Q3 2021 Arch Capital Group Ltd Earnings Call
Today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good day, ladies and gentlemen, and welcome to the third quarter 2021 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.
When 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.
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 reviewed periodically 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 in the call to be subject to the safe Harbor created thereby.
Management also will make reference to some non-GAAP measures of financial performance.
Reconciliation to GAAP and definition of operating income can be found in the company's current report on form 8-K furnished to the S. E. C 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.
Thank you Liz.
Good morning, and welcome to our third quarter earnings call.
We are pleased to have delivered solid results this quarter as our operating units generated a nine 3% annualized operating return on equity and a 12, 5% annualized net income ROE Despite an active active catastrophic.
Catastrophe quarter. So are you guys.
Premium writings in rate growth remained strong in our P&C unit.
Driving solid fundamental earnings while our mortgage insurance unit again produced excellent results.
The current market conditions.
Allow us to demonstrate the value of our diversified platform and underwriting strength as they.
It provide us with plenty of opportunities to deploy capital and generate an expected return on equity in the mid teens.
And the broader P&C arena, we continue to see the market hardening along with ample evidence that our industry is addressing the adequacy of pricing across most sectors.
The trajectory and market acceptance of rate increases reinforce why we remain optimistic that improved economics in the P&C market will be sustainable for some time.
As you know the P&C industry is facing many degrees of uncertainty.
<unk> cat activity and for the last five years.
Rising inflation.
Cove is ongoing influence on our global economy.
And enduring low interest rates.
One faced with escalating risks underwriters need both rate increases and conservative loss estimates in order to build adequate margins of safety into premium levels.
With our agile underwriting established teams and strong capital position, we are well equipped to grow into this improving market.
Turning now to our operating units will begin with insurance.
Our early focus on strengthening our underwriting capabilities and seizing recent market opportunities is working.
Gross written premiums continued to grow substantially up 32% over the same quarter in 2020, and our accident year combined ratio ex cats improved to 95%.
This is another indication of the progress we have made in our specialty insurance business.
We have been leaning into this hardening market for two years now as rate increases remain well above the long term loss cost trends and have spread to more lines than last year.
Overall 2021 rates are up around 10% compared to 2020, and we expect that the benefit of higher premium levels will be realized well into 2023, enhancing our expected returns for that period.
This quarter had many bright spots, including.
Positive rate increases have accelerated and lower limits account. These these lines had previously lagged the increases in larger accounts that is no longer the case to our early focus on Lloyd's and business in the UK has improved our scale and our economics in this market.
Some of our business lines that were most impacted by COVID-19 like travel or recapturing some of the lost volume as both business and consumer travel increases in summary, our specialty insurance group is making the most of the current opportunities.
Pivoting now to our reinsurance group.
We delivered strong growth in the quarter with gross written premiums up nearly 25% over the same period in 2020 on a net basis reported growth was only a modest 3% versus the same quarter in 2020 due to a catch up in sessions to Watford following the purchase of the company with our partners at July one.
Franco will provide more detail during his comments, but absent. This one off transaction reinsurance net written premium growth was still very strong at 30% and our outlook remains favorable as similar to instruments, we're experiencing broad rate increases in our specialty and casualty reinsurance lines.
In the quarter.
Our reinsurance segment reported a combined ratio of 106%, reflecting the effects of the third quarter cats, primarily Ida and the central European floods, but reinsurance is accident year combined ratio ex cat is excellent at 83, 2% there are signs that property market rates could adjust higher.
Due to cat fatigue, as you've likely heard on other calls this quarter.
The recent five year period of elevated losses from catastrophes proves an important insurance outage losses don't know the level of the premium.
There are also early indications that retro sessional in aggregate excess of loss protections are becoming increasingly hard to come by and we believe that this will be reflected in higher property rates broadly.
As you know we were and remain judicious in the deployment of our cap P&L, which was effectively flat in the third quarter at less than 6% of our tangible equity we remain underweight and net property cat exposure and we will deploy more capital to the line is expected returns improve above our.
But it's too early to make a call on a January 1st renewal process, but pricing in this sector is heavily influenced the margins and if ILS or other capacity phase there is a possibility for significant rate corrections and increase engagement on our part in the meantime, our reinsurance teams are demonstrating their agility.
<unk> and life insurance are leaning hard into the markets where returns are most attractive.
Thirdly, our mortgage group continues to deliver exceptional returns.
<unk> $234 million of underwriting profit in the third quarter and continues its impressive rebound from last concerns associated with the pandemic are September 30th.
Insurance in force of 457 billion for the segment was up modestly further good news is that notices of default have declined to pre pandemic levels at September 30, which is a good indicator of improved conditions.
Additionally loans in forbearance continued to decline as federal programs conclude and we remain cautiously optimistic that most of these loans will ultimately cure.
Rising home prices have broadly increase homeowner equity and Youll recall, our position that equity levels are the best indication of whether a delinquency will ultimately result in a loss, we estimate that 98% of our loans in forbearance today.
At least 10% equity providing significant protection against potential losses.
