Q3 2022 Arch Capital Group Ltd Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yeah.
Good day, ladies and gentlemen, and welcome to the third quarter 2020 to arch soft.
Capital Group earnings Conference call at this time, all participants are in a listen only mode.
We will conduct a question answer session and instructions will be given at that time as a reminder, this call maybe 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 review periodic reports that are filed by the company with the SEC from time to time. Additionally.
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 the forward looking statements in the call to be subject to the safe Harbor created thereby.
Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found on the company's current report on form 8-K furnished to the FCC yesterday, which contains the company's earnings press release and is available on the company's website.
I'd like to introduce your host for today's conference Mr. Mark Grandison.
Mr. Francois Morin.
You may begin.
Thank you Michelle.
Good morning, and welcome to <unk> third quarter earnings call.
Our investors know.
Youre getting a diversified.
The active adult.
Alligator.
And we all know.
Let me start again guidance part of it.
Our investors know that with arch Youre getting your diversified time-tested active capital allocator that understands how you navigate cycle is crucial for long term success.
Hurricane and gave US a stark reminder of the importance of insurance.
And our Hearts go out to all those law lives or properties.
As we turn to 2023, our agility is never more important.
As an insurer, we provide protection for our clients during times of uncertainty.
The reality for our industry is a big event like Ian almost always result in opportunities for the company that actively manage the capital and have the ability and decisiveness.
When market need that capacity.
<unk> is one of those companies.
The current environment presents us with the opportunity to enhance its relationships with clients.
<unk> got insurance and reinsurance solutions in these uncertain times.
The cat activity in the third quarter has significantly increased pressure on property cat market, which could have ripple effects across all property and casualty line as we approach 2023 renewables.
Over the last several years, we've maintained a property cat rates have been inadequate.
Now the market recognizes this as well the.
The events of the past 18 months significant interest rate hike repricing of investment ongoing general inflation concern and the increasing cost of capital.
All point to the need for a higher margin of safety in the premium.
With property being the poster child.
We're pleased that the underwriting discipline of our insurance and reinsurance segment limited impact.
Quarterly earnings event.
As we have said before our proactive approach to cycle management enables us to protect our capital over the long term.
From our standpoint.
Other insurers are reducing that overall participation, we have an opportunity to showcase our outstanding team strong balance sheet underwriting acumen and creative.
Our positioning should reward our shareholders with superior risk adjusted returns.
John .
I want to take a few minutes to call your attention to areas in each operating segment, while we continue to make positive strides.
In the third quarter, our insurance and reinsurance segments continued to grow premiums and delivered solid current accident year ex cat combined ratio of 80.
$89 five for insurance and 85 five arrangement.
In our insurance operations, we continued to see strong net premium written growth in the third quarter.
Approximately 19% from the same period in 2021.
Some of the most significant growth came from professional liability, including cyber as.
As well as a strong increase in travel alone.
Our excess and surplus lines business, both property and casualty also continued to achieve rate increases above trend and we are optimistic about the opportunity for further growth in 2023.
Competition in P&C is robust, but rational and the markets are taking a more technical approach to pricing and abroad that suits arches underwriting philosophy.
Cyber insurance has become increasingly important to our insured globally and.
And we have substantially increased our support because quite simply we believe that today's cyber market has changed for the better the.
The most important development over the past several quarters is that the alignment between client and insurance company has significantly improved as insurers have become more vigilant in their efforts to mitigate cyber risks.
Additionally, insurance insurance terms and condition.
Additionally, Titan.
<unk> have increased in rates have reached a level, where we believe we have an opportunity to earn an appropriate return for the assumption of width.
Next our reinsurance segment once again delivered excellent top line growth across an array of its specialty businesses, including property property Fac and other specialty lines.
Since inception, a hallmark of our Retrans group has been its ability to quickly adapt to changing market and reallocate capital to earn better risk adjusted return.
Current market conditions, and the likelihood of capacity constraint, where likely create an eventful January one renewal period and our teams are actively planning to meet the demands of our clients.
Now I'll go to mortgage group.
Or as I call it our beautiful business.
They once again provided proof of their sustainable earnings model by delivering $299 million of underwriting income that is essentially uncorrelated with our P&C operations.
So higher interest rates affected new origination volume they also improve the persistency of our portfolio.
<unk> rose, 4% in the quarter to 75, 4% and allowed us to grow our U S primary mortgage insurance in force to nearly 295 billion.
Our embedded in force book is in Great shape credit quality remained excellent unemployment is still at historical lows and the average borrower has a superior FICO score of 748.
Homeowners equity a key factor in protecting against screen is very high with 98% of policies, having at least 50% equity in their home.
In addition, the semi market is being proactive.
Creasing rates to adjust to the evolving environment.
We continue to be thoughtful in how we manage our mortgage portfolio and because of our diversified model. We have the ability to take a measured view of the business is just one component of our diversified enterprise.
In the near term.
