Q2 2021 Arch Capital Group Ltd Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the second quarter 2021 arch capital.
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 Rick.
Hello Group.
But for 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 uncertainty.
Certainties.
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 in the call that are not based.
Just on historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
The company intends the 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.
Definition of operating income can be found on 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 Sirs, you may begin.
Thanks, Liz good morning, and thank you all for joining our second quarter 2021 earnings call.
At arch, our playbook remains simple yet effective we protect our capital through soft markets and on lease our underwriters doing hard work.
We believe that this time tested strategy gives us the best chance.
GAAP and to generate superior risk adjusted returns overtime.
Well you should expect then from US at this stage of the cycle come straight from that playbook.
Long as rate increases support returns above our threshold, we will continue to grow our writings.
We have seen this video before in a hard market of true.
2002 through 2005, when P&C results generated a sustainable stream of earnings for several years after market practice speak and we're fully earned.
And so again this quarter the power of arches diversified platform is evident in our strong underlying earnings in each of.
Operating segments.
We delivered a 13% annualized operating Roe.
And aided by good investment returns and annualized net income ROE of 21% this quarter.
1 item that stands out this quarter was our strong P&C underwriting activity.
Our P&C insurance results demonstrate significant improvement in underwriting performance.
Better market conditions allowed our teams to expand their overall positioning and grow net written premiums substantially over the same quarter last year.
We are now on the sixth consecutive quarter of rate increases at plus 10%. This.
<unk> comfortably in excess of loss cost trend estimates.
The higher level of premiums earned from the post 2019 policy years.
Primary driver of our improving underlying accident year combined ratio about 2 thirds of the combined ratio improvement was due to lower loss ratios attributable.
To rate increases and underwriting actions, we have taken over the past several years the balance of the improvement was driven by a lower expense ratio.
Production increased across most lines of business and geography areas as pricing improvements spread.
While rate increases has tapered off.
<unk> highs in some lines, we're seeing increases in lines that had been immune to meaningful change and in lines, where price increases at east, we're still getting rate on rate increases on and improving margins, we estimate that approximately 30% of our insurance premium growth.
Flex rate increases.
Greece's about 15 percentage from higher net retention level and the remaining growth comes from new business and exposure growth with existing clients.
Both our international and U S insurance platforms continue to excel in the current market with substantial growth in professional lines programs.
Off from property and travel and A&H writings.
Our reinsurance group also had a quarter of strong growth, while producing strong underwriting results for <unk>.
Large portion of this growth results from our ability to leverage our expertise and historical experience as a rider.
<unk> per share business when markets dislocate, our clients need capacity and capital as they seek to reshape their portfolio.
That's why since 2019, we have been increasing our participation in side-by-side quota share arrangements. This has always been part of our reinsurance playbook and based.
For historical patterns, we believe a good place to deploy our capital for the next few years as you may have heard.
This market is notable as rate increases in traditional ex ol reinsurance lag the insurance rate increases. So our current preference is to be closer to the primary rate increases through quota share with our clients.
Clients property Cat XL is 1 of the few areas, where we had where we have reduced premium writings. They are down 26% as we are not finding enough opportunities that meet our return expectations. However, as you can see in our supplement premium writings grew substantially in property other than cap and.
And specialty segments casualty and Marine also produced excellent levels of growth.
With insurance, we expect the ongoing rate improvements to be reflected in our underwriting results over the next several quarters.
The arch arrangement story is 1 of providing creative capital solutions during hard markets that enabled.
Adjusted leverage our growth faster than in our primary reinsurance markets. We have considered this a core capability throughout our history.
Our reaction to this market is no exception all in all it was a very satisfactory job of seizing hard market opportunities by our team.
Copper ADM as they say.
From a strategic standpoint, it's worth noting that we along with our business partners successfully completed the purchase of Watford at the beginning of the third quarter and are focused on working to build a sustainable reinsurance French franchise.
Allow me now to switching.
Tables and fears.
Which continues to be a hot topic for our industry.
Want to reiterate our perspective on how we view inflation at arch.