Overall, the semi market remains competitive, but rational and our business continues to generate returns on capital in the mid teens mortgage originations continue at a pace similar to last year's record origination volume and credit quality remains excellent.
As you know in all of our operations, we actively manage capital to enhance shareholder returns with strong results in our mortgage segment have enabled us to optimize our capital structure via increased reinsurance sessions through our Bellamy mortgage insurance linked notes as well as traditional reinsurance and.
Additional reinsurance purchases enable us to reallocate capital towards faster growing areas in specialty property and casualty lines, while enhancing our return profile and EMI by reducing required capital.
<unk> remains a very attractive business for us.
<unk>.
Now a point of pride and interest to us and perhaps to you. All is that last Saturday October 23rd Party celebrated its 20 year anniversary so.
So I'm going to say to our investors. Thank you for believing in us and to our employees past and present. Thank you for your contributions to arch for last 20 years and our clients.
For showing support and conviction in our capacity to provide products to your.
Finally.
The PGA tours in Bermuda. This weekend, so golf is top of mind.
Golf tournament is interesting in that it takes place over several days and therefore consistency is critical.
You have to be sure to pick your spots and lower your score, but if you want to make the cut you off.
To limit the Bogies early so that you can play more aggressively in the stretch and then once you get to the weekend you can play with a bit more freedom and really try for the breweries and Eagles at this point in the cycle. We feel we've made the cut and now we're focused on really taking advantage of our positioning to make sure. We end up at the top of the leader Board.
Well great.
Thank you Mark and good morning to you all on this first day of the Butterfield Bermuda Championship here in Bermuda, Thanks for joining us today.
Before I provide more color on our solid third quarter results you will have observed that while our earnings release still makes a distinction between core and consolidated for purposes of.
Comparisons to prior periods. There is no difference between the two presentations this quarter.
As we discussed on the last call the closing of the Watford transaction on July one gave rise to a reconsideration events and as a result of our updated via E analysis, we no longer consolidate the results of Watford and our financial results, our 40% share of Watford results is now reported.
And the income from operating affiliates line.
There is no longer a need to make a distinction between core and consolidated results in our financials.
As Mark shared earlier, our after tax operating income for the quarter was $294 7 million or <unk> 74 per share, resulting in an annualized nine 3% operating return on average common equity.
And book value per share increased to $32.
$32 43 at September 30 up one 3% in the quarter.
A very solid result in light of the catastrophe activity that was much higher than the long term average for this quarter, which we estimate that over 45 billion and insured losses for the P&C industry apart approximately three times the average third quarter cat losses observed over the last 10 years.
This quarter I wanted to first give you some additional detail on the results of our reinsurance operations, which were impacted by the Watford acquisition, especially on the topline.
As part of the agreement signed at the beginning of the year with our co investors in Watford, we committed to seeding varying percentages of the premium written by our Bermuda and U S Treaty reinsurance operations to Watford.
Effectively enhancing the existing business model to also serve as a sidecar for arch Wilder retrocession agreements were effective as of the start of the year. They are signing was contingent on the transaction closing, which delayed the recognition in our income statement until this quarter.
As a result, the third quarter ceded written premium reflects a catch up of approximately $161 2 million from the first half of the year.
The impact of the premium catch up adjustment on underwriting income for the reinsurance segment was minimal.
Growth in gross written premium remained strong at 24, 6% on a quarter over quarter basis and growth in net written premium would have come in at 29, 5% adjusting for the Watford ketchup.
The growth was observed across most of our lines, but especially in our casualty and other specialty and property other than property catastrophe lines or strong rate increases and growth in new accounts helped increase the topline.
The segment's accident quarter combined ratio, excluding cats stood at 83, 2% compared to 83, 1% on the same basis, one year ago.
On a year to date basis, the ex cat accident year combined ratio has improved by approximately 250 basis points over the same period last year, reflecting the improving underwriting results and most of the lines in which we write.
In the insurance segment net written premium grew 40% over the same quarter, one year ago, and the segment's accident quarter combined ratio, excluding cats was 95% lower by approximately 360 basis points from the same period one year ago.
Excellent results across the board, which demonstrate the progress of our insurance segment has made over the last three plus years and improving its performance and provide us with optimism on the underlying quality of our franchise going forward.
Losses from 2021 catastrophic events in the quarter net of reinsurance recoverable and reinstatement premiums stood at $335 9 million or 17, four combined ratio points compared to $12 five combined ratio points in the third quarter of 2020.
As noted in our pre release, our P&C operations were impacted by Hurricane Ida the European flooding events of July as well as a series of other events across the globe.
Our mortgage segment had an excellent quarter with a combined ratio of 26, 2%, reflecting favorable prior year development of 48 4 million about half of which came from <unk> from better than expected cure activity in pre pandemic delinquencies and recovery.
On the second lien loans and the other half from our CRT portfolio in international.
The decrease in net premiums earned on a sequential basis was primarily attributable to lower levels of single premium terminations in the quarter for U S semi business and to a lower level of call. The CRT transaction than what was observed in the second quarter.
