Arch Capital Group Ltd.

Good day, ladies and gentlemen, and welcome to the first quarter 2019 Arch Capital Group Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call may be 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, certain statements contained in the call that are not based on historical facts or 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 in the company's current report on Form 8K, furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your hosts for today's conference, Mr. Mark Randison and Mr. Francois Morin. Sirs, you may begin.

Thank you, Crystal, and good morning to you all. We have had a good start to the year as ARCH grew book value per share by 7.4% to $23.12 at March 31st and generated operating earnings of $0.67 per share, due to strong underwriting and investment results in the first quarter of 2019. As mentioned on our call last quarter, we continue to see modest upward rate movement in property and select casualty lines, along with reductions in sitting commissions paid by our reinsurance units. Our mortgage insurance, or MI Group, continues to operate in a market characterized by historically strong credit conditions, and conservative lending standards. For ARCH, this is an underwriting market where selection and segmentation remain key to generating favorable results. It is not a one-size-fits-all market by any means. On the one hand, we believe that the modest improvement in the property currency markets reflect broader economic growth, particularly in the United States, while on the other hand, we see inconsistent evidence of increased discipline by underwriters. We can sum up our view of current market conditions with two key virtues that describes how we operate at Arch, prudence and patience. Prudence has been a good advisor to us. In our P&C segments, rate changes in the quarter for our insurance group has been positive, but ranging in any one line from minus 5% to plus 8%, averaging about plus 2.3%. Considering that insurance loss trend or claim inflation typically runs about 200 bps above the CPI, we remain prudent in setting our loss picks and allocating additional capital in any single line given the uncertainty of future loss costs. Prudence in our reserving process dictates that we maintain an appropriate margin for error because reserving errors can lead to pricing errors. We saw modest growth in the first quarter of 2019 in our insurance group as net written premium increased 8% due in part to the UK acquisition we mentioned last quarter. The balance of the growth was from a combination of rate and new opportunities in short and medium tail lines. In typical ARCH fashion, we remain focused on risk-adjusted returns and patience means that we seek evidence of acceptable margin improvement even as the market experiences some pullback in capacity, such as in the larger commoditized lines and also within some E&S markets that you have heard about on other calls. Within our reinsurance group, property cat exposed rates are moving up after absorbing severe industry-wide catastrophe losses these past two years. These losses have caused some dislocation in capacity across the industry and have paved the way for new opportunities which our underwriting teams were able to participate in. However, we remain focused on the absolute level of risk-adjusted rates and selective in our approach to cat-exposed business. Now turning to our MI segment. Overall, the underwriting environment remains very attractive. Growth in our insurance-in-force is producing increases in earned premium and contributing to a future stream of earnings that is strong and predictable. In MI, the key underwriting characteristics that drive earnings are credit quality and the economy, which more than pricing, drive ultimate performance. Therefore, even as pricing has become more competitive, credit quality remains excellent and key macroeconomic factors are very good, which has resulted in very strong risk-adjusted returns. As you may know, in MI, from an accounting standpoint, these returns will be reflected in earnings over several years. For the first quarter of 2019, our US MI New Insurance Written, or NIW, was $11.2 billion, down about 2% from the same quarter a year ago. While NIW reflects business written in a quarter, The more relevant indicator of insurance earnings is insurance in force, which ARCH MIUS grew to $277 billion at the end of March of 2019. As with all our business units in MI, we are focused on returns rather than market share, and we intend to remain disciplined and agile. We believe that our long experience with Raystar and our insurance-linked notes, known as Bellamy Securities, provide ARCH a competitive advantage with respect to risk management, our interface with lenders, and our upfront risk selection. As I alluded to earlier, our key risk barometers are at very healthy levels. Credit quality, as indicated by FICO scores, remain strong across our in-force book with a weighted average score of 743. Our combined ratio and our MI segment remains exceptional at 25.6% in the first quarter, which is substantially better than the long-term industry average of the mid to high 40s. With respect to our investment operations, higher yields available in the financial markets produced excellent results on both a yield and total return basis. Turning briefly now to risk management, for the past few years, And continuing into 2019, our property cat exposures remain at historically low levels with a 1 in 250 year peak zone at about 4% of tangible common equity at April 1st. In our MI segment, our issuance of Bellamy Securities continue to pace with our second issue this year that closed yesterday and provides $620 million of reinsurance indemnity on more than $35 billion of insurance in force. We have issued $3.5 billion of Bellamy Securities over the past four years, which remains an important part of our risk management capabilities. As of today, Bellamy Securities provides protection on more than 90% of our existing insurance in-force. With regards to PMIRES, as of March 31st, 2019, ARCHMI's U.S. sufficiency ratio was 146% of the GSE ratio, capital requirements known as the PMIRES, as I mentioned. With that in mind, and with that, I will turn it over to Francois now to provide you more specifics on our quarterly results. Francois?