As underwriters, we study inflation on a line by line basis to price the business and established reserves in some lines like workers' comp inflation remains low at this stage.
Stage, I would say zero to 1% however in other lines like high excess general liability, we're estimating inflation to be in the 8% to 12% range.
As a point of comparison loss cost inflation from the ground up has been in a 3% to 5% range for around 5 years broadly across our.
Inflation. It is important to consider line of business specifics when we discuss claims inflation.
Second it's worth noting that in every line of business the inflation rate increases as you move up attachment points. The key pricing on reserving for an excess policy is to start with the proper ground up trend and then.
For the best curve to select a range for the trend in the upper layers as is often the case in insurance, we are estimating and there is a lot of uncertainty around the correct number our philosophy is to keep this methodology consistent through the cycle.
Third we also supplement our analysis with some subjectivity.
<unk>.
In the current environment and in certain lines.
AD trend to try and account for the increased uncertainty, including the possibility of the so called social inflation.
We are typically more willing to adjusted trend above our indications and we are to reduce it all with creating a margin of safety in mind.
Activity. This is not a new concept that arch, but a time tested philosophy that has allowed us to navigate both soft and hard markets through our opportunistic cycle management approach.
Let's turn now to our mortgage group, which continues to operate as a well oiled machine generating $250 million of operating earnings.
Mined for the quarter.
Our insurance in force remained steady at roughly 278 billion for U S primary EMI.
Refinance activity has slowed and we expect improving persistency throughout the remainder of the year and into 'twenty 2.2022.
Delinquency rates are decrease.
Earnings in seeing across our portfolio and we still expect a large portion of delinquencies to cure based on many factors, including a strong equity position of our current inventory where more than 95% of delinquent policies of over 10% of equity.
New notices of default continues to decline and.
And at 7400 in the second quarter or better than pre COVID-19 levels.
Out of the U S. We increased our writings in Australia as the housing market remains strong we like the long term opportunity in Australia as demonstrated by our announcement to acquire Westpac for LMI business, which we now.
We expect to close later this quarter.
Pricing remains competitive but rational across EMI industry has rates are back to 2019 levels. However, the credit quality of borrowers remains strong similar to 2016 supporting our confidence in our continued earnings.
While our mortgage insurance portfolio.
As I close my prepared remarks, this quarter I'll borrow from cricket.
Which is top of mind because this weekend marks cup net here in Bermuda when the entire island goes cricket Crazy for for day holiday weekend.
I think of the current P&C market like being the first team to <unk>.
During a cricket.
<unk> test match test cricket is 1 of the few sports debt isn't governed by o'clock. Unlike games that must be completed in 60 or 90 minutes.
Net cricket is about scoring as many runs as possible as long as you are getting favorable balls or pitches for baseball fans.
And for as long as it takes for all of your batsmen to be out the details on not critical but the idea is that similar to this market. We are waiting for the right ball and scoring as many runs as possible, while we can rather than swinging aimlessly, we'll do what we always do play defensively when we have to become aggressive in score as many runs as possible when the opportunity.
Acuity arises.
We're not worried about the clock running out we'll just keep scoring runs.
Now I'll bullet over to Frostwork 2 months for financials.
Thank you Mark and good morning to all of this first day of the Bermuda Cup match classic Thanks for joining us today.
Before I provide more color.
Our excellent second quarter results I should remind you that consistent with prior practice. The following comments are on a core basis, which corresponds to arches financial results. Excluding the other segment I E. The operations of Watford Holdings Ltd and.
In our filings the term consolidated includes Watford.
As you know we closed earlier this month on the transaction, we announced late last year to acquire Watford in partnership with Warburg Pincus and Kelso.
Concurrent with the closing we will be making changes going forward and how we reported our equity interest in <unk> results, which I will share with you in a few minutes.
As Mark shared earlier, we had an excellent quarter with each of the 3 legs of our stool performing very well and our investment portfolio also producing solid results.
After tax operating income for the quarter was $407.2 million or $1 per share resulting.
An annualized 13% operating return on average common equity book.
Book value per share increased to $32 <unk> at June 30 up 4.8% in the quarter.