Recall, the second quarter benefited from higher earned premiums due to an unusually high number of CRT transactions being called which we highlighted as effectively being a non recurring event.
The delinquency rate for our U S book came in at $2, 67% at the end of the quarter a material reduction from the peak we observed at the end of the second quarter one year ago.
We had another solid quarter in terms of production, mostly from the purchase market and with refinance activity coming down from prior levels. The insurance in force for our U S. Semi book grew slightly.
The increase from last quarter in the insurance in force of our International mortgage unit is mostly the result of the acquisition of Westpac lenders mortgage insurance limited in early August.
Although income from operating affiliates grew significantly to $124 1 million. It is worth noting that approximately $95 7 million of the total is attributable to a onetime operating gain resulting from the acquisition of a 40% stake in Watford.
Was offset in part by a realized loss upon the deconsolidation with the resulting net income gain of $62 5 million.
The remainder of the operating income from affiliates represents our share of the net income generated this quarter by your operating affiliates, which consists primarily of Watford coface and premier.
Total investment return for our investment portfolio was de Minimis on the U S dollar basis for the quarter.
Net investment income was $88 2 million during the quarter down by $1 2 million on a sequential basis, driven by lower coupons on fixed maturities and lower income and consolidated funds.
The duration of our portfolio remains low at two six to eight years at the end of the quarter, reflecting our internal view of the risk and return tradeoffs in the fixed income markets.
Equity and net income of investment funds accounted for using the equity method produced $105 4 million during the quarter more than half of the total income generated by our investment portfolio and a key contributor to the growth in our book value.
As we discussed on prior calls we have increased our allocation to alternative investments in the last few years and these funds now represent represent approximately 12% of our total portfolio at the end of the quarter.
We are also very pleased with their performance so far this year, which stands at 13% year to date.
Of note had we included income from funds using the equity method in our definition of operating income our reported operating ROE would have increased by three 2% on a year to date basis to 13, 3%.
While these funds returns where potentially more volatile in core fixed income strategies. We believe the incremental returns they provide more than compensate for the liquidity constraints and volatility there that are usually associated with them.
The effective tax rate on pretax operating income was a benefit of <unk>, 7% in the quarter.
Reflecting changes in the full year estimated tax rate the geography mix of our pretax income and an eight 2% benefit from discrete tax items in the quarter.
The discrete tax items in the quarter, primarily related to a partial lease and a valuation allowance on certain UK deferred tax assets.
Now a quick comment on the two acquisitions, we closed on this quarter Westpac and summer said bridge.
You will have seen that in accordance with purchase gap, we established approximately $337 4 million of intangibles and goodwill this quarter, most of which will be amortized through our income statement going forward to.
To help with your modeling efforts, we now expect our amortization expense to be approximately $25 million in the fourth quarter of this year and $21 million quarterly throughout 2022.
On the capital front, we redeemed all of our expanding series E. Noncumulative preferred shares for $450 million on September 30.
Separately, we repurchased approximately $9 7 million common shares at an aggregate cost of $386 9 million in the third quarter.
If we include the additional common shares we have purchased in the fourth quarter. The year to date totals are now approximately 24 million shares or five 9% of the common shares outstanding of the bidding at the beginning of the year for $917 $7 million some.
Some of the additional share repurchases in the fourth quarter were effectuate it under the new share repurchase authorization of $1 5 billion approved by our board of directors earlier this month.
As we have said since our formation 20 years ago, our core operating principles are anchored in active cycle and capital management. We believe this quarter results demonstrates our ability to execute on this philosophy and leaves us to invest in opportunities, where we believe the returns are most attractive.
At recent prices and with the prospect of improving returns we believe buying back our shares continues to represent another compelling value proposition for our shareholders without compromising our capital flexibility, nor a lessening the quality and strength of our balance sheet.
With these introductory comments, we are now prepared to take your questions.
Thank you if you have a question at this time. Please press the Star then the number one key on your Touchtone telephone.
If your question has been answered all English to remove yourself from the queue. Please press the pound key.
If you're using a speaker phone please lift the handset.
Our first question comes from Elyse Greenspan with Wells Fargo.
Hi, Thanks, Good morning, good morning, Good morning, Mike.
First question.
Mark.
Talking about the mortgage business you talked about.
Why are we ensuring so there was more capital from wells.
On the P&C side.
Which I found interesting in the past you've spoken about mortgage running at around a 15 plus return in P&C at kind of <unk>.
10 to 12 has the dynamics changed that that caused you to kind of buy some more reinsurance.
Pursue more growth on the property casualty side.
Yes, I think our opportunities on the P&C side.
Have improved ride over the last couple of years and I think we're even more convinced of the length and the hits that has legs for for the foreseeable future so that makes us.
To be more proactive to balance if you will to capital allocation between more than one year. I mean, we did rely heavily on our capital deployed in <unk> for quite a while because of returns in P&C as you know at least warrant as attractive, but now that we have a new attractive and increase and improve returns in the P&C It behooves us to two.
Balance the risk profile of the portfolio. That's one of the reasons why we.
We would do some more reinsurance and again the reinsurers also helps.