Thank you, Mark, and good morning to all. Before I give you some comments and observations on our results for the first quarter, I wanted to remind you that, consistent with prior practice, these comments are on a core basis, which corresponds to ARCH's financial results, excluding the other segments, i.e., the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford. As you know, Watford's common shares began trading on the NASDAQ Global Select Market on March 28, 2019. While this event now provides a market price on the value of our ownership in Watford, it does not impact the presentation of our financial statements or any of our disclosures. which have remained unchanged since Watford's formation in 2014. After-tax operating income for the quarter was $275.9 million, which translates to an annualized 12.3% operating return on average common equity and $0.67 per share. Book value per share was $23.12 at March 31st. a 7.4% increase from last quarter, and a 13.3% increase from one year ago. This result reflects the effect of strong contributions from both our underwriting operations and our investment portfolio. Moving on to underwriting results, losses from 2019 catastrophic events in the first quarter, net of reinsurance recoverables and reinstatement premiums stood at 7.9 million or 0.6 combined ratio points. These losses were nearly all observed in the results of our reinsurance segment, which were impacted by a handful of minor events across the globe. As for prior period net loss reserve development, we recognized approximately 36.7 million of favorable development in the first quarter net of related adjustments, or 3.0 combined ratio points compared to 4.6 combined ratio points in the first quarter of 2018. Both the insurance and the mortgage segments experienced favorable development at $1.7 million and $36.6 million, respectively. The reinsurance segment experienced a minor amount of approximately $1.6 million of adverse development, including $16 million related to Typhoon Jebi. The increase for this event reflects updated loss information received from SINs and additional industry data. The mortgage segment benefited from significant favorable development in our first lien portfolio, where cure rates observed in recent quarters continued to be materially better than long-term averages and expectations. The insurance segment's accident quarter combined ratio excluding CAS was 100.2 percent, 150 basis points higher than for the same period one year ago. The year-over-year comparison for the insurance segment is affected by two notable items. First, as we mentioned on a previous call, our operating expense ratio was impacted by the shift in the timing of share-based compensation from the second quarter to the first quarter. This shift increased the first quarter expense ratio for this segment by approximately 94 basis points relative to one year ago. Second, we continue to invest in our insurance operations, including the integration of recent acquisitions in the U.S. and the U.K. The most notable impact to our expense ratio this quarter relates to our UK regional book, whose operating expenses added 110 basis points to our overall expense ratio for this segment. As mentioned in the earnings release, we did not acquire an unearned premium portfolio with this acquisition, and as a result, the expense ratio will remain higher than the long-term run rate until the associated earned premium reaches a steady state. Overall, the underlying performance of our insurance segment showed improvement in the quarter, mostly due to lower levels of attritional losses and acquisition expenses. The reinsurance segment accident quarter combined ratio excluding caps stood at 92.4 percent compared to 93.4 percent on the same basis one year ago. As we mentioned on prior calls, we tend to look at trailing 12-month analyses in order to assess the ongoing performance of our segments. given the inherent volatility in the business that can emerge from quarter to quarter. The year-over-year comparison for the reinsurance segment is affected by the presence of a $10.2 million premium retroactive reinsurance transaction we entered into this quarter, which contains sufficient risk transfer for insurance accounting treatment under GAAP. While the overall combined ratio for this segment was basically unaffected, The impact of the transaction to each of the loss and expense ratio components was more observable, with a resulting increase of 90 basis points to the loss ratio and a decrease of 80 basis points to the expense ratio. Overall, we were able to reduce our expense ratio by approximately 400 basis points, mostly as a result of the growth in earned premiums since the same quarter one year ago, the retroactive reinsurance transaction just mentioned, and the shift in business mix. Once we adjust for these variations, the underlying performance of our reinsurance segment remains stable this quarter. The mortgage segment's accident quarter combined ratio improved by 650 basis points from the first quarter of last year as a result of continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 3.5 percent compares favorably to the 15.5 percent in the same quarter of 2018, due to substantially lower delinquency rates. Part of the difference is also attributable to increased favorable prior development, which was approximately 670 basis points higher than last year. The expense ratio was 22.1%, lower by 120 basis points than in the same period one year ago, as a result of a higher level of earned premiums. Total investment return for the quarter was a positive 270 basis points on a U.S. dollar basis, and a positive 348 basis points on a local currency basis. Contributing to this result was our decision to extend our portfolio duration slightly during the second half of 2018, combined with the defensive high-quality position of our fixed income portfolio and the solid performance of our equity portfolio consistent with the recovery in global financial markets. The repositioning of our portfolio during 2018 combined with the reinvestment of shorter maturity bonds at higher yields generated higher investment income year over year. We also benefited from higher than usual investment income from investment funds in the quarter. The corporate effective tax rate in the quarter on pre-tax operating income was 13.1 percent and reflects the geographic mix of our pre-tax income and a 50 basis point benefit from discrete tax items in the quarter. As a result, the effective tax rate on pre-tax operating income excluding discrete items was 13.6% this quarter, higher than the 10.4% rate from the same quarter last year. At this time, we believe it's still reasonable to expect that the effective tax rate on operating income will be in the range of 11 to 14% for the full year. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each each jurisdiction. With respect to capital management, we repurchased approximately 111,000 shares at an average price of $25.96 per share and an aggregate cost of $2.9 million under a Rule 10b-5 plan that we implemented during this quarter's closed window period. Our remaining authorization, which expires in December 2019, stood at $161 million at March 31st. Our debt-to-capital ratio stood at 14.6% at quarter end, and debt plus preferred to total capital ratio was 21.2%, down 130 basis points from year end 2018. With these introductory comments, we are now prepared to take your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And for optimal sound quality, we do ask that you please use your handset instead of your speakerphone when asking your question. And again, ladies and gentlemen, that is star 1. Our first question comes from Josh Shanker from Deutsche Bank. Your line is open.

