Arch Capital Group Ltd.

Good day, ladies and gentlemen, and welcome to the Q4 2019 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. 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 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 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 host for today's conference, Mr. Mark Randerson and Mr. Francois Morin. Sir, you may begin.

Thank you, Crystal, and good morning to you. Ours completed 2019 on strong footing as the mortgage insurance market remains healthy and our property and casualty operations are well positioned for the pricing improvements taking place in many areas of the market. Our operating income produced an annualized return on common equity of 11.7% for the fourth quarter and 12% for the full year, while book value per share grew 3.2% for the quarter and nearly 23% for the year. While property and category rates are increasing in several lines of business, we believe the market remains in a transitioning phase between soft and harder conditions. Given the uncertainty of current claim trends, we believe our industry needs further rate increases to provide a more clear risk-reward proposition. In this transitional environment, risk selection and thoughtful capital allocation remain critical to generating superior returns. As we discussed last quarter, strengthening market conditions are evident to us from both the rise in our submission activity and our ability to achieve significant rate increases. This location is ongoing as some industry participants de-risk by tightening underwriting standards and by actively managing down their exposures. We believe that these conditions are likely to continue in a foreseeable future due to the continuing uncertainty regarding losses from the recent soft policy years. While there are some lines of business where the rise and loss costs can be tied to social inflation, in our view, a large component of the stress on the P&C industry's performance is due to prolonged soft market conditions and optimistic loss picks over the last three to four policy years. But reported capital levels are still high. Combined ratios are still below 100. Therefore, the duration of the transition or hardening market is unpredictable. Within our insurance segment, conditions for growth improve throughout the year, as indicated by 29% growth in our fourth quarter 2019 net written premiums. About one quarter of our premium growth came from recent acquisitions, while 50% was created organically through new opportunities, and the rest coming from rate improvements. Following three years of elevated property losses in both the U.S. and internationally, property rate increases, particularly E&S risk, in cat-exposed area in the US are up more than 25%. We have also seen rate increases ranging from 10 to 20% in large commercial general liability and public company D&O policies. But as we discussed previously, rates are not rising in all lines, and in some areas, rates are not rising enough. Switching now to our reinsurance business. Pricing in that segment tends to follow primary insurance, and we have observed some signs of discipline returning to the reinsurance market. In our facultative reinsurance business, we are seeing increasing submission levels and much improved pricing. FAC reinsurance has been a leading indicator of 3D market conditions historically, and we like the positive signal FAC is giving us at this point. On the 3D side, we are beginning to see modest improvements in terms and conditions, including declines in ceiling commissions ranging from one to three percentage points. Seating commissions remain elevated, however, and are 500 bps above the level seen in the last hard market. Focusing on the January 1st reinsurance renewals for a minute, rate increases in what is primarily a property cap reinsurance renewal period created a few opportunities for our reinsurance group, but we remain underweight cat risk. As a reminder, Our self-imposed internal risk limitation is 25% of equity capital. At this point, our 1 and 250-year PML stand at only 6% of equity capital. Turning now to our mortgage insurance segment, RTI continued to perform well. As I mentioned earlier, the operating environment is characterized by strong credit quality and a healthy housing environment. In addition, lower interest rates led to strong new mortgage originations in the quarter. Accordingly, our new insurance written at Arch MIUS was strong at roughly $24 billion in the quarter. Overall, our U.S. insurance in-force was $287 billion at quarter end, and the underwriting quality of recent originations remained very high. On a macro basis, lower interest rates and high employment have made housing more affordable. At the same time, demographic forces in the U.S. are creating a tailwind as millennials move into their prime household formation years. Lower interest rates also led to greater refinancing activity in the quarter, which explains a decline in our persistency rate in the fourth quarter down to 76%. From a historical perspective, this level remains high, and along with good mortgage origination activity, supported growth, in our insurance enforcement accord. With respect to our investment operations, interest rates have returned to historically low levels. As in our underwriting approach, we have maintained our focus on risk-adjusted total return, which contributed to our growth in book value per share in this quarter and the year. In summary, Archer's position following years of deemphasizing the most commoditized and soft business lines in property casualty markets is favorable. We have the human and financial capital to grow should the market continue its favorable trajectory into 2020. And with that, I'll hand over the call to Francois.