It helps our return on a net basis as well, which is also another benefit.
But I would return numbers I gave is still kind of where you see the three businesses, So 50% plus and then 10 to 12, yes.
I would say on the on the on the P&C side Elyse I would say, it's getting up is north of that and all I think we have our prospects.
Closing closing the gap is closing between <unk> and P&C, if you will.
Yeah.
So north of that.
This 12% I would agree I would think is the case, yes.
And then in terms of capital you guys put in place $1 5 billion authorization and it sounds like you bought back a little bit under that so far this quarter going through the end of next year.
Great what you buyback depends upon the market also where your shares are trading over the course of the next year, but.
When you put that in place was that design.
Mark of what you will buy back or are there other.
Other factors that could cause you to either fully buyback that level or maybe come in or just help us kind of think through that as we think about capital return.
2022.
Well I mean, two things I mean, we bought were.
Close to $1 billion this year so.
We don't want to go back to the board every three months and ask for more so we thought okay. What may we need could we need by the end of 2022 over the next shifting over the next 15 months effectively.
$1 5 billion is just a number that nice round number nothing nothing special about it.
But are we committed to that number the answer is absolutely not.
If the market.
Keeps improving and we have the ability to deploy our capital.
All our capital and then some in the business, we may not end up buying anything back. So it's really again a function of the market conditions and vice versa. If the market doesn't really generate gives us a lot of opportunities to grow we might be in a position, where we buyback more than that so it's really again it'll be a function of what we've seen front of us.
Over the next 15 months and.
And if we ended up going through the 1 billion and a half sooner than the end of next year then.
We'll do something else. So again, it's very dynamic very real time, I'd say and.
We'll see where things take us.
Okay. Thanks for the color.
Thanks.
Our next question comes from Jimmy Buhler with J P. Morgan.
Hi, Good morning. So first one other question on that just what youre seeing in terms of pricing both on the insurance and reinsurance side.
And to what extent.
Do you think.
Price increases are going to hold versus maybe.
Especially on the reinsurance market seems like things are getting a little bit softer.
So through year, but how does how do recently hired catastrophes affect your view of the.
Mills.
Jimmy if we if we bifurcate the market into property Cat you agree I would tend to agree with you that the property cat rates did not increase as much as we had hoped collectively as an industry I would say not only at <unk> on a single arch phenomenon.
And therefore, that's why you saw us write less property cat over the next over the last nine months, but certainly the reaction to those rate level.
It's still early like we said like I said in my commentary.
We should have a repricing definitely repricing in Europe and in the U S. Even for the layers that have been impacted that's for sure and I think it would start to spill out even onto those that have not.
Not sustain a loss because I think there is a recognition of heightened cat activity.
And I think that the market is sort of bracing for that as we go forward, it's going to be a matter of degree on the rest of the marketplace I think that.
I think that overall since if you look at the liability lines in general overall Youll see Youll you can think of in terms of the quarter share. If you write quota share of casualty or liability lines youre benefiting from the rate increases in the business and I think thats ceding commissions, which were.
Maintaining held high for 2020 are starting to come down a little bit. So it is a recognition that.
So there's a bit of an improvement from that perspective on a quota share on the excess of loss in general for liability the ratio stable to somewhat more stable, but again you apply those rates against a base that is increasing in premium levels. So they are also getting some price uplift and I think that big.
Soon I mean, the reinsurance market Jimmy feeds off of the insurance market right.
And in a positive way I want to make sure. It's a positive message. We we actually we own are receiving in of a portion of what the insurance market rights and to the extent of interest market rights premium at a higher level, we are benefiting from those.
From those rate increases.
Okay.
And then can you quantify how much you've got in terms of Covid reserves, especially for business interruption.
Assuming they are mostly still light.
As you had been quantifying last year.
And just discuss what the process would be and the timeline would be for leasing these given that for the most part it seems like the courts have been citing with insurance companies at least thus far in the U S.
Yes, I would say I mean, we're still very much.
A lot of IBM R&R COVID-19 reserves more of that more than half, 60% or so I would say of our of our call. It COVID-19 reserves on the P&C side are still <unk>. So.
Yes.
And how quickly will we know we're not know whether we will need those reserves. It time will tell I think it's where we said, yes, I don't disagree that.
So far there have been a couple of positive developments from the courts, but.
It's going to take a while I truly think this is very complicated and issue that will take years to resolve so I wouldn't expect us to to really take dramatic action on the level of open reserves on the P&C side for for for some time and Jimmy and are in our industry and insurance.
When 95 lawsuits and lose 96 and it changes everything so theres a lot of uncertainty in our space, even though we've been a good streak one.
One change could could change everyday so we're very.
What is the rough number.
The rough dollar amount of reserves.
That's a good question I don't have it in front of me, we can circle back with you I know, we booked a few hundred million dollars last year and.
We paid some of that I don't have to you that the current figure, but we can give you that we havent change ultimate Jimmy.
For the last three quarters.
But it's not something like that's more in maybe 'twenty two 'twenty three 'twenty four as opposed to 22 in terms of potential releases on these.