In the insurance segment net written premiums grew 43, 3% over the same quarter 1 year ago.
38, 5%, if we exclude the growth due to the COVID-19 related recovery in our travel accident and health unit from the same quarter 1 year ago.
The insurance segment's accident quarter combined ratio, excluding cats was 91, 4%.
Lower by 470.
<unk> points from the same period, 1 year ago.
The improvement in the 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. In addition, the expense ratio was lower by approximately 180 basis points.
Since the same quarter, 1 year ago, primarily due to the growth in the premium base.
As for our reinsurance operations, we had strong growth of 63, 6% in net written premiums on a year over year basis. The growth the growth was observed across most of our lines.
Andy based on especially in our casualty and other specialty lines or strong rate increases and growth in new accounts helped increase the top line.
The segment's accident quarter combined ratio, excluding cats stood at 87, 1% compared to 87, 5% on the same basis 1.
Yes.
As we have discussed in the past we believe the underlying performance of our reinsurance segment is better analyzed on a rolling 12 month basis, which typically smoothed out the impact of certain large transactions and or claims that can have an impact on quarterly results.
1 year on that basis, the ex cat accident year combined ratio stood at 84, 3% over the last 12 months lower by 660 basis points from the prior 12 months, where the improvement almost entirely reflected on the loss side as a result of the rate increases we have observed.
<unk> over the last 6 plus quarters.
Losses from 2021 catastrophic events in the quarter net of reinsurance recoverable and reinstatement premiums stood at $46.5 million or 2 for combined ratio points compared to $13.5 combined ratio points in the second.
Quarter of 2020.
The activity in the quarter was the result of a series of small events across the globe and some late reported claim activity from the North American winter storms and Viola in February.
Following up on the trends we have seen in the last few quarters the ultimate impact.
Back of COVID-19 on our mortgage segment remains very manageable.
In particular, the delinquency rate, which came in at 311% at the end of the quarter.
Is now close to 40% lower than it was when it reached its peak during the pandemic at the end of the second quarter 1 year ago.
Another solid quarter in terms of production.
And with refinance activity coming down from prior levels. We saw the insurance in force for our U S. On my book remained relatively stable.
Of note. This quarter was the exercise of call features by the GSE is on certain vintage credit risk transfer contracts.
Reducing the insurance in force for a non U S on my portfolio.
The overall impact on these calls was an approximate 1 time $31 million benefit to our underwriting income.
Approximately 2 thirds of which came from the release of prior year loss reserves and the rest from.
The call premiums received.
The combined ratio for this segment was 26, 5%, reflecting the lower level of new delinquencies reported during the quarter.
Income from operating affiliates was strong at $24.5 million, mostly driven by an excellent first quarter.
Quarter at Colfax as a reminder, we report our ownership interest in <unk> results on a quarter lag into our financial statements.
As regards to Watford.
Hosing of the transaction on July 1 gave rise to a reconsideration event and as a result, we revisited our.
Our V I E analysis based.
Based on the new governing documents of the entity. We have concluded that while we will attain significant influence we will not control the entity going forward.
Accordingly, we will no longer consolidate the results of Watford in our financial results starting with our third.
For the financials, and our 40% share of Watford results will be reported in the income from operating affiliates line on.
Along with our proportionate share of other operating affiliates, such as co fast and premiums.
As a result of the closing of the transaction. We also expect to report.
Third quarter, 1 time nonrecurring gain of approximately $65 million in the third quarter.
Total investment return for our investment portfolio was positive 150 basis points on a us dollar basis for the quarter.
Net investment income was $89.4 million during the quarter.
Port up $10.7 million on a sequential basis, driven by lower investment expenses and interest received on funds withheld transactions.
The duration of our portfolio remains at 1 of its lowest levels in our history $2.31 years at the end of the quarter, reflecting our internal view of their risk and written.
Earned tradeoffs in the fixed income markets.
Equity and net income of investment funds accounted for accounted for using the equity method returned approximately $122 million during the quarter.
A key contributor to the growth on our book value.
The effective tax rate on pre tax operating.