Better returns will most likely come from our property and casualty segment, and we would expect that our capital allocation.
Bear this out.
Although investment returns were challenged again in the third quarter. It is important to note that rising investment yields even after adjusting for claims inflation should help boost our return on equity.
Italy with the fed attempting to tame inflation, we may continue to see negative investment markdown, a significant amount of which we would expect to recover with our fixed income securities mature over the next several years.
Ultimately the relatively high quality and short duration of our portfolio combined with strong cash flows provide an opportunity for us to reinvest in new money yields that are substantially higher than our current book yield.
In conclusion, our performing in the P&C insurance market is always a challenge and the most recent paradigm, where the property cat market was supported by cheaper alternative capital had increased the level of difficulty.
However, many of the investors in ILS funds have recently seen their recurrent underperform and are beginning to leave the market.
Without an August source of cheaper capital our industry is nearing an inflection point.
There appears to be a shortage of players with the capacity and willingness to participate.
Creating possible blocks supply shortfall.
Fortunately for our shareholders, we have both the capacity and the willingness to deploy more capital in that space.
For as long as the reward justify the risk.
We are optimistic with regards to the opportunities ahead of us in the fourth quarter and into 2023.
Talk about our principal of six cycle management and capital allocation that almost every opportunity because they are truly part of our DNA we.
We have remained disciplined overtime and kept our focus on fundamental when it came to underwriting.
The market needs companies like us to rise to meet their needs and as I like to say to our team arc is open for business with <unk>.
That said I will turn it over to Franco to go through some of our financials in detail before returning to answer your questions as well.
Thank you Mark and good morning to all thanks for joining us today.
As we communicate communicated in our release earlier last week, our third quarter results were adversely impacted by the effects.
Hurricane Ian and other global catastrophe events.
In spite of the severe nature of Ian.
We believe we will end up being the largest single loss in our history. We reported after tax operating income of 28 per share, resulting in an annualized operating return on average common equity of three 8%.
Year to date, our annualized operating ROE is 11, 6%.
This result demonstrates once again the value and the resilience of our diversified platform.
Now on to catastrophe losses, where we wanted to provide a bit more color on our assessment of hurricane yet.
We all know it's still very early in the claim adjusting process and the final determination of our ultimate loss exposure will likely not be known for quite some time.
Our initial estimate of the ultimate losses is based on an industry loss of $50 billion to $60 billion.
We believe this range is appropriate at this time, given the unknown impact of inflationary trends.
Actual supply demand imbalances in labor and material costs, the newly introduced Florida property insurance reforms and the extent to which storm surge claims may end up being covered by insurers among others.
We're all we believe our estimated market share of the event will be comparable supplier of large events of a similar nature.
In the insurance segment net written premium grew 18, 6% over the same quarter, one year ago as our underwriting teams continue to find new business that meets our return expectations.
Overall underwriting performance was excellent with an accident year combined ratio, excluding cats of 89, 5%, a 100 basis point improvement over the third quarter of 2021.
In line with the last few quarters commentary and ongoing shift in our business mix and structure of our reinsurance programs resulted in a slightly different split between the loss and expense ratios compared to the same quarter one year ago.
In the reinsurance segment net written premium grew by 73, 6% over the same quarter last year.
Worth pointing out that in the third quarter of 2021, we'd have a catch up in ceded premiums a summary significantly reducing our net written premium.
Absent this impact the year over year increase in net written premium would have been 37, 9%.
And much like the insurance group reflects an environment, where we are better able to write business that meets our return thresholds.
The segment produced the next cat accident year combined ratio of 85, 5%.
230 basis points higher than the same quarter, one year ago. As a result of an elevated number of larger personal claims in our in our property other than property catastrophe book.
And also an increase in our expense ratio due to an ongoing shift from excess of loss to more proportional business.
We believe this movement in the loss ratio is well within our expectations are.
Eric variability of the underlying claims activity in our book of business.
Our mortgage segment, having other excellent quarter with a combined ratio excluding prior year development of 39, 9%.
Net premiums earned decreased on a sequential basis as we continued to see the effects of higher recessions on our use of my book and lower levels of single premium policy terminations.
Persistency of our in force insurance now stands at 75, 4% at the end of the quarter.
Has continued to increase due to the rise in mortgage rates, which considerably reduces the attractiveness of mortgage refinancing for most borrowers.
We recognized $126 million of favorable prior year development across our mortgage segment this quarter.
As delinquencies continue to cure at a higher rate than expected.
Over 80% of the favorable claims development came from our first lien insured portfolio at U S semi mostly related to the 2020 in 2021 accident years.
The remainder of the favorable development came from recoveries on second lien loans and better than expected claim development in our Australian operations in our <unk>.
<unk> portfolio.
Income from operating affiliates stood at $8 5 million and was generated from consistent results with profiles offset in part by underwriting losses at Summer's re due in part to Hurricane Maria.