There are releases I will figure it will probably take another year, you're going to have and we might hold a little bit more longer for the reasons I just mentioned in terms of the court decisions.
Got it thank you.
Yes.
Our next question comes from Mike Zaremski with Wolfe Research.
Hey, great good morning.
<unk>.
Okay.
I guess.
And some of the prepared remarks, when you guys were talking about the primary insurance segment.
Talked about kind of seeing right acceleration actually in the lower limits.
Smaller commercial space.
And any theories on on what's on why that's happening is it is it due to loss cost trend, increasing because we're kind of seeing a fading.
A little bit of a deceleration in the large account space so kind of curious if.
If you guys have any abuse, maybe broadly too.
Kind of loss cost trend given all the uncertainty during the pandemic on the primary insurance side.
But the loss cost trend as we observe it and it might change there's still roughly in the 3% to 5% it depends on the lines of business, but we have already changed.
Our view on this at this point in time, we had a loss reserve review I believe a couple of months ago.
So it's not changing although we are.
Putting in our loss ratio pick an extra level of margin of safety to make sure we wouldn't be missing because it could be higher as you know inflation is certainly another concern that we all have collectively as underwriters in terms of my theory about why the smaller accounts.
Get those rates right now, it's just that the market is a human psychology market and the pricing get more acutely needed in the larger capacity play. This is where the market starts focusing its first effort as the market hardens and this is not unusual. This is not unusual this is a very very normal phenomenon in.
Hardening markets, you'll tend to try and fixed dose or more.
Important meaning if you put a $10 million 15, and $25 million limit. These are the ones youre going to try to fix right away because presumably those will have caused you a bit more pain over the last two or three years, you were expecting more things coming from that portfolio and it's just a matter of time before people start looking sideways as to what other lines of business need rate and then you start.
Dipping down into your overall portfolio and seeing where the liability trends for instance might else will be an impact and this is sort of a sort of second round sort of a rippling effect from the main capacity providing.
Layers into the ones, who have a lower place and at the same time to be fair and to be I mean to be truthful you also have development.
Ongoing happening on the smaller account at the same time, it's just not as acute and as glaring and as obvious.
Early as the larger capacity play that's why.
Interesting that's helpful.
Maybe switching gears to.
The mortgage segment just curious.
I know the forbearance levels continue to decrease.
Could you.
Remind us.
I believe there is some extensions to the forbearance program or maybe even new kind of enhanced programs, where the P&I could be reduced if the payments can.
Can be reduced by up to 25% is that correct and if so.
Are you seeing.
Your borrowers utilized those options.
Yes, so right now.
The program is done expires at 930 expire in 900 in terms of foreclosure right so but.
The forbearance I'm sorry, the foreclosure.
It's still unclear right because they could also come back and extend it further if things were to change.
The CFPB has also involved with the FHFA, saying that.
We don't want to have anymore.
There is a moratorium on a foreclosure process as well so I think both federal entities are trying to push to go back to your last point of the question pushed the mortgage loan mortgage originator and provider of.
Providing solutions to them.
The borrowers who are still in forbearance or not current on their payments and to your point.
A lot of it is going to be continuing the same payment most of it is going to be continuing the same payment at prior to the Covid Forbearance program and is attaching at the end towards the end.
The lack of what wasn't paid what was accrued as on paid at the end of the loan. So this is roughly what it is going to look like but it's going to be another.
Another three quarters before we have more visibility because even though.
Forbearance programs talked and 930 and people should come now to the banks and.
Mortgage originator and trying to remediate their position from a forklift from a forbearance perspective.
It's still going to take another six to nine months and I think the agencies are watching carefully so everything is heading towards a.
Happy resolution, if you will of the overall forbearance programs like everybody is focusing on this at this point in time.
Okay, Great and one last one sticking to mortgage I could take this offline with you.
With that kind of an eight two but just don't want to.
Increased ceded.
Premiums ceded as a percentage of gross is that due to <unk> and I guess if at all if it is.
Can you guys continue to upsize the reinsurance.
Usage in the segment if you thought Opportunistically you wanted to ship more growth towards other lines of business.
Yes, that's very much in that vein I think mark made the point earlier we.
We're always looking to optimize the portfolio and certainly a lot of that is focused on capital deployment.
We I think made the point last call that we had increased our.
Quota share percentages on the U S Army book.
At 701, so that's starting to play through basically in that that is reflected we also we were still very active in the <unk> space. So we're or purchasing quite a lot there as well and I would say those two things combined really explain why we have more ceded premium.
Starting this quarter.
Got it there's more appetite if you decided to do more either quota or <unk> in the future.
Are you kind of reaching kind of a max.
I mean, I'd say, we certainly do a lot of Bellamy does it is so I don't want to say, we wouldnt do more but it's I mean, we already are very active in that space and made big placements. So I wouldn't expect us to necessarily increase that.
That vehicle with that that mechanism to transfer risk a whole lot.