<unk> was 7.6% in the quarter, reflecting changes in the full year estimated tax rate debt geography mix of our pretax income and the benefit from discrete tax items in the quarter.
Turning briefly to risk management, our natural cat <unk> on a net basis decreased.
Income of $676 million as of July 1 for the northeast peak zone down to approximately 5.6% of tangible common equity and well below our internal limits of the single event 1 in 250 year return level.
On the capital front, we issued $500 million of 4.
75% perpetual fixed rate preferred shares in June.
We expect to use the proceeds to redeem all or a portion of our outstanding series E. Non cumulative preferred shares in September 2021, and to use any remaining amounts for general corporate purposes.
Separately, we repurchase.
Purchased approximately 7.8 million shares at an aggregate cost of $306 million in the second quarter, bringing our year to date share repurchases to over $485 million or approximately 45% of our year to date net income all while growing our book value.
For <unk> and top line.
As we have said since our formation 20 years ago. We are strong proponents of active cycle on capital management. We believe this quarter's results demonstrates our ability to execute on this philosophy and leads us to invest in opportunities, where we believe the returns are most attractive.
<unk>.
At current prices and with the prospect of improving returns, we believe buying back our share represent another compelling value proposition for our shareholders without compromising our capital flexibility.
For these introductory comments, we are now prepared to take your questions.
Yes.
Yes.
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Our first question comes.
From Elyse Greenspan with Wells Fargo.
Hi, Thanks, good morning.
Mike.
1 is on capital.
By.
Francois you just bought back.
Less than half on earning just start this year and I believe going in for the year you guys thought you had more.
More than enough capital.
Core.
Growth.
The growth that you thought you would see so.
Should we think about a pickup in potentially capital return at that statement is true in the back half of the year.
Update us would you be willing to be active buying back your stock during wind season.
Just given that it seems like you have a good level of excess capital.
Yeah.
Sure on the second question on the lease.
We're in a while in our early days and I would say pre mortgage years.
We're somewhat more careful with share buybacks during the during.
The reason we're not we're now as you know a lot more diversified so I think that constraint or that reality is maybe less applicable than it used to be.
But yes, certainly as we think about share repurchases or capital deployment.
Throughout the second half of the year.
<unk>.
The wins, we certainly think that we could be buying back more shares I mean, our top priority is still to invest in the business and grow the business as best we can but as you saw this quarter I mean, we were able to do both and then some and like to think that if things stay where they are within reason we would be doing the same in the second half of.
Yes.
Okay, and then in terms of.
So on.
Your insurance segment. So you guys still seem pretty positive by 30% of the growth came from rate increases in the quarter positive on pricing a little bit.
Okay.
Any concern on that inflation, which we've heard throughout the industry broadly.
You guys are thinking about the pricing environment as well as just what's going on with inflation do you have a sense for how long you think pricing.
Continue to exceed loss trends broadly across insurance recognizing.
Obviously, many different lines that come together.
There is a question that will lead all of US if you get the right answer to Rich's Elyse, but I think it's fair to say that the market momentum is.
As clearly there I think you've heard on other calls that debt.
Our push for rate and increase the rate adequacy and getting to a better level is.
Share it among most in the industry I think there's a recognition between some of the losses that have occurred in the past and cat losses included.
Some uncertainty on social inflation cyber risk as well as no property cat events. Obviously those have occurred I think theres, a written and the interest rates being lower I think there's a recognition that.
Prices need to go up.
I will just give you a quick anecdote, which some of our folks are doing final audits.
On the reinsurance side that is where some of our clients who are competitors of ours as well.
And the common threat of teen theme that seems to come through the audit is that the.
The underwriting community is recognized.
I think.
More needs to be done and you can see this evidenced in the discussion that they have with brokers. So we're very we're very secure I think theres going to be I know.
Quite a bit more runway to this to this pricing.
<unk> improvement.
And then 1 last 1 on the reinsurance side it sounds like France lagged.
<unk> the comments that the deterioration in the quarter margin kind of 1 off.
I guess as we think about going forward. My question more is as we've seen the shift to more on longer tail lines within that book.
Lee from property would you expect the underlying loss ratio to deteriorate or was it just that it was just.