Net investment income was <unk> 34 per share up 21% from the second quarter of 2022, and 55% from the third quarter of 2021 on a per share basis.
The strong positive cash flow from operations over $2 $8 billion a year to date.
Combined with the proceeds from maturities and sales of securities deployed in a rapidly rising yield environment underpinned this improving results.
Going forward with new money rates above, 5% and a growing base of invested assets.
Should have a good opportunity to further enhance our operating income grew solid investment income results.
Total investment return for the investment portfolio was negative three zero to 1% on a us dollar basis for the quarter.
In a challenging environment of rising interest rates and weak equity markets.
We remain cautious relative to work duration credit and equity risk with our investment portfolio and this defensive strategy helped minimize the mark to market hit to book value.
Our investment duration remained relatively unchanged compared to one year ago and is slightly underweight relative to our liability duration.
Turning to risk management, our natural cap P&L on a net basis stood at $851 million as of October one or seven 7% of tangible shareholders' equity.
Again, well below our internal limits of the single event, one in 250 year return level or.
Our peak zone <unk> is currently the Florida Tri County region.
On the capital front, we repurchased a minimal amount of share of this quarter approximately 236000 common shares at an aggregate cost of $10 1 million.
As our prospects of seeing meaningful opportunities in the business remains very good for the remainder of this year and into 2020.
With these introductory comments, we are now prepared to take your questions.
If you'd like to ask a question. Please press star one.
Our first question comes from <unk> <unk> with Jpmorgan. Your line is open.
Hey, good morning, So first.
Just had a question on <unk>.
Obviously on pricing in the reinsurance market, obviously cat pricing hardening a lot.
After Ian how do you think it will affect pricing and non cat lines, and where do you see the best opportunities for growth.
For arch.
So thanks for the question I think it's still early I think the.
Ian is one part of the equation. This is what I think we should probably see an impact.
On other lines of business because aside from <unk> and we also have the markdowns and inflation concerns and whatever else is out there. So.
It would be reasonable to expect.
Rippling effect through the other lines of business I also want to remind everyone that the market has gone through a hardening.
Telecast for the last three years to four years, so I'm not sure we will see a similar furthering a hardening of the same level that we saw but we're not really really good level right. Now so anything that is incremental above that is hugely accretive to us as an industry returning to March.
And then how do you think about capital because there are a lot of companies total equity has come down a lot because the marks on iOS.
And I noticed you bought back very little stock this quarter not sure if that has anything to do with capital or just preserving capital ahead of cat season, but how do you think about capital overall for the industry as well as for you guys and specifically how that's affected by <unk>.
Declining total book values.
I'll start with the overall industry and I'll talk to transfer for specifics for arch I think that the careful born out of the industry is a big deal.
We are in an industry that rights against the surplus.
Unlike 2008, when the markdowns recovered pretty quickly.
Don't seem to be right now at this point on that.
Where it will recover soon so there's already pressure on our capital and in terms of how you write the business and how much you're allowed to write for.
The rating agencies are the regulatory agency.
So I think it will create pressure and that pressure is not going to be short term, we think it's going to last.
For a while.
And as an underwriter capital is one of the main ingredients you have.
To create underwriting decisions and provide service to your clients. So.
It's a big deal and we're talking with some companies during 2830% 35% is that these are big.
Changes and I would add as you know Jamie that in addition, as we have an environment, where there are a lot of uncertainty while inflation recession and whatever else is out there so and I think the.
I think we're all collectively bracing for.
Interesting several quarters ahead of us.
That's helpful.
Yes, the one thing Jamie I'll add specific to our trades and Thats really part of our history. We've always operated with the principle that we want it to have a strong and conservative balance sheet.
And why have we done that why are we taking that route.
It was always with the mindset that we wanted to have Optionality, we wanted to be able to take advantage of improving market conditions, when and if they come around.
Right and what I mean, consistent and strong and conservative balance sheet.
The investment portfolio, you saw that in our markdowns.
We got some like everybody else, but I think we're probably more on the low side and also in terms of leverage we don't have a very levered balance sheet. Even today at 930 were below 25% the right at 25% on that.
Debt to capital basis. So those are the reasons why.
We feel like Thats again, thats been our strategy and this may be a moment in our history there.
Tells us that.
We will be able to enjoy the benefits or the reap the rewards.
Maintaining such a strategy. So I think we're in a really really good position.
We're positive we are optimistic about the market going forward.
We're still not there yet and we will see what happens at one one but.
From a balance sheet point of view, we're in a really good position.
And then any color on the sort of minimal buybacks this quarter.
Well again it's.
Two twofold I would say a we typically.
Don't do a whole lot in the third quarter ahead of the hurricane season, So thats very consistent with our history.
Theres always the stock price matters always as you know in the charter stock buybacks.
Going into the order, we just wanted to see how things how things played out.
And.
Sure.
Also with the expectation that we would.