And on the quota share Amy work, yes can we see more we could but then it's a risk return tradeoff and Neil whether the economics work are reasonable or work in our favor too. So right now we're happy where we're at but if things change in the market gives us better opportunities, we could conceivably see it a bit.
Yes.
Thank you.
Yep welcome.
Our next question comes from Josh Shanker with Bank of America.
Yeah, good morning, everyone.
And this may not be the best math, but its Ross I think you guys are the.
The inventory.
Covid Europe Morris claims about 120000, you've had about 90000 cures.
I'm estimating that you guys have about $20000 up.
Notice.
Right now in the portfolio may not be exact historically, you've had about an average of 5000.
<unk> dollars are noticed it seems like the reserves are stuffed, particularly as you tell us that at 90%.
That means that 90% of <unk> 90.
98% of the point of the.
Claimed to have at least $10000 in equity.
So I mean I'm trying to rectify.
Can you explain to me I feel so I have asked this question before I just don't understand what's going on there.
The answer is going to be very similar so very good question, but what are you going to tell you about the police in the backyard.
We if you look at the average case reserve for <unk>. It's actually 23500 I believe is in the supplement you can look at Intuit and you're right. It was it went up from last year. The run rate pre Covid was roughly 10 11 12000, so it did increase.
About.
It's about 110000.
Claims that we got as well at Colgate and the forbearance and about 78% of them.
<unk> so far so we're about 2500, so be it as it may we have about 31770 I think is a number in terms of.
<unk> outstanding.
When you multiply by 23 Youre right it would look.
On the high side, a couple of things I will say here number one is.
The average face the average severity of the of the policies that are facing the COVID-19, or starting from May 2019, which have a higher face than the one we had.
Back in 2019, when it goes in 2019 were largely pre 2008. So you have to adjust for the level of coverage that has increased over the last 10 12 years. So that explains one one to 23 would be higher than the $11 13 historically.
The second part of your question was where should it go and this is where it's more art than science, Josh. We hear you. We are cautiously optimistic that it may not come to pass in terms of meeting the reserves and hopefully some of it will will cure better than we anticipated, but I <unk>.
Just want to remind everyone on the call and as we remind ourselves all the time, it's that this is a political.
Positioning things could change very quickly from the FHFA the gse's the how.
Housing department, so we need to be really careful and we've never been through that kind of event. So we are <unk> as you know and we will take a cautious prudent approach to reserving and if we happen not to need those reserves as we do typically will be taking them by the hand from the liability side down to the capital side.
We're not going to have been stranded for a long time, but again so much. So many uncertainties, Josh we understand youre puzzling. This is a very unusual situation for the industry. Therefore, we have to and Thats, what we appear probably to be a little bit unusual in that we're reserving it.
And my second question unrelated can you talk about the differential I guess, the new business penalty.
New business you are putting on the books.
<unk> legacy customers, who you have a deep sense of there.
Is there the risk factors on those accounts is there a gap is the business that you are renewing at better margins.
At least what you're booking at the new business given that you know more about the business you already have.
I believe just youre talking about P&C right.
One of the.
Primary P&C not more of a kind of makes sense to me so.
And it really various stood question, Josh because we're keeping track of the renewal rate versus the new business rate level and.
Symptomatic or as a representation of the hardening market the pricing of the new business is coming higher than than the renewal business.
And thats sort of speaks to the fact that.
They need a new home and aimed to be repriced and people sort of get.
Get tired of that relationship and that goes back thrown back into either the E&S or the admitted market. So right now we're still seeing.
On average the.
New business price better than renewal business.
Okay no. Thank you thank.
Thank you Josh.
Our next question comes from Tracy <unk> with Barclays.
Thank you just a big picture a picture question a theme this quarter with you in Europe closer peer group is that the insurance growth is outpacing the more primary market focus player without reinsurance arms.
Are you seeing a lot of market dislocation, where you feel like you just do a better job assuming.
<unk> right that still meet our risk adjusted return hurdles.
We'd like to think were better than the average guy out there but a.
Tracy I think overall the dislocation.
Was much larger in 2020, I think you are still seeing some dislocation right now it's certainly not.
Still some repositioning of limit.
Provided the market by a lot of players still as we speak.
And I think what what explains our ability to grow is first we have a really well established presence and we were very underweight Tracy historically were really really good market for people that want a good security.
At four.
Products such as D&O for instance, right were really good home for someone to take on new as an insurer and we're sort of we're definitely benefiting from that as an incumbent.
Good with a good quality good reputation as we do.
And also I think the other thing that I want to mention we had said that that last year, we were suffering a little bit from some of the travel and travel lack of traveling and impacted our travel portfolio that certainly helps by Tracy decided that economies reopening in people who are traveling in this war to also helps explain why we are able to.
To grow a bit more than probably meets the average.
Then the average would.
Lastly, I would say that beyond just new business funding new homes I think they are programs. We're also growing in programs as you see this as very specialty smaller risks I think that again another another example of.
Programs, finding a new home.
Going away from the existing incumbent possibly because of our results and funding in your home and we're definitely already receiving in of that relationship.
Yes, and one thing I'll add quickly I think both depending on the mix of business.