From 1 off factors in the quarter, we could still see improvement in that on a go forward basis.
Yeah for sure in terms of modeling I think thats going to go up and down right and I would say the numbers. We quoted in terms of the rolling 12 months is probably as good a good starting point.
On the business mix, yes, there'll be.
Some fluctuations here on there but.
Yes, we want more casualty, but we wrote also a lot more other specialty which is.
Maybe combined ratio is there a bit better so it's it's hard to pinpoint exactly where everything.
Whats going to happen obviously in the next few quarters, but.
Steer you to day.
On a rolling 12 month number that I quoted to be that should be a good starting point at least if I may add to that point and we also bear in mind as arch, we tend to be prudent.
Reflecting on the margin improvement early on so we will and we will have to wait and see what it is.
I just want to make sure.
We keep that in mind as we go forward.
Okay.
Okay. That's helpful. Thanks for the color.
Thank you. Thank you.
Our next question comes from Jimmy <unk> with JP Morgan.
Hi, Good morning, So first just a question on pricing.
Obviously your comments are pretty positive, but can you sort of compare in.
What you're seeing on the primary side.
Versus what Youre seeing range.
In reinsurance broadly.
Yes, so on the insurance side, there's a lot more activity more price pick up on the insurance side and that's why on a quota share basis, even though the ceding commissions have not decreased.
Congrats as they would have otherwise on the other hard markets I think that if you're on a core share basis essentially taken.
Youre participating alongside clients and from the rate increases for whatever rate increase that would have included in my remarks on the insurance you could ascribe to the quota share reinsurance participation on the excess of loss it tends to always lag a little.
A little bit behind there is some benefit from the underlying rate because.
Because the excess of loss pricing typically as a percentage of the underlying portfolio. So to the extent that some rate increase at the primary level the excess of loss would get.
Because it will be a bigger percentage, but I think debt it would be safe to say that the softer market.
Markets.
Probably gave us less adequacy or it's probably more of a need for price pick up on the excess of loss in general and we're probably expecting this to start to happen. Soon I think there will be some recognition debt is sort of a second derivative of.
Typically of a hardening market book.
That helps.
Are you equally.
Really optimistic or are there signs for the argument you mentioned.
Property cat, maybe slowing down a little bit but are you equally optimistic about the sustainability of the trend on pricing in both reinsurance and insurance.
Yes on the excess of loss because like I said.
If I go back to the 2000 to 2005 market I think.
The excess of loss market got probably a lot better it took till like 2000 for to get there. So you need a couple of years of primary rate increases to start to find its way onto the reinsurance excess.
Pricing.
It's a very normal hardening market, so I am very encouraged actually.
And then just lastly, you mentioned credit quality on BMI side being strong.
How are you and obviously the labor market is very good as well but.
But how are you thinking about high property price isn't just inflated values for homes and how that factors into your view.
The business that you're writing now.
If you were in a equilibrium in terms of supply and demand or the supply was plentiful we'd be worried that would take us back for the 2006 and 7 period, but.
But the supply and demand on the housing is such that it should help maintain that pricing for quite a while we have 1 to 2 million homes missing in the marketplace and it takes.
A while to find their way to the market. There is also under build as you know as we all read in the press so.
From my perspective.
Price appreciation is there we look at over.
Evaluation, we also have these metrics.
From a price from our economist and not seeing significant national.
Older valuations, so thats not another yet another not of concern and interest rates are still pretty low at 3% on the mortgage rates that is at 3%. So the affordability.
It's still pretty high.
And compared to historical.
No.
<unk>. So all of these put together, it's never 1 dimension right.
Yeah.
If you look at I think overall, if you of course of course everything at tense in the positive direction.
Okay. Thank you.
Our next question comes from Josh Shanker with Bank of America.
Okay.
So I think I've.
Asked the same question on like from the last 2 conference calls I'm going to ask it again I look at the reserve releases in mortgage and I look at the AR reserves per new case.
In the <unk> 'twenty, 1 numbers and youre reserving more than ever.
For on new defaults or delinquencies.
As youre releasing reserves.
Yet the housing prices are.