Market, even before and we still thought that the hard market would be.
Go well into 2023 and that was one of the reasons why we felt maintain.
Maintaining the capital base that gave us the ability to write that business in 2003 was what's critical for us.
Thank you.
Welcome.
Okay.
Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Okay. Thanks.
Kevin.
Your expectations for pretty strong price increases at January one.
Obviously.
You have some time right until Florida and other business Renews later next year, but where would you think based on the growth you think you could see in reinsurance.
What do you think your P&L will shake out next year.
Really good question and I think it's obviously dependent on.
The risk adjusted return that we would see in that like I just wanted to remind everyone that we are.
Okay underway at seven 7%, so we have room to grow if we see the opportunity.
We could grow a little bit in 2020 to seeing opportunities.
We would do the same thing if we were to be presented with the same.
Situation.
I think we have the capital the appetite and the expertise to fully participate in the upcoming market auditing I think at least the need they need if it continues to shape up the way is designing itself.
We're going to be part of the solution, we're going to be part of creating new solutions and providing meaningful capacity for clients.
What I like about where we are as we have a diversified platform. As you know is it a lot of flexibility and Thats why as I mentioned, we had a really good position.
All I can say is no.
Can you tell me what the returns are what I would tell you on what we would be willing to take.
But you would expect to hear from art that the way, we think about building up new risk and a tower is incrementally as we would go up on the P&L. We would expect the expected return to increasingly improve over that period. So it will be really really highly depend on how much the rates go and you might have.
Sure.
It can be.
It's too early to tell.
But it's going to be right now, but we think it could change, but it should be significant.
Based on what you think could transpire and you think about putting your capital to use next year.
<unk> reinsurance mortgage I mean, it sounds like more will be on the P&C side, and then do you see more going to reinsurance versus insurance because it sounds like you guys are still seeing some good opportunities on the insurance side as well.
What I will tell you. If you look at this is the beauty of our platform like when the.
Company, and an insurance company right to participate in the App.
The marketplace reinsurance really really quick and proactive way to do so I would think the early stages of this at this hard market get there that we would be deploying more capital more quickly into our reinsurance unit because it's also where I think most of the need is going to be right on the insurance portfolio. As you know it takes a year to turnover.
Portfolio, where there, whereas our reinsurance portfolio could be done much quicker. So I think it's going to be in steps like it always has been it's the same in 2002, when we were formed.
Really really reactive and very quick to market on the reinsurance side as we saw our insurance business building up and getting a traction in.
Taking advantage of our market. So I think over time, we'll then where does it Atlanta in 2024 and beyond if we have this opportunity again as I mentioned.
Then it will be a relative royalty of returns it will defence, who get the better risk adjusted return.
They will have to go in front of fossil and I would argue their case. These are historic perspective units.
This is what we're going to go through we go through this on a quarterly basis to make sure. We are keeping all the returns.
And the same.
Most optimally optimal as possible.
And then one numbers one Francois you pointed to 230 basis points.
The reinsurance segment I think from elevated property claims. So if we're thinking about that kind of the run rate I'm, assuming we should X out that to 30, and then assume as the business shifts more towards property and property cat that they would be underlying loss ratio improvement driven off of that mix.
And that business.
Yes, I think Thats, a fair way to think about it.
<unk> said before I think looking at loss ratios on a quarterly basis is not something that's not how we think about it we'd like to thank more than rolling 12 months or even maybe longer periods that to have a view of the long term performance of the book.
Again, I'm, just making the point that just let everybody know that we're not worried about this whole blip in our quarter.
Very much part of our normal volatility of our business, but going forward if the market ends up being.
Very constructive, let's say on the short tail lines, specifically, yes, the loss ratio, presumably could come down a little bit.
Thank you.
Youre welcome.
Yes.
Our next question comes from Michael Zaremski with BMO. Your line is open.
Hey.
Good morning.
Well I guess just sticking with capital.
It is.
No.
We don't want to spend too much time on this S&P capital model, but I remember checking my notes from the spring when we're all using them as a punching bag or at least I was <unk>.
Okay.
Post have released a new version.
Soon before year end I thought and there was always the issue of kind of the Bermuda senior debt maybe not.
<unk> credits I don't know any any thoughts is that something you guys are thinking about or is that does that issue kind of.
Not a tail risk, we should or anything we should be thinking about.
<unk>.
Yes.
Yes.
I think many of us thought.
We have an answer to all those questions by now.
The model proposals that they perform work.
Substantial.
In broad so I think it impacted most I mean, most types of companies Europeans and North Americans life, D&C et cetera. They did get a lot of feedback so that the current thinking and what we would we'd be just less.
A world know recently that they are.
They are all up there are second version of their proposal.
In the first quarter.
So there's still a bit of uncertainty there as to what changes they may.
Make to what they suggested initially.
We've had discussions with them and many others have as well specifically in this Bermuda.
Depth issue.
We'd like to think that's going to get resolved reasonably well.