Yeah, thank you very much. Mark, I appreciate your comments about CPI. and lost cost trend, you know, look, I think that at the very time that you make a change in your outlook, it might be the wrong time. But if you look at the past few years, what has been the lost cost trend, and what year are you comfortable making that statement about? What years are too green, and what years can you say, yeah, we know where the lost cost trend was in, say, 2015?

I think, yeah, so you have to, it takes about, three to four years to really develop, and then we're talking about primary business, to really get a good sense for the CPI. So, I think if you look at the CPI, I mean, we know what it is, 1.8, 1.7, 1.9, that range has been consistent for the last two to three years. The pickup in the delta that I talk about, the claim inflation spread above that CPI, takes two to three years. So, we have some good sense for probably 2015, 2014, 2015, 2016, we still have things developing. you know, for more recent underwriting years. And I would add that it's even more problematic or more difficult to fully assess when you're in a specialty line of business and when you have, of course, excess policies.

Generally speaking, was 1516 about 200 base points above the loss cost, above CPI?

It was a bit above that, I believe. Last time I checked the numbers about six months ago, we had 150 BIPs above the CPI in trend inflation from 2009 to about 2012, and I think it's since then picked up. So I'm trying to look at a long-term average. It's very hard to pin down the exact numbers.

And I hope I can get two and a half questions in, but they're somewhat related. I want to understand the structure of your Jebi exposure. I don't know how much you initially picked for it, but you're not a big Japan player and you're not a huge property cap player, so I'm just trying to figure out what happened to the contract that you paid more? Obviously, the PICS went up there. And two, to what extent are higher reinsurance costs, particularly on the Japan renewals that just passed, and then when we get to Florida and the Gulf in the mid-year, to what extent are the pricing increases we're seeing in property going to get somewhat swallowed by higher reinsurance costs?