Our appreciating on.
I'm trying to figure out what's.
Whats the math is about why the potential.
Potential claim for a loss keeps getting worse.
Yeah.
Well, you're asking a very good question, Josh I think big picture.
As you know we're still there's still a lot that has to happen before we have more.
Visibility into how the and how the forbearance loans are going to are going to pan out and how theyre going to whether they're going to cure, whether they're going to.
Turning to clean and.
As you know those are I mean, thats on 18 month process. So we.
If we look at the peak months of April and May of last year.
They are 18 month period will will expire unless things change should expire in the fourth quarter. This year. So that's what we will certainly have.
Again, more visibility and have been more.
<unk> view on how to weather, our reserves were too high or.
We're not and so that's where we sit on that at this point.
We're reacting a little bit to the data, but again, we still.
Still feel there is quite a neat a lot that needs to be settled before we.
We take I'd say action on the current reserve levels in terms of the new delinquencies.
There is always tweaks that happen every quarter you look at the average <unk>.
Incidence rate in.
On severities in frequency.
Frequency assumptions that we've put on the new delinquencies that get reported this quarter again, thats, a smaller inventory of new delinquencies, So I wouldn't.
There is a bit more leverage and how those numbers play out.
But big picture I think were still very comfortable with our reserve levels.
Yes.
Yes.
I think youre, implying maybe that we got too much.
Possibility, but again, we'll know more in the second half of the year.
So when I look at the reserves I guess for $65 million of reserves for current accident year period put up in the fourth quarter is that a strength.
On average claim for the entire portfolio or is that a.
Is that a new we think the new claims being put on to 'twenty 1.
Have the potential to be worse in terms of severity than the average claim currently on the book.
Yes, I think its the latter we didnt, we didnt really make any adjustments in terms of prior notices so notices that were on the books before the quarter started.
The thinking on the new notices as that.
Fact that became delinquent kind of this late in the game.
Jim I'd say given that forbearance programs have been available for some time over a year.
We think that there is a possibility that they could turn out worse than the ones that we got earlier. So there is a bit of a mindset or a philosophy that and time will tell but given that they might have gone through all.
Other savings and they might have tried a lot of things and now they finally turned delinquent so thats a little bit of the I think the rationale behind the <unk>.
These numbers.
Okay. Thank you very much for the update.
Youre welcome.
Our next question comes from Ryan Tunis with Autonomous research.
Hey, Thanks, good afternoon guys.
Mark I guess my first question, Hey, can you hear me.
Can you hear me, yes, we can go ahead, Matt sorry about that.
I had a cycle management question.
With property Cat.
I'm not being critical I'm just curious.
A year ago. It looks like you wrote.
$18 million of premium this year, you wrote 88.
So you wrote less.
I get that property cash flow at the best place to be but it feels like the rate environment was incrementally a little bit better.
So I'm just I.
I guess, a little bit curious like what goes into the decision to.
As conditions.
Improve actually decide.
<unk> of 'twenty, 1 we don't want to write as much as we did in <unk> 'twenty.
It's a really really good question. So I think a couple of things happened right number 1.
We probably like everyone else have different perception of the riskiness of the Cat book right. So we just had a windstorm in.
100, <unk>, so that will definitely.
Make you take a different look at the non modeled losses right. There's a lot of non modeled losses I think thats percolated, we more than we expected for the last 2 or 3 years. So theres an element of loss cost expectancy.
Also as a result of debt needing a higher margin of safety for your return.
That's clearly the number.
1 consideration.
The second 1 that is not to be.
Forgotten is also.
And allocation of capital the same well worth a better use of capital is it is a risk adjusted of exit cap.
Worth as much as a Y in other property for instance on casualty and those decisions.
Janet on a quarterly basis on we don't want to say almost daily so as you get into a broader range of opportunities on the reinsurance side, specifically you were able to manage a portfolio and so.
We optimize our portfolio as you go.
Moving on a quarter or 2 quarters ahead. So that's sort of the thinking behind his talk on management with a view of.
Optimizing.