We don't have finality on that but.
We're somewhat positive that we will get a good resolution there so.
From that point of view I would say our capital base is strong and we don't see a need to make any changes to it at this point.
If I may add Mike I wanted to one.
One of our key thing on capital.
Allocate capital and economic basis, S&P is definitely an important piece of the puzzle, but it's not the only thing that drives it so we're carefully thinking.
Pension to it.
And we will see what happens.
Okay understood I appreciate it maybe switching to.
Your primary insurance operations, which I know are diversified among a number of businesses, but I guess.
A lot of good commentary in the prepared remarks could you give us an update on kind of where pricing has been trending.
Maybe just broad question on on the primary insurance marketplace, and maybe just maybe it's tough to put out payment without with a broad brush, but if we thought about the.
Okay.
<unk> insurance lifecycle clock, just kind of curious where are you at what time do you think do you think it is.
It's a great question and I have looked at that looked at the clock many times a year and looked at it last week.
About 12, nearly $130 well known on the P&C side, I would say and probably eight o'clock ish on the property cap space.
But the clock can be turned back so I'm not sure that 11 30 has been a sticky so that will be my comments sort of alluded to the first question is I had a quick question on answer I think that overall most lines are getting rate over trend.
We're still seeing plenty of the fact that this is a broad statement glad you rightfully point.
That were specialty.
Company with many different products and everyone every one of these products.
Current characteristics of an exposure base.
Kathryn point different geographies.
Rod Leeds speaking most funds are still getting rate over trend I think some others have said that in other calls this week.
But I think that as in every hard market. This is what we're sort of absorbing in a few areas.
There's been a lot of the bill for last three years.
Almost over correction and some certain pockets and I think that appropriately and rationally people are looking at the history and the experience and they seem to the experience is much improved and the one example, these excess D&O front.
I think it's a line or two here and there that perhaps smaller.
The increase or small rate decreases the thing is it gets recorded royalty gets a lot of the headline in the papers.
It's just not really a true reflection of the wider market I think that.
By virtue, if you look at the way we operate on the insurance and reinsurance on the P&C mortgage for that matter, we really focus on risk adjusted returns and if we if you see us grow it.
The risk adjusted returns and on.
And the profit is there.
So I think overall the market is still very very is presenting us with a lot of opportunities both on insurance P&C and reinsurance.
Yeah.
Okay.
Maybe I think you brought up the excess and surplus lines marketplace.
Yeah.
Andy.
Maybe you could remind us how large that business that is for you all and is that is that the dynamic is different in that marketplace versus kind of the.
The picture you painted.
In terms of the primary insurance marketplace clock.
I think that no actually not it's actually an area that is still a very very active and very interesting for a lot of our growth actually come from those E&S property and casualty lines of business that can be selective not all one line in all one monolithic. Some line as you can appreciate <unk>, but certainly we are.
Participating in the ones, where we like the risk return our E&S premium right now in the U S. Because it's.
It's hard to decipher what's in London.
But in the U S. It's about 28% of our premium that.
We write E&S is almost double what it was three or four years ago. So we have really leaned heavily into that marketplace and continue to do so I think that what's happening with Ian.
Acute need for capacity specific property should mean more E&S property opportunity and potentially some E&S casualty opportunities as well I want to remind everyone. This is a beautiful business to have a specialty insurance company because you have a little bit more freedom of former premium are great and I think we're.
Really our underwriting acumen and underwriting expertise.
It's showcased itself.
Thank you best of luck.
Thanks.
Yes.
Okay.
Our next question comes from Eric <unk> with Jefferies. Your line is open.
Thank you good morning.
My first question is with regards to the changing reinsurance market do you see that leading to change in retention rates in both insurance and reinsurance and if so.
What impact do you see that having not only on the top line, but.
Also on potentially lowering the attritional loss ratio and increasingly acquisition costs.
It's a broad question Alan Thats, a great question and I think we're all improving and intensity.
I think.
Maybe the best way to if I couldn't feel allow me for one second to sort of draw a parallel with Katrina and the way it evolved no back in Ohio that is not exactly nickel product, but let's go there for one second and go back in time again, turning back the clock as I just said before after the all five turning to markets and our portfolios has to be repriced at the <unk>.
Parents level.
Some insurance companies took a long time took a year and a half to really repurpose and re underwrite and re former reshape their insurance portfolio.
To make sure that it was a better footprint not as risky so risks not risk off but readjusting the risk of insurance companies are taking with something that I believe there will be doing for the next 12 to 18 months.
But as I said before it takes a long time to do so in the meantime, you still have the exposures specifically what happened to the reinsurance companies come in.
All we're going to be more returns for the capital with capacity that we provided to you the portfolio Hasnt changed.
We have two months in particular, while we want to see what impact what you're going to do in the portfolio that was <unk> five right.
So and then what happens as you get into the new year.