Thank you, Mark, and good morning to all. Before I give you some comments and observations on our results for the fourth 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 filing, the term consolidated includes Watford. After-tax operating income for the quarter was $308.4 million, which translates to an annualized 11.7% operating return on average common equity and $0.74 per share. Book value per share grew to $26.42 at December 31st a 3.2% increase from last quarter, and a 22.8% increase from one year ago. This result reflects the effect of strong contributions from both our underwriting and investment operations. Starting with underwriting results, losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $30.4 million, or 2.2 combined ratio points, compared to 9.7 combined ratio points in the fourth quarter of 2018. These losses impacted both our insurance and range segments and were primarily due to typhoon Hagibis and a series of smaller events. As for prior period net loss reserve development, we recognized 54.7 million of favorable development in the fourth quarter, net of related adjustments, or 4.0 combined ratio points compared to 6.1 combined ratio points in the fourth quarter of 2018. All three of our segments experienced favorable development at $2.8 million, $19.1 million, and $32.8 million for the insurance, reinsurance, and mortgage segments, respectively. We had solid net written premium growth in the insurance segments. of 28.7% over the same quarter one year ago. The insurance segments accident quarter combined ratio excluding cats was 101.6% higher by 330 basis points from the same period one year ago. Approximately 220 basis points of the difference is due to an elevated level of large attritional claims in the quarter primarily from our surety unit, which can experience some volatility from quarter to quarter. The balance is primarily due to a higher expense ratio driven by investments we are making in the business and the integration of our UK regional book and other smaller acquisitions. Now, moving on to our reinsurance operations where we had a relatively stable quarter. Net premium growth was at 4.3% from the same quarter one year ago, And the accident quarter combined ratio excluding cats stood at 92.3% compared to 96.2% on the same basis one year ago. The difference is mostly attributable to the presence of a large attritional casualty loss arising from the California wildfires in the same quarter one year ago. Our expense ratio remained essentially unchanged at 26.9%. The mortgage segment's accident quarter combined ratio improved by 200 basis points from the fourth quarter of last year as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 0.9% is lower by 120 basis points than the result recorded in the same quarter one year ago, mostly as a result of better than expected claim experience. The benefit to the loss ratio from current year favorable development was 510 basis points, in addition to the 940 basis points related to prior years. The expense ratio was 20.7%, consistent with the results from the same period one year ago. Total investment return for the quarter was a positive 107 basis points on a U.S. dollar basis, as our high-quality portfolio continued to perform well. For the 12-month period, our portfolio returned 7.3%, an excellent result driven by particularly strong returns across our fixed income and equity investments. The duration of our investment portfolio at December 31st was down slightly to 3.40 years from 3.64 years at September 30th and was overweight relative to our target allocation as we continue to expect a lower for longer global interest rate environment. The corporate effective tax rate in the quarter on pre-tax operating income was 6.9% and reflects the geographic mix of our pre-tax income and a 30 basis point benefit from discrete tax items in the quarter. The 2019 fourth quarter effective tax rate on operating income includes an adjustment to interim period taxes recorded at an annualized rate. This adjustment increased the company's after tax results on pre-tax operating income available to Arch Common shareholders by 12.4 million, or 3 cents per share. As always, the effective tax rate could vary depending on the level and location of loss or income and varying tax rates in each jurisdiction. Turning briefly to risk management, with the recent improvements in catastrophe pricing, we have increased our natural cap PML to 612 million as of January 1, which, at slightly more than 6% of tangible common equity on a net basis, remains well below our internal limits at the single-event 1 in 250-year return level. This change demonstrates our ability to deploy incrementally more capital in an improving market to opportunities that offer adequate returns on an expected basis. In our mortgage segment, as mentioned on our prior earnings call, we completed our 10th Bellamy transaction in the fourth quarter with coverage of $577 million. As of the year end 2019, the Infor's Bellamy structures provide aggregate reinsurance coverage of approximately $3.3 billion. With respect to capital management, we did not repurchase shares this quarter. Our remaining authorization, which expires in December 2021, stood at $1 billion at December 31st. Our debt to total capital ratio stood at 13.1% at quarter end, and debt plus preferred to total capital ratio was 19%, down 350 basis points from year end 2018. Finally, as you know, we closed on the Barbican acquisition in November of last year. The integration of their platform is well underway. For the 2020 calendar year, we expect to incur approximately $65 million of intangible amortization across all acquisitions we have made prior to December 31, 2019. 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 followed by 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. Once again, to ask a question, please press star and then one now. And our first question comes from Yaron Kinar from Goldman Sachs. Your line is open.

Hi, good morning. So my first question just goes to growth in the insurance segment. If I heard your comments correctly, it sounds like you're so lukewarm in terms of the market opportunities and the rate environment and rate adequacy. And yet, I think even excluding the acquisitions, you grew at a good 20% clip or so. I guess, where are you seeing the opportunities? And if you were to become more constructive on market conditions, where do you see that growth capping?