Okay, so that's about three and a half questions, but I'll sort of take one at a time. The first one on Jebby, You're quite right. Our exposure has been on the wait for quite a while. We had actually increased our exposure to quake after Tohoku earthquake, but on the wind side, you're right, we had been more careful. And this one is having a small amount of limits up there, mostly on the excess of loss basis. And as you know, Japan also buys somewhat on a combined basis, but most of our wind exposure is on the wind and flood only still to this day. And really, the initial numbers came in at $3 billion, as you know, developed to about $12.5 to $13 billion, we believe, as we speak. What was missed by our seeding company, not only by the reinsurance community, was the business interruptions and contingent BI lost exposures that were inerrant in exactly the location where JB hit. A lot of it had to do with semiconductor that created a lot of issues, a lot more issues from the BI and CBI perspective. which was not properly reflected when you went through the path of the storm and modeled it through, you know, your existing portfolio exposure. And the seeding companies had done the same thing, did not see it happen, did not see this developing, and it just so happened that it created, you know, it was not fully appreciated by most people, by the whole market, frankly. So this is sort of where we are right now with Jebi. So you talked about price increase. We've seen some price increase. in April 1st, as you know, in Japan. You know, but we, you know, but the price increase that we saw brought us back to about 20, you know, the rate level in 2014. So it was a lot more subdued, a lot more tamed than we would have hoped for. Based on those, that indicator, Josh, knowing us, you know, that we've increased somewhat but did not go, you know, a significant increase. We are still trying to be patient in seeing further rate changes. As we talk about Florida, the initial discussions are that the demand is going to be stable, but the supply of reinsurance is taking a pause. We don't know yet where it's going to go, but the initial signs is that it's taking a pause, which should mean, you know, an interesting renewal from a reinsurance provider perspective. Did I answer between that?

Yeah, but I was more interested in your outwards costs more than your inwards opportunity. As you pay more for reinsurance, does that limit the extent of these rate increases we're seeing in property lines?

Well, no, because the big reinsurance purchase that we would do would be on the insurance side. And we do not have a significant floor or these kinds of exposures that would have created the loss into our layers. So we have a very different exposure from our CAT perspective. So it doesn't really... factor itself into pricing. It's not a significant change.

That's perfect. Thank you very much.

Thank you.

Thank you. Our next question comes from Amit Kumar from Buckingham Research. Your line is open.

Thanks, and good morning. Maybe two questions. The first one is a follow-up on the Jebby question. Can you also talk about, I guess, what was your trami exposure and also talk about if there were any aviation losses in the attritional loss ratio.

Well, first of all, our trend exposure is de minimis. We have basically none, and the question in aviation is not something we're a big participant in, so it's also de minimis in terms of aviation loss as part of the attritional loss.

Got it. That's helpful. The other question, I guess the only other question I have is going back to Josh's question. There is this sort of debate emerging between ENS pricing and commercial pricing, and Evan talked about this a lot earlier today. Can you maybe just spend some time, you gave us a range of minus 5 to plus 8, and then that came out to plus 2.3. Can you just talk about how you're feeling about pricing versus loss cost trends in some of those lines? And what would be the lines where we're still trying to get rate increases? And how should we think about 2019? Is it time to sort of sharpen our pencils and think about margin expansion from here, or would that be premature?

Thanks. So, yeah, I think the best answer I can give you on what we think of where the margins are is if you look at where we grew premium in this quarter. That will give you great indications as to what our teams think in terms of absolute margin. Margin expansion is one thing, but it doesn't mean it's necessarily enough to get the return. So we've seen enough margin expansion in a few lines that we grew our exposure. What was the second part of the question again?

In terms of some of those lines and the rate adequacy in those lines versus lost cost trends.