A buyer and where our insurance group is no exception, you still need to buy reinsurance in nature, it's still a volatility that.
Appropriate and prudent to purchase so the purchasing silicon there might be some push and pull on the retention presumably your attention would have to go up somewhat may be constrained because of a constraint on what limited available.
So I think if you keep.
Put it all back together there'll be shifting and changes.
In the reinsurance side more likelihood one one as I mentioned and as we lead towards Florida renewal mid year.
Issuance portfolio will sort of be reacting to what the reinsurance market is telling them that it's more costly from a cat perspective, let's take a long time to develop I mean, it's not like a one renewal and done.
Alright.
But do you think I guess, if we just focus on the insurance segment for a second.
Ultimately I would think with maybe lower.
Or higher retention, maybe you actually see some improvement in the attritional loss ratio, but at the same time some head of the acquisition I. Appreciate it that's all your other question I apologize. So the answer is that could be a point as you see the recent supply is getting more expensive. It's a change that would perhaps even by reinsurance the insurance fee.
We now know that they need to charge more to make up for what the loss or to get the protection because the recent market is also selling them something very very very informative as to what is the price of Cat chart, but you need to sharper category. So you are right. So overall, we will have pricing increase on the primary insurance portfolios, which to your point.
Will lead to should lead to a lower attritional loss ratio because it's the same kind of losses from nutritional perspective without a premium. So yes that is a fair assessment for a fair expectation.
Okay.
And then a follow up to a statement you made earlier on the marks.
Yeah.
Got it.
Rating agencies is largely looking through interest rate related mark maybe.
Some some exception with S&P and I also thought the stat accounting doesn't really account for Citrus Park. So why would that we are becoming industry capital issue.
Sure.
Well I think it's.
There is the official Ken.
Pronouncement, there or what the official view of how people look at certain things, but let's be honest here I don't think anybody totally.
And it doesn't et cetera at all.
Companies that have loss.
20% of their capital base. So far this year if rates go up another 100 200 basis points over the next 12 plus months.
At some point.
You can't right.
First of all booked up P&C business at three or four or five to one I mean thats just people again are pushed back and you got to have a plan.
Remediate or <unk>.
Have a view on when those marks are going to revert back so.
No.
Great agencies, or I think in that camp I think.
They will give us and others some latitude, but it's not infinite it's not like they don't consider it at all so that's really our point here is that <unk>.
Like it or not some capital has evaporated.
Not permanently but for the time being.
We need to work through.
Got it thank you.
Okay.
Our next question comes from Tracy <unk> with Barclays. Your line is open.
Thank you I have follow up questions on your ability to grow prop cat risk and capitalization.
I feel like your 25% target of one and 250 Pamela tangible equity is an easy way to communicate your appetite for the street.
But I realised the large consideration is allocating capital on a risk adjusted basis. So can you remind us how do you view diversification credit or covariance between EMI and catastrophe.
Or said another way does your risk adjusted capital consumption from IMI restrict your ability to take on prop cat risk even if there is diversification credit.
Yes, I'll start with a very good question, but we wont divulge what are.
Economic model is but if you look at the economic model there is a large amount of.
Lack of correlation between NII and the P&C doesn't mean that they can't go bad at the top of it some.
Non correlation between the two there's also a lot of correlation benefits that we derived from the multitude of demand around the world. We have a very diversified portfolio I think the way that we look about this is.
The way you look at the curve Youre economic curve and again, we have to be careful as the mathematics mathematical exercise, we're not beholden to any mathematics.
But you look at the way you flex the P&L if you put the pressure on inquiries occurred and see what could happen if we do what if scenarios.
But you always have.
In maximum downside are you willing to take.
Combining both of these or two or three or at least read at 45 curves that we have.
<unk>.
That's all I'm going to leave it at that for now I think that this is an exercise that we.
We do all the time, we're going through right now than it's ever changing because pricing is moving and it's one thing that I wanted to I want to remind everyone is that we.
We don't only look at the loss itself you have to look at what premium chart for the risks with what we reported.
Our combined ratio and the profit level is very very important and every time you have a line of business that provides more profit.
Margins improve or increase it helps the overall balance sheet. The overall portfolio that you have a reinsurance with having said all of this with having a proper.
<unk> com on the downside potential we don't want.
Russell just mentioned the balance sheet, because we still want to be able to take advantage of the next market.
If and when it does present itself on the mortgage side I'll remind everyone that we buy a fair amount of quota share for that sort of protection of our downside. This was a part of our consideration.
We buy quota share we also buy excess of loss. So we have some protection.
Also a good example of how we manage the risk even if we like we feel very much like BMI routes, where we offer a very prudent and making sure with some of the downside is somewhat protected again for the same reasons that I mentioned earlier on the call.
Okay.
Yes. Thank you for reviewing the process I was just trying to get at do you think that.
Gives you an advantage to grow and prop cat risks given the diversification credit absolutely. There is no doubt in my mind.