<unk> can return not necessarily bidding all all out right I mean, thats sort of 1 thing Thats holding group told me way back. When you said you don't want to be unlucky property cat. If you have all these great opportunities and not excluding onset of a cat <unk> realm.
Probably behooves, you as a manager to taper down a little bit also provided.
Because it's not as jussi, perhaps as the other lines are appearing at this point in time.
So it's a bit of a window into how we think yes that makes sense thats interesting and then.
I guess just in mortgage insurance seeing the attritional loss ratio.
I mean, yes pretty much at pre pandemic levels.
I guess that was a little bit surprising just given there are some new notices and that felt like back in 19, they're almost done so.
Yes.
Is this sustainable kind of a 15% to 20% attrition or is there something this quarter that was on.
On unusual tailwind.
Well I mean.
Attritional ex excluding BYD. That's that's how we think about again I think I mentioned it in prior quarters were a 20% loss ratio with Canada.
Plus or minus debt should be what you should get over the cycle.
And there is there's a bit of noise with Neil on the CRT transactions. So I mean, there's moving.
<unk> parts within that but yes, 20% is absolutely sustainable.
And then just lastly, just out of curiosity I was wondering if you guys would be willing to share like an internal view of what your excess capital position is.
Well thats not something we made public in the past.
And I think because.
It's a daily again, a moving target right I mean, there is we.
We don't know what the market is going to give us. So we could give you a number but then next tomorrow will be different so it just we rather want to keep the flexibility there and thats.
I thought I'd try.
Yes, thanks for that.
Right.
Yeah.
Our next question comes from Meyer Shields with <unk>.
Thanks, too I think basic questions first I know theres a lot of commentary at arch.
Elsewhere about establishing prudent reserves because of.
Current uncertainties.
With regard to your in place and.
Is that men.
<unk>.
Let me say it differently are you releasing reserves more slowly now than you would have in the past because of that issue or is that in at current accident year.
Issue.
I think my are you on an actuary as I am So you know debt.
<unk> net.
Impacts current accident year on prior accident year ratio, clearly, where it's part of the.
For the recipe if you will of establishing reserves so.
Great.
The.
Historical trend as you know where triangle is the best we can tell the expense net captured within the loss development.
<unk>.
So I think it's on both sides does that mean debt. We are releasing net I think it's probably means that we historically had been a bit more.
Careful in establishing our loss pick if you look back at our history of combined ratio on the insurance group, specifically, you'll see that we were.
In fact very on a much higher than most people were in the industry. So that tells you that we were reserving at that point.
The view of the loss rate on the loss inflation that was 1 of 3% to 5 percentage, we haven't changed our <unk>.
Really at this point, except for like I said in my comments certain lines, where it is.
For the appropriate to do a bit more.
Okay, No I think thats, the right call and it makes a lot of sense second question in reinsurance.
Should we think about the catastrophe exposure in the non property cat property book.
Well, it's part of it.
$76 million on that front as I mentioned, we are accounting for that but it's definitely less.
Less other cat exposure there is some in there, but it's definitely not the driver of the exposure.
At all so.
It depends on what kind of business you look at other cat load on these premium is anywhere from 5% to 10%, sometimes a bit higher depending on the quota share you are writing, but and a lot of our other specialty.
Of course, you have some but again much much smaller so I would say to.
The other large the larger contributor to our PMA to the cat ex health portfolio.
Okay excellent. Thank you so much.
Welcome and thank you.
Our next question comes from sales.
With Deutsche Bank.
Yeah, Thanks, and good morning.
I'm wondering why don't you focus on the business. So the other $44 million in favorable development. It seems like just shy of half of that was due to the G.
G S. He's on the cancellation on the CRT deals.
On the other 24 million.
Give or take can you give us the strength of the vintage years associated with that or or what's driving that development.
Well ill give you a bit more specifics so yeah youre right just about half of the under our hat just slightly under half of the total was from the GSE.
<unk>.
Deals.
And about a third I'd say is.
As a little tweaks again in call. It COVID-19 assumptions that we've kind of brought down a little bit and that that's across.
It's across all our book so it's like a U S. Erik primary use semi it's across some CRT deals that are still around that.