The first part is, thanks for the question. The first part is, I think we're lukewarm in the sense of saying it is a full-on hard market. We just want to impress upon everyone that when the early stages of rate changes, and we don't know how long that's going to last, and I also made comments about the fact that the industry has an all-time capital high and still printing very reasonable combined ratio numbers. So I just wanted me to point that it's not across all lines of business. Having said this, the growth that you see us experience or go through for the year, and certainly in the fourth quarter, is in the areas where market are coming back to our pricing level and return expectations. So we have de-emphasized those lines of business for quite a while, actually, as the softer years were eating into our production. And I think of late, we've seen a resurgence of submissions, and we're able to hit and get our pricing in return. So in the areas where we're growing, I would say that it is definitely an improving market, and improving such that we believe we're clearing some of the loss trend or loss cost trend concerns that one may have. So I also want to remind that we had not grown as much as the market could have indicated over the last year. So this is good growth on a lower number. For instance, on the D&O side, you know, we – Our premium written was about half of what it was last year versus five years ago. So you don't need much of an increase to really make a dent in the overall price increase. And the second question is we can grow a lot. And as we saw, you asked Yaron whether we can grow based on the conditions. As conditions continue on and we're seeing right now, you know, still being very, very good, I think we can still grow a fair amount. I think we have been, you know, our guys, our people have been very busy even in those softer years, but I do believe that we have extra capacity and appetite to write more, quite a bit more if it happens. How much will depend and be dictated by overall rate level in 2020?

It sounds like that premium growth could accelerate then in the right market conditions.

That is a fair statement.

Okay. And do you have any sense where you're booking the new business coming on relative to the overall portfolio in insurance, with the adequacy of returns there is?

Yeah, so we haven't changed much of a loss fix. Now, I want to put things in perspective as well, is that the rate changes – that have taken place that we're talking about really started to be, we believe, enough above the lost cost trend since the middle of 2019. It's a bit early and premature to make any changes to your booking your loss ratio you look at on an accident year basis. Plus, things could develop on historic history all the accident years prior to 2019. It's premature to make any comment and to loss pick as we speak. Frankly, loss pick, if they are to improve, and we believe everything else being equal, they should improve over the next couple of years, they'll take six to seven quarters to really see some good tractions and see some movement there.

Understood. Thank you, and best of luck in the year ahead.

Thanks, Aaron.

Thank you. And our next question comes from Jimmy Bular from J.P. Morgan. Your line is open.

Hi, good morning. First, I just had a question on the tax rate. It improved a lot, 18 to 19, and I think it was lower than what you'd expected as well. What's driven that? Is it just the geographic makeup of income, and what's your expectation or sort of likely range for 2020?

Well, yeah, a couple of points here. I think it was a bit lower than what we had, I guess, given as a range earlier in 2019. There's a couple of discrete items that played out throughout the year, which helped out in terms of publishing the final tax rate. So when I just, I took some notes, I look back and, you know, without these adjustments, which is really how we think about when we give you a range, the 2018 tax rate was 11.2, this year was 10.9. So Very close, you know, ultimately, you know, we had some additional benefits that brought it down to 10.4 for the year. So, yeah, I mean, as you know, tax rate is very much a, you know, it's hard to have a lot of precision on the tax rate because we just don't know where the losses are going to be before they happen. So whether there's a cap or favorable or unfavorable developments on prior years, et cetera. So looking at 2020, I'd say we're very comfortable saying that we're going to probably be in the same range. Maybe, you know, if you want to expand, maybe to try to make sure we're in the range, maybe 10 to 14. You know, in the years past, you know, last year we said 11 to 14. So maybe there's potentially it could be a bit lower, but I think it's a bit early again. I mean, there were early days of 2020, and hopefully that's enough for you to update the models.

Okay. And then on the MI business, obviously your overall margins have been very strong, and the same goes for peers as well. And a lot of that's just the strong results on the legacy block. But if you look at new business ROEs, are those in the sort of double-digit range, or is it more sort of a single-digit ROE type business in terms of new sales? And I realize it will take a while for your overall business to shift towards new business ROEs.

I almost choked up. Now, we're solidly well in the double-digit return still in the market. It's still very good quality. I would even argue that the risk of the later last half of the year actually improved somewhat for the industry, not only for us. And I think that had to do with Fannie and Freddie sort of, you know, putting a bit more constraints on the risk layering in the business. So, no, still very, very healthy returns. Very healthy.