But it's not again someday worth if it gives us diversity.
We always are we're conscious of as I mentioned to make sure the profit.
Is improving and I guess on the property cap the one thing that should be clear.
It's riskier.
So no other charges as tobi talked about hunting and higher need higher charge need.
To take a commensurate or similar rate that we would take that they in turn.
Three credit funds, we need to be cognizant of those things and I think yes. It is.
It is really.
The fact that in addition to earnings power to your point I mean, thats, what you're sort of alluding to the Friday, we have earnings coming from them I definitely help us as.
As we redeploy capital into other opportunities.
We think we see it.
Okay and I also want to go back to the conversation on negative marks and capital in a way.
Is it matter I know S&P like penalize you for that but do you have access about Q1 dollars 3 billion line of credit.
Crystallize any unrealized losses by being a fore seller is that fair I'm, just wondering if investors should pay more attention to liquidity.
Yeah.
Well.
It's a fair point.
Again.
We're not constrained I think that the.
The most important thing.
Leverage ratio is down but we also have access to other forms of capital. Our line of credit is one that you mentioned there are others. So.
If the opportunity is there for a while.
Additional.
Growth in our P&C lines in <unk>, and maybe mortgage whenever we will see them as we move forward.
I think my view is that it's hard to write an on call. It <unk>.
Capital Thats just not in the on the balance sheet right. So it's got to be in the balance sheet somehow.
And our view is.
Yes, we see recovery and the unwinding of that Mark to market hit so far but.
The capital base has to show that it's real and solid ticket pricing and right on it and Tracy.
The argument that your you're pushing us on I mean, you could take it to the extreme right what are the capital goes up by 8%.
But at some point it starts to matter, it's not as important as five or 10%. It's more importantly, 30 and becomes progressing more important because in the end we have to pay our policyholders.
And where are the reserves did a cat loss with the detail of our capital.
It does matter and the big World. So I think it's not.
And I think it shouldn't matter, 100% now because.
Some marks and there's still capital available, but it has to make a difference on how over time, because the argument which fall.
What point do you think it starts to matter 50, 60, 80, I think it's not a it's a different degree through the capital stack.
Okay. Just one last one really quickly given the higher reinvestment rates, how long will take arches mark.
How are you.
Well I mean, we've done some rough math I mean, you can kind of look at it like a portfolio.
Turning over to year ago, and average show that call. It eight quarters and you can do kind of rough math.
By that but the reality is we're going to also.
I think we're going to.
Yes.
We do have plenty of free cash flow coming through and thats going to be reinvested at pretty significant levels. So we think that overall that book value should start growing pretty quickly beyond just the recovery of the markets.
Thank you.
Laura.
Our next question comes from Josh Shanker with Bank of America. Your line is open.
Yes. Thank you I Wonder if you can give a little outlook on the.
Mortgage.
Our insurance sector are we at the bottom of the issuance cycle here for opportunity.
Does this last for a little while but are there even fewer.
Mortgages army purchasing reinsurance over the next year, where do we stand right now.
Sorry, Josh in what sense and on the primary side of Armani or.
Primary Amaya I am clearly new home sales are down.
And so obviously, we're gonna expect less flow.
<unk>.
Is it going to continue to decline from here or is this kind of a.
I guess, a holiday from mortgage issuance looks like for the MRI business.
Well you know we've said it before I think.
And that still holds the enforce book is where we're going to generate most of our underwriting income for the foreseeable future for the next two to three years. It doesn't matter really materially whether production is stable declining increases increasing the <unk>.
<unk> is going to drive the underwriting income for the next three years or so and we are.
Very comfortable with the level of the performance of that book right now because as we know and as we've said before home price appreciation is a big part of that.
Refinancing refinance activity is coming down so.
Systems' ease up et cetera, so there's a lot of things pointing us in the direction of saying, yes that enforce book is doing well and we'll keep doing well.
We think.
Over time, no question that if home production, new production kind of keeps declining to levels very low levels for an extended period. Then it may be starts to show in the numbers, but we don't think thats anytime soon.
IW, which you just mentioned about new production and if you look at the MBA numbers the purchase market, which is by far the most important one.
<unk> business is a lot more stable, but it's not as much of the decrease so we're still fairly.
Positive, we're still going to get some nice production from our team over the next several quarters and again I'll remind everyone that.
And mortgages is up.
Note that 7%, where it does make it a bit.
Harder to get into a home but.
The fact is there's still pent up demand for housing for.
For the purchase market should stay free.
Reactive for its next several quarters, which bodes well for Adobe.
These forward looking.
And as premium yield declines on insurance in force.
Is there a bottom that we should be expecting margins to continue to.
Ticked down in the coming years.
Yes, I think I just mentioned this in my in my comments the industry is like everyone else here on the call talking about what's happening around the world to some uncertainties assessments whatever else the potential things that could happen in the industry is raising rates as right as breathing premium rate as we speak on the mortgage the mortgage.