You called the more established in the traditional insurers workers' comp and commercial auto typically will make up bigger shares of their of their portfolio all of those moving up nicely, but I would say that.
Certainly comp.
It had a really good period of excellent results so rate increases on the comp side had been pretty flattish.
So again, thats, probably worth adjusting for comp.
Because it's such a big line for some of these carriers.
And I'm wondering how much of that is structural in nature like our others, raising attachment point and youre lowering attachment points are offering lagarde basketball.
No we do.
No no. We don't do that we don't play that game I think we would just be replacing most of our play typically on specialty lines. Tracy is mid excess versus second exited its sort of what we play a lot of times and high excess of course in certain areas. So.
No.
We put a record creative we're not seeing any of the deductible being played out in the marketplace and Thats. In fact, they are deductible increases if anything else and we just see a lot of shortening of limit toward on the stacking. We saw that in 2020 is ongoing as we speak considered letting stretch of 25.
I'm talking about a larger placements youll have.
Stretches of $10 five or five to 10 really in 15, perhaps until staying but theres a lot more players needed to to fill up the towers, that's definitely happening more so it is still continuing to some extent leftover in 2020.
Okay, and then just shifting to reinsurance rates shown here favorable reserve development coming from.
Yes, I mean, the vast majority and we'll talk to it and obviously in the Q. It vast majority is in short tail lines, I mean, I would say probably 80% in short tail lines.
Mostly property other than cat.
We've grown a lot in the last couple of years.
Sure.
While the tail is always a bit longer than we think it should be it's still we have a pretty good idea two or three years out after writing the policy or the account and we're seeing a lot of that coming through in this quarter a bit of favorable development on prior year cats as well.
<unk>.
On trade credit and surety from a few years ago, where we had some reserves that proved out to be a bit more.
Required so we released those this quarter.
Thank you.
Sure Youre welcome.
Our next question comes from Meyer Shields with K B W.
Thanks This is <unk>.
Michael Management question, I guess for Marc when if ever do we decide that there is never going to be inappropriate hard market and property cat just came out of the line.
[laughter].
I think that by virtue of well first I'm an optimist.
I've always been an optimist I've heard so many times over the last 27 years from some of our own underwriters that they will never be a hard market again, and what I view. This it's music to my ears, because that means we're cruising for Bruce So I think that things will things will get better and get at some point it may not be this quarter and my hope at some point.
Numbers speak for themselves if you lose money every year people just get.
Get disenchanted and just walk away from it is happen after the 90 storms in Europe 90 to Andrew's earthquake in California and 94.
Terrorist attack.
Between our return Walmart I mean, there's always changes and it's not I rattled by five or six of them.
And you got to believe that the world is a dangerous place Meyer. So I think something will happen and again losses don't necessarily change the market the market pricing, but perception of risk.
Will and woods. So maybe we're in this place where people say you know what why bother and if thats the case and that and the demand forecast as you know protection and elastic so if supply shrinks.
When demand will stay as is and pricing will therefore increase so I'm an optimist, so I'm not sure when it's going to happen, but I believe it will happen at some point.
Okay No understood that's exactly I was looking for thank you sure.
Our next question comes from Brian Meredith with UBS.
Yes. Thanks couple of quick questions here for you first I just want to follow up on the comment about new business pricing better than renewal pricing and I've heard that from other curious I'm. Just curious will you actually go to book the margin on that new piece of business are you booking a better margin than perhaps that renewal piece of business or do you have to build in some level of <unk>.
And because it is new.
Yes, it's a very good well I think the latter part is what we would do but even we would also take a higher level of cushion on margin of safety. If you will now reserving even in our in our renewal business.
<unk> I think that we are as you know reserving wise and loss ratio pick why that arch, we tend to be more conservative and hope for the best and hopefully good news come down later, we're trying to figure out a way to have as much cushion as we can early on so that we're not surprise down the road and that's not changing I would say, it's the same approach renew.
Our new business, Brian how much of a change.
Not much of a change got you okay.
Just a quick question here or are we still seeing admitted market shed business to the E&S markets or has that slowed.
A slowdown a little bit, but its still happening.
Yeah, we're not seeing a return back to the admitted market quite yet it's going to take a little bit longer we think.
Got you got you and then one kind of bigger I guess philosophical question for you.
I think with the semi business clearly you've demonstrated that it is not a as big of a volatility business as maybe some of the perceived.
Just given the results we've seen through this recent crisis.
That is indeed, the case and the amount of cash that business throws off because it's not a growth business.
I guess I see you guys using share buyback as you need just capital management and I completely get that where your stock is trading now, but what about a dividend and maybe remind us about your philosophy with respect to to a dividend.
Well I mean, I'll take that Brian I think it's something we talk about with the board and between ourselves all the time, we had a pretty long discussion at our last board meeting on that it's always on the table I'd say right now.
I mean I think it's.
Share buybacks that we went through this quarter were very attractive to US economics, we're very much I think.
They're easier to justify justify sorry.
But.
Could we ever introduce a dividend certainly that's on the table that saying, it's imminent, but it's something that we evaluate pretty much.