The ones that we grew are on the shorter tail. Most of the growth has been on the shorter tail lines. The reason it's a bit easier to do so is because the loss costs are a little bit easier to pin down. You have less uncertainty about ultimate loss costs on the shorter tail lines. That means that if you think you're proceeding a march of safety, of rate above loss trend of X, you're more certain you're going to get this. In other lines of business, such as ENF casualty, we, like others, have seen some pickup in pricing there, but there's a lot more uncertainty there in terms of what the gap between loss cost and rate increase is. And I would argue some of them in some lines of business, even though we'd look to have like a 300 pickup, let's say, margin, They probably need a bit more than that to really make a big allocation of capital from our perspective. So it's really a transition and really, you know, an incremental marketplace. Yeah.

One thing I'll add to that, just quickly on, I mean, the London market, as you know, is going through a period of dislocation. We benefit from that. We're not huge players in London, but we have a, you know, meaningful participation in, you know, both on the syndicate and the company side. Who knows whether that is going to be sustainable for the rest of 2019 and into 2020, but certainly, as Mark alluded to, some of the growth we saw in the premiums we wrote in Q1 are specifically related to opportunities in London in particular.

Got it. I will stop here for an LREQ. Thanks so much for the answers.

Thanks, Amit. Thank you.

Thank you. Our next question comes from Elise Greenspan from Wells Fargo. Your line is open.

Hi, thanks. My first question on the reinsurance side, Mark, in response to an earlier question, you said that supply is taking a pause. So now when we think about supply of capital in Florida, is that a comment that you would make to overall capital, to alternative capital, to traditional capital? I guess as you think about the buckets of the capital sources for the upcoming Florida renewals, if you could just give us a little bit more color on how you think this will play out.

Well, I don't know how it's going to play out. I'm just talking about the early signs. But in terms of where it's coming from, the supply and the pause has been taken by all participants because implicitly in some of the traditional players, some of it is relying on alternative capital, and there's also alternative capital standalone as well. So it's really taking a step back, a lot of moving parts of Florida, the assignment of benefits, the LAE adjustments, and whatever else, the department asking for buying more limits. I mean, there's a lot of moving parts right now. So people are still – and people are waiting to see more up-to-date IRMA numbers. You know, they've been developing, as we all know, for several quarters now. So everybody's taking a pause. I think it's a collective – it's not, obviously, you know, a consensus, you know, that's developed by talking to one another, obviously, but it seems to be this, you know, taking a pause, positioning from the supply. But we've seen this before, at least, so I want to be open. Sometimes you see this, and at the end, people sort of roll over and do act differently than you would have thought they would behave. But I'm just telling you as we speak, last information that I received this morning about, you know, the current state of the overall feeling in the marketplace.

Okay, thanks. And then back to some comments, you know, you guys have been making throughout the call on the primary insurance market. So it sounds like you guys are finding more opportunity in the shorter tail lines as opposed to some long tail lines just given on, you know, some concerns about loss costs. You know, another company earlier today pointed to this being a casualty-driven market upturn. Would you agree with that statement? And maybe there's just, you know, you guys are holding off on really, you know, pushing for growth on the casualty side just given waiting to see how lost trend plays out?

So, well, I don't know if it's casualty-led before. We've seen in terms of where we've allocated our efforts, our efforts in capital that Francois mentioned, A lot of it is led by cat exposure and marine exposure and short tail exposure. So this is where we've been more allocating capital for the last, you know, six quarters, three to four quarters, and still continue on as we speak this quarter. On the liability side, for us to have a casualty led, we would still need to see some pain in the marketplace. We're not seeing broad pain yet at least emerging on the insurance portfolios. What I would tell you, and that probably sort of, you know, size or, you know, is in line with what the comment that was made earlier on some calls is that the reinsurance market is actually being a bit more disciplined, a bit more reactive to the casualty placements. And that tells us indirectly that there's probably a bit more negative perception about the ultimate results in those numbers. But I'm not sure that these results have been published yet.

Okay, and then are you seeing – sorry, one last question. Are you seeing more business come from, you know, the standard market to the ENS market?

Yeah, most of what we see is through the ENS market, most of the growth, except for the U.K. regional, obviously, which is a specific focus. But, yeah, the Lloyd's business and the ENS market is where we're seeing more opportunities, yes.