Sector, which is good news, which speaks I believe volume for the new environment that we have in MRI and industry.
Is a lot more disciplined and deliberate in what it's doing.
It's something we would have expected, but it's good to see it happen.
In life.
<unk> segment, we're seeing right now.
Pending what happens at one one is mortgage insurance still the highest ROIC the of your off Giovanni.
Right now we have this.
A lot of discussions about this right now we believe that our P&C operations are slightly gaining and getting ahead of it they'll tell rmi group debt, but it seems that the P&C units are squarely taking the lead.
Thank you very much.
Okay.
Our next question comes from Michael Phillips with Morgan Stanley . Your line is open.
Thanks, Good morning, everybody.
The question is no discounting of the current times, we're in with property Cat and then.
Massive hurricane on the heels of what's going on with interest rate environment everything else, some mark to markets, but.
And we're going to have lots of movements around property cat pricing, obviously, but.
But to what extent you think or.
And then a period very early innings of more respect for property cat that this will continue actually over the long term, which clearly has not happened at a very long time.
Well the answer is we don't know right I mean, this is protecting the future I mean, there's a lot of modeling out there.
Trying to address it and certainly on the cutting edge of ourselves with.
Neurologists and everyone else Hello, as fast to make sure we're on top of it but again its like everything else it.
It's a prediction.
And we try to put as much.
Christian or exhibit a.
Extra level of conservatism estimation that you're on the right side of the equation and if things keep on going on when Youre getting worth of embedded in your adjusted reflecting the last data point into next year. The expectation I think that if you take a step back I talked about it on the.
My comment.
What it also.
What's also going on is that we do.
We set a disregarded the true expected cap expected cat losses, if you were to just allocate without putting a lot of.
Wait or a lot of decrease in to some of the factors that could parameters that go into cat pricing.
We as an industry.
Just more attributes to charge more for their cat risk and we didn't and I'm always reminded of the law of large numbers, we said over the long run you get what you deserve and the results. So it's not far from my mind to think Thats, perhaps just perhaps not a.
Admittedly a change in climate change or that could be the case, but it could also be just by virtue of not charging it up over time that you sort of get you read that reward the mispricing.
Yeah, that's kind of what I was alluding to but okay. Perfect. Thank you. That's all I had appreciate it. Thank you.
Yep.
Our next question comes from year on Qunar with Jefferies. Your line is open.
Thanks.
Take us an opportunity to follow up on something you mentioned in the script cyber.
So maybe two questions there first on the Attritional side.
My understanding is that it's really about active management. So not just the annual questionnaire at the time of renewal, but really identifying and managing real time vulnerabilities.
So as a traditional insurer what capabilities you have on that front from a tech angle.
Are you partnering with third party vendors to achieve that.
So the answer is a great question Jan I think number one is we are partnering up with guys who are cutting it really on top of it data technology and really differentiate work for our clients and that's a really good place to be we.
We also have a team of plenty enough our lot of our teams were on the tech side for cyber risks are not part of the underwriting team. So we have a lot of people within the underwriting units or actually more people in fiber specialist data sales also.
Contract with other third party vendors want to make sure that we are on top of it. In addition to all the third party vendor that we have ourselves within the company and we also on the lookout and understand its more and more and it's a big investment.
Yes.
Got it.
And then.
The other question I had on fiber or actually one of your competitors was talking about this today as well.
<unk> got more comfortable with a tail before really.
Pursuing more significant growth.
Decline. So how are you thinking about the tail in.
Are there actions, you're taking in order to manage it and then I'll yourself pick up the comfort to grow.
So very good question. This is harder to manage the technical level as you can appreciate right because if you need a cloud and other.
Type systems, I think that what we do right now is instead of in lieu of adding this.
Technical.
Structure infrastructure, which we think at some point should come or will come is that's the shortfall and realistic about what a worst case downside scenario can be and we have various scenarios that we run every quarter to make sure that ramp up of it then and again there is the downside so everything we're doing life, but again.
It with the returns that we're seeing and we think the risk reward is fairly clear.
Trailing a favor we like the odds of that business.
And one thing I'll add to that Brian it's to US we think of it as an earnings event not a capital event. So we some of these kind of we think pretty severe widespread.
Events would not.
Our capital base.
Correct.
Right.
It's probably also because the book is still relatively small in the overall portfolio if it does grow.
From a capital of that unless you have proper exclusions are risk protection and Sean Yes, we'll still have reinsurance that we buy and how the things that we can do there as well so yes.
Okay. Okay.
Okay. Thank you.
Thank you.
I'm not showing any further questions I'd like to turn the call back over to Mark Grandison for closing remarks.
Thank you very much for your listening to our call.
Looking forward to talk to you again in the new year with perhaps no more cutting we'll see what the market.
Thank you very much.
This is Mike.
In today's conference. This concludes the program you may now all disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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