Irregularity.
And we'll keep looking at it.
Great. Thank you thank.
Thanks, Michael.
Our next question comes from Elyse Greenspan with Wells Fargo.
Hi, Thanks, just one additional question.
<unk>.
Highlighting that.
Sessions to Watford in the quarter, given that that transaction closes.
My sense is they're going to become more like in terms of the business that youre seeing today and birthdays prior to this transaction. So as you think about 40% can you just help us think about the earnings between there because I would think that.
As we go through next year that that could become a meaningful contributor to earnings as the underwriting income with Watson pick up.
Two.
Yeah, I think a 40% share would grow at an average sort of reinsurance market results right. Because we are writing business on the balance sheet of Watford. So you would expect that I think that what you would also see is our.
Collecting fees or for our efforts and compensation for our efforts for Watford that would be.
For the 100% so I think that the overall return would be slightly better even though at least as you can appreciate with the accounting rules it might not show as such but I think that our results will be as good I would hope or if not better than our overall results. So it's definitely an accretive return generated before reinsurance platform.
So it will be hard to match.
Okay Alright.
That should pick up within that other income line as we move to the next year.
Yes, so a couple of the 40% correct. The other income line as well the fees are picked up by the reinsurance segment, because it's for the underwriting services they provide to Watford.
But you are correct in saying that the net equity pick up of the 40% that we own in Watford, if youre modeling and what kind of combined ratio is going to operate at what kind of.
Premium or are you going to see in terms of the volume.
Youre right I mean, it's probably more and more over time is going to look more and more like arch re the reinsurance segment.
The percentages, we cede to Watford are not uniform across all of our divisions, but.
Directionally I think thats, a good way to think about it and the other thing too which has somewhat been an issue with Watford is the performance of the investments right and that has that's being a little bit.
It's being addressed as we speak I think there's a process underway to reduce the volatility from the investment portfolio or investment strategy at Watford, So think of it more as that yes.
More or less volatile stream of income with more reliance on underwriting income and less so on the investment income and hopefully that gets you in that.
Good place to start modeling out how Watford is going to play out for us or the 40% for arch that going forward.
And then maybe I'll squeeze one last one I'm not sure. If you provided an updated tax guidance.
But if you can just let us know that and then we've heard about some potential changes whether in the U S and also abroad in relation to Bermuda.
Eddie on any kind of prospective tax loss and just some of what we're hearing in the market and how that could impact us.
Yes, I would say first of all that question till fourth quarter, we're still in the 9% to 11% kind of tax rate for <unk>.
For arch in the fourth quarter for 2022, and beyond and Mark will chime in it's a way to orla. Unfortunately.
We track it we look at all developments very carefully we're on top of things and the reality is they change daily. So it's very hard for us at this point to give you any kind of guidance or any expectations of what we think 2022 is going to look like we will be more than happy to have good discussion at our next call, but for now we see.
It's just premature to because we really don't know Dana leads us to make the point about daily literally last night, our tax director or this morning, just sent US like there is a new proposal on the hill that brings back shield and then correct other things and dispenses of other areas of the technicals in the OECD. So again, a moving target it's politics.
We will react to it when we do when we see it.
Okay. Thanks for the color. Thanks Lee.
Our next question comes from Matt <unk> with JMP.
Yeah. Thanks, good morning.
Thanks.
I just wanted to circle back on the discussion about pandemic reserves and Mark you're pretty clear on the P&C side in terms of getting.
95, good outcomes, but the 96 change everything.
How about <unk>.
Kind of follow up for Josh its line of questioning like things look pretty conservative there can you help us with a little bit of a timeline by which if things can kind of continue to unfold well would be the timing by which we might see things online.
Well, let me start I'd say.
No.
We may see a little in the fourth quarter, but that will be I don't think everything will be resolved, but I truly think that the first half of 'twenty. Two is when you'll see most of the of the movement or the corrections in our assumptions and cure.
Cure rates mediation, so I'd say, we're going to start seeing some some some data.
As early as this month internally and the number of cures in people moving out of forbearance, but.
The way it is going to flow through our numbers again, given some of the uncertainties that mark talked about I think what will be first half of 'twenty two and the reason also in that it is.
It has to be set and understood is that they had 18 months of forbearance worth when you get into forbearance earlier in 2020, and some of them went into forbearance came out of forbearance and went back in again, but do you still get to get to due to two.
Benefit from 18 months worth of forbearance. So that's why some of them will coming out of their 18 months.
In the fourth quarter and many of them in the first and second quarter. So it seems like some of them were able to get cut back current for four or five months and went back to forbearance program. That's why we have this lengthy adjustment period.
Thank you that's very helpful. Thanks.
Thank you.
I'm not showing any further questions I would now like to turn the conference over to Mr. Mark Anderson for closing remarks. Thank.
Thank you so much for being here, we're going to be going from watching some golf Transco and I am happy 20th and have a good weekend everyone. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect.
Okay.
[music].
Yes.
Okay.
Okay.
[music].
Yes.
[music].
[music].
[music].
[music].