We made some adjustments on those reserves.
And also on the on the International book So Thats.
Gives you a perspective and then Theres just call it just under 20% of.
Favorable development on run off businesses are second lien on student loan businesses that have been in run off for for quite some time. So hopefully that gives you the split.
So on.
Answers your question.
Yes, that's great that's great. Thanks.
So I think that the team the Pmiers sufficiency ratio I'm sorry go ahead.
Yeah.
The Pmiers sufficiency ratio was pushing up near 200% and maybe you could talk to us about the.
The ability to upstream capital when the GSE might let you do that.
Do you go to the state regulators and contemplate getting especially you know permission for a special of some sort.
Yep.
As we discussed last quarter that's in the works.
Second half of the year, we are.
From a process already to upstream as you mentioned the dividend from our regulated entities to the holding company in the U S.
It's some of it will have to be.
Extraordinary some of it is ordinary dividend. So there is I will have to have some discussions with the regulators on that.
I'd like to think that we can.
Get them comfortable that with our current levels of total capital and some of it is you know a lot of it being trapped in or.
Within that contingency reserves I think they will.
I think we'll be able to get them comfortable that the level of dividends that we're talking about will be will meet their needs and ours. So.
Stay tuned, but I'd like to think that we'll be able to extract some some dividends in the second half for the year. If I can address for once that can fill the GSC to gse's or allowing you to do a dividend without any approval at $1.50 or above right now of PMI correct. So and at the end of the year is going to go down to $1. <unk>. So we think we have flexibility EBIT from that perspective, you've seen if you consider them.
In other gatekeeper of that dividend payout.
Perfect. Thank you.
Sure.
Our next question comes from Brian Meredith with UBS.
Yes. Thanks, a couple of quick questions here first.
The decline you saw on your property cat reinsurance I'm assuming.
I mean that was just reduction in Florida exposure and I guess on that question.
What is your southeastern kind of Gulf exposure look like today versus last year.
It's down versus last year.
But the first question on Florida, we had some decrease in flow over if you look at premium it's not as it's.
And as onto 1.
I think Brian I think that the reduction was also as a result of buying a few things to 2 if you will around the portfolio.
So it's not necessarily all like because we know if we get into this market trying to get our net exposure to a different level because of the returns we.
No 1 else was on reinsurance buying items to take care. So it's not only from Florida decrease.
Got you got you and then my second question is now that the Watford deals closed it is private hands on the longer public company any material or any meaningful changes in strategy here that youre anticipating.
We use the newest watch for Richard going forward.
Different types of business, they get right et cetera et cetera.
Yes, I'd say at a high level I mean, it's still early days, but at a high level. I think you should think more Watford is a true.
A call on close.
For cone to arch re business.
Our underwriting than what Watford Watford was.
Didn't necessarily do all the same classes of business was very much focused more on the longer tail stuff because of the.
For additional pickup.
Assumptions that were on in terms of investment returns that we're going to get.
So the call it the 2 point on business.
Huddle of Watford makes it more similar to what the arch re portfolio or book looks like.
Got you so the results should actually trend towards ultimately trend towards would arch re looks like.
Much more self correct excellent yes.
Okay, and then I'm just curious on Watford.
Is.
Business mobility or any contemplation that maybe taking on some of your mortgage insurance exposure going forward.
We actually rights on mortgage on Watford, Yes, there is some already existing it's actually been 1 other things they have done for quite a while and that's also something thats. Okay for Watford Watford shareholders. We're very pleased with moving in the opportunity to participate the only.
I mean, it's an issue with ratings too Brian.
Brian So thats something that that day.
Ratings do matter for in terms of getting GSE.
<unk> and regulators comfortable so.
That's something that they're going to look into as well.
Great. Thank you.
Thanks, Brian Thank you.
I'm not showing any further questions I'd now like to turn the conference over to Mr. Mark Anderson for closing remarks.
Thanks for thanks for everyone to be here and listen to our call and we are off to a cut much and we'll talk to you next quarter. Thank you.
Ladies and gentlemen, thank you for your participating in todays conference.
This concludes the program you may all disconnect.
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