comes from Meyer Shields with K B W.

Great. Thanks, So two questions on the P&C side.

First.

Arch is confidence in the pricing cycle is clearly borne itself out but is it safe to say that.

Maybe this is as good as they get on the property cat because there is this level of capital available. So.

So that cycle will play out along historical line.

All I will tell you Meyer is my experience, we do a lot of property cat, writing an old one or two.

And if you remember at arch, we were not heavily focus on property cat XL XL at the time, where more and more on the liability side and the market was going on I know for willing to five and we thought we'd net and we thought we had seen the loss of the hard market for a little while and Katrina Rita Wilma happen to change the whole thing. So my question My answer to you is I don't know.

I don't know is the short answer I think that there is clearly.

A lot of capital debt again found its way over the last four or five years and once capital finance went to a net it gets sticky right. It wants to stay there for a while and we'll sort of justify itself for a while longer per hasnt. It should.

But I think we're always on.

Hopefully it doesn't happen, but we could be one major event away from changing the perception of risk in that area and that I think will mean actually a much harder market you would expect minor because the volatility in the knee jerk reaction would be like an elastic right. When this happens I think you'll have a you may have a massive exited.

Out of the door and that might create more opportunities for us I'm not saying it will happen Meyer, but I could see some day aware your premise does that does not actually hold through so there's always there's always a chance.

Okay, No I just wanted to understand what youre thinking there.

Second you talked I think on the insurance segment about market dislocation and I.

Maybe the sense is out there that that has been a major factor or wasn't a major factor in 2020, but now most companies are kind of settling down.

They're comfortable with their books of business.

Are you still seeing like today debt.

Level of market dislocation.

Dislocation is youre right Theres some from re realignment there is a couple of people going back to the market and this is truly happening, but it's not across the board and there are still we believe.

Bad news that needs to come their way through the system at that might make somewhat of a difference as we go forward.

But again if you if you had if you had a 20% rate increase on one transaction on the insurance side this year.

And you had this is on top of a 10% last year.

Return on rate on rate, perhaps three times its not a bad place to be and plus I think what we hear Meyer for what its worth and its actually not insignificant. We are hearing in terms and conditions funding changing and moving in the right direction. So rates will move first in terms and conditions sort of follow right behind it and we're hearing that this is what's happening in marketplace. So even though we may not have a headline.

Growing as high in terms of rate change as much as it was two or three years actually on.

Underlying conditions in their policies.

Could actually help improve beyond the number that we see on that.

The headline number.

Okay understood. Thank you so much.

Our next question comes from Brian Meredith with UBS.

Hey, Thanks, a couple of them for you here. The first one mark first of all I Wonder if you could just confirm it used to be that youre determination on whether you buy back your stock or not is that if you could actually recouped. The premium you pay relative to book value over a three year period.

Is that still the case and if it is does that basically mean that you could continue to be pretty aggressive with your share buyback given where your stock's trading right now.

Yes, I think that rule of thumb still is still in place I mean, obviously, it's not a black and white I mean theres always.

Factors, we consider around deploying whether theres business opportunities and et cetera, but yes, we still think in those terms of the buyback.

And when we bake in that we want to earn it back over.

No more than three years.

And Youre right I mean, I think the fact that on a price that the stock price is not as is.

Is below that level.

Suggests that maybe will be will be out there buying more stock as we go through the year.

We'll assess.

Obviously as we every day every quarter, we will look at what's in front of us, but for the time being I think we're.

Certainly something were considering and we probably will do more of.

Got you and then just on that on that topic. So just maybe a little bit on uses of capital or cash kind of here going forward. The next 12 months. It sounds like you've got $453 million, that's going out here. We've got Watford did I think is yet to get to close is that is all going to be constraining to your ability to actually buy back stock. Given you also have the capital you need to fund your growth.

On your business and particularly what Mark just said on the reinsurance business is going to be very capital kind of generated type transactions.

No because we I mean, we raised $1 billion on capital as you know last summer we didn't deploy fully until it was all part of that kind of 101 looking ahead towards the one one would do we know these transactions were.

On the horizon.

And we have a lot of faith in our ability to generate earnings moving forward on our own.

So self funding the growth I think is something that is part of our plan and.

We don't really have a whole lot of constraints other than that and Brian on both these acquisitions as you mentioned, we will actually be accretive and grow book value for us So their capital positive for US Gotcha that makes sense and then last question I guess now that it's closed Curtis maybe you could give us a little bit of.

Color on what the title insurance market looks like on Europe kind of return profile.

Should we expect here.

It's been about what 20 minutes that we announced this so we're going to have to give me a couple more quarters.

I don't mileage is challenging.

We have it but this time, we got a way to think it through what we got we are going to have directors on there are going to be working very closely on hand in hand with co faster. We're very excited as you know Brian.

There's more than meets the eye on this one I think strategically.

It's going to be a very very valuable thing for us way beyond just the initial investment I think it's a it's a.

Formidable.

Establish.

Company across so many countries with so many client context, where we're really excited about debt.

Great. Thank you.

Thanks, Brian.

I'm not showing any further questions I would now like to turn the conference over to Mr. Mark Anderson for closing remarks.

Thank you very much everyone have a next a nice.

Several months ahead, where the ahead of the first quarter return is an exciting time to be at arch and we're very pleased that you are there with us to enjoy thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.

Q4 2020 Arch Capital Group Ltd Earnings Call

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