And then, sorry, one last question. On the intangibles, they were a little bit higher than I would have thought this quarter. I think that's due to your two newer acquisitions. Is the Q1 level kind of a good run rate for this year? And can you give us a sense of where the intangibles amortization expense might come in in out years?

Yeah, well, certainly, yes, part one, our practice for the amortization of the intangibles is linear throughout the year. So you should expect the remainder of 2019 to be very much close to the same level that we had in Q1. In terms of outer years, we had given direction on the, you know, specifically on the UGC transaction, how it was going to wind down in 2020 and beyond. So we're happy to recirculate that and give you an update on that. But that's very much scheduled, and we know where it's going to be. I don't have the numbers in front of me for 2020, but we can certainly give you that. Okay.

So the UGC numbers are unchanged, and it's just up a little bit due to the two recent yields.

Exactly. Correct. Yes. UGC numbers were locked in at the time of the closing. Yes.

Okay. Thanks so much. I appreciate the color.

Thanks, Elise.

Thank you. Our next question comes from Mike Zaremski from Credit Suisse. Your line is open.

Hey, good morning. First question is on mortgage insurance. I believe in Mark and the prepared remarks you mentioned, even as pricing has become more competitive, you used that term. Is pricing currently becoming more competitive? I know that a lot of it's within these dynamic pricing models, so it's not as transparent. And maybe... you could comment on is that maybe why your market share, I know you don't, you know, focus on market share, but maybe that's why your market share seems to have like you've fallen quarter over quarter.

Yeah, I think that, yeah, I think it's true that there's, well, it's hard to see if it's a broad competition, but certainly there's a lot of dislocation occurring in the pricing, in the marketplace as a result of all these new risk-based pricing. It's very hard to see what it means and to even evaluate whether it's down or up or sideways. We'll reserve ourselves some more time to evaluate and come to terms to what it means in this quarter. Certainly, we haven't changed our pricing. We held the line and stayed the course on our base-based pricing. At the end, we just harvest what we put out there and what's stuck to the marketplace. But it's going to take a while. Markets are going through establishing the systems, educating the loan originators how it's used, and fixing some of the bugs. So it's going to take several quarters for us to really see if there is truly that much more price competition. But I think the price competition that I mentioned in my remarks, has been over the several last quarters. I was not specifically talking about this quarter.

Okay, that's helpful. And lastly, moving to kind of leverage levels and excess capital, if you can remind us, and our leverage is down to 21%-ish historically per UGC. It was in the teens. Can you remind us, is there a level that you've kind of soft promised the rating agencies and then Also, kind of curious whether holding dry powder is more or less important today versus in the past.

Yeah, part one to your question, yeah, 20% was roughly the number that we were, the leverage level, the leverage, yeah, the level that we were targeting at the time of the acquisition. And, you know, we are there today. So I think we've accomplished what we set out to do, and that's good news. And yes, part B to your question, absolutely. Dry powder is something that we always have been firm believers in, whether it's deploying the capital in potential other opportunities, whether they're acquisitions, or if this rate environment picks up steam and gives us the opportunity to put more capital at work in the business in any of our three segments, we want to have that ability to do so. So, The answer to your question is yes. Having the flexibility is something that we've always believed in, and thankfully I think we're there right now. Thank you. Thanks, Mike.

Thank you. Our next question comes from Yaron Kinnar from Goldman Sachs. Your line is open.

Hi. Good morning. I wanted to circle back on the reinsurance prior year development. So even if I exclude the JEBI adverse development, I think, Nat, you see a bit of a decrease year over year. Can you maybe talk about the moving pieces there?

Yeah, a couple of things that are, I'd say, more minor. I mean, there's been some timing of some claims that came through that, yes, impacted favorable or the level of favorable development in our reinsurance segment reserves. No question that You know, we've had a healthy level of releases over the years that we're not, you know, we never planned for it. We always observed the data and we always reacted to data. It turns out this quarter the level of favorable wasn't as high as it has been in prior quarters. Does it revert back to a higher level next quarter? We don't know. We'll find out in three months. But no question that, you know, JEBI was a big part of it. There's a couple of other small moving parts that are just, I think, a bit more noise and somewhat idiosyncratic in terms of the timing of the events that affected the aggregate level of PYD on the reentry segment.

And I think our last class trend discussion, Yann, is certainly key into our, you know, being prudent and careful in the way we set up reserves because, you know, things could be shifting. And so that's certainly part of the partly informing our decisions, you know, currently. It's not recent, but it's certainly part of that as well.

I understand. I guess what I'm trying to get at, though, is the year-over-year change, again, excluding Jebby, coming more from shorter tail lines, more from longer tail lines?

It's a mixed bag. It's a bit of both.

Okay.

Yeah.

Okay. And then with regards to the UK block that you acquired earlier, should we expect it to be fully earned in kind of within a roughly 12-month period, so January of 2020?

Yeah, pretty much. I mean, right, so the premium, you know, it's a ramp-up, so it's effectively a startup, and it won't be 50% earned in 2019. But you're right, Q1 into next year, I'd like to think that the run rate of earned premium is going to be pretty steady. And, yeah, there's nothing specific, nothing special about there. annual policies and the accounting should follow pretty easily from there.

Great.

Thanks.

Thank you. And our next question comes from Meyer Shields from KBW. Your line is open.

Thanks. I also wanted to ask about the U.K. acquisition. Once you get past the steady run rate for earned premiums, is there any difference in its loss ratio, expense ratio breakdown, and the legacy ARCH insurance segment?

Well, it should. I mean, there's a lot of moving parts in the expense ratio. We're trying to improve on that point in the U.K. in particular, and you guys all know about the realities of the London market, and it's generally an expensive place to do business in. So that was always one of our objectives here is try to reduce our expense ratio specifically from the U.K. side, and this acquisition helps us achieve that given it's a more, It's a better business model for us and more efficient on that sense. But the counter to that, I will say, is we're very – there's other opportunities, other investments that we're making within our insurance segment that may offset some of that. So we don't have complete visibility on everything we're going to do in 2019, but if you're looking for some, you know, view on what the expense ratio may look like for the insurance segment, For the remainder of the year, I would say no question that Q1 was elevated because, again, the lack of rent premium on the UK book and the timing of the share-based expenses or competition expenses, you know, by the end of the year, we'd like to think that we could bring it down between 100 and 200 basis points from where it was in Q1.

But, Maya, overall, the business that we've acquired is retail business. As you know, it's not, you know, cheap necessarily. It's still, there's a lot of commissions that have to go through. But, But the problem, well, which means the loss ratio would hopefully be lower than a comparative E&S portfolio. Having said all this, I think by virtue of the critical math that Francois just talked about, I think that it should improve the overall expense ratio. But I wouldn't expect it to go to be a significant improvement.

Okay. No, that's very thorough and very helpful. I appreciate it. Looking at mortgage, I think, Mark, you talked earlier about the benefits of the current economy. I don't know how to ask this without being too politically charged, but do you see that as being vulnerable to next year's presidential election?

Well, politics are part and parcels of what we have to deal with all the time. We're on the receiving end of what's happening out there. The one thing I'll tell you about the politics, we've been worrying about this. We've been asked that question for a long time. But the consistent answer on any administration that was in place and anybody that runs the FHFA is clearly a recognition that private market has a place in delivering the product to the homeowners and providing insurance and protection. So we don't see any major change there. We also don't see any change to the GST mandate and the way that MI is one of the collateral that's used to bring the LTV down below 80. So none of those core essence, you know, things that are really essential for to make sure that the market exists has been under siege or will be under siege. I mean, there might be some changes to the delivery of the product, and we certainly have been participating in some of those new innovations, and we'll continue to do so for the future. But the way we think about politics and as it regards MI is, you know, we are agnostic as to what happens. We'll react and are able and willing to help in any way that we can to deliver the product to the homeowners and to the banking system. Okay, no, understood. Thank you so much. Thank you.

Thank you. And I am showing no further questions from our phone lines, and I'd like to turn the conference back over to Mr. Mark Grandison for any closing remarks.

So from Francois and I, have a good day, and then we'll talk to you next quarter. Thank you much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.