And then just lastly, any comments on 1-1 renewals and specifically were they better, worse than your expectations and anything, any sort of views on the sort of upcoming 4-1 renewals in mid-years?

The 1-1 renewals were in continuation. You had some rate increase in the third quarter. Broadly in industry, fourth quarter was a bit better. The first quarter lined up to be, you know, better yet. So, yes, better rate environment at 1.1, clearly, for the first quarter. We don't know what it means for 4.1. I am done prognosticating what the future will hold. You know, it's the law of supply and demand and perception of relative risk is a market-based thing. So sometimes I think markets should go up, and it doesn't, and sometimes it goes down, and it's all over the place. So it's too early to tell. where 4.1 and 7.1 will end up. But clearly, if the momentum of 1.1 continues, it's going to be an improving market, clearly. Thank you.

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

Hi, thanks. Good morning. My first question Hi. My first question is, I guess, on 1.1 a little bit. You know, we've heard about the retrocessional market being pretty strong this year. You know, has Arch ridden more of that business? And just how did you observe what went on in the retro market at 1.1? And is that a sign of potentially better things to come, or would you think it would be for some of the 4.1 and 6.1 renewals?

Yeah, I mean, certainly on the – I mean, you see that a little bit in our CAT DMLs. They went up in large portion because of additional retro business that we wrote that I would say was very much opportunistic. So whether that sticks and whether that means – tells us something about a 4-1s or 6-1s, we just don't know. But for sure we saw some definite – some good opportunities in the – specifically in the retro space at 1-1 that we were – happy to have the capital to be able to deploy and take advantage of the opportunities.

Okay, and then with the insurance book, I know you guys in the past have talked about that expense ratio being elevated just due to the accounting and the earn-in from some of the you know, some of the more recent deals you guys have done. I'm assuming that there was still somewhat of an impact on that in the fourth quarter. And can you just, you know, kind of give us a sense to think about, you know, if you have Barbican coming on, how we should think about the expense ratio within the insurance book in 2020?

Yeah, so as I said in my remarks, I think the expense ratio was roughly, call it 130 bits or so in this quarter was the result of effectively bringing on online the UK regional book. So we're now a year into it. So everything else being equal, 2020, we should see the premium being earned out and the expense ratio coming down. The new twist is Barbican, and as you know, the Lloyd's market in particular has a slightly higher elevated expense ratio, which we think is, you know, there's an offsetting benefit on the loss ratio. But, I mean, to give you a bit of, you know, directionally a bit more, we think the 2020 expense ratio is going to be for insurance. We think it should be right around where it was for 2019. You know, it's not going to improve materially. I don't think it's going to get worse because we're going to see some benefits, but I think it should be about at the same level.

Okay, that's helpful. And then lastly, on the insurance pricing, Mark, you seem to be pretty positive, especially relative to where you've Your comments have been for most of 2019. And it's a developing market. And I guess every market seems to be different. And capital, obviously, a lot more robust than if we went back to past upturns. Is there any market, like if you think back through Argus history, does this compare to the early 2000s? Does this compare to kind of 2013? Is there a market that this feels similar to when we can kind of think about pricing improvement or does it feel because of the social inflation issue may be different than any of these past markets?

It's different in terms of the health of the industry and the combined ratio, as I mentioned, that's for sure. So that makes it a very unique opportunity. But I do believe we have major players pulling capacity out. So even though it's printed capacity, effectively used capacity is definitely lower than you know, in the overall market, specifically on the large risk. You know, you know some of the players, and we've talked about them, Lloyd being, you know, clearly one of them. I think I would tend to think it feels a bit more like the 2005, after Katrina returned Walmart, because, you know, capital was still plenty. People paid their claims. A couple of companies had some issues, but by and large, you know, the pricing went up, and it was larger as a result of perceived risk. And I think this is what's going on. I think people, as an industry, this uncertainty around social inflation is creating a lot of uneasiness and pushes us to want to charge more to make sure we cover as much of the eventuality as we can. So that's sort of what I would say to perceive. The heightened risk perceived is higher. It's not a bankruptcy-driven, reinsurance-driven necessarily market term. Right. It's a blend of a few of those. It's hard. I guess you live and learn and experience new things as you go. But, yeah, that's what I would summarize it to be.

Okay. Thank you so much. I appreciate the call.

Thanks, Elise. Thank you.

Thank you. And our next question comes from Mike Zalemski from Credit Suisse. Your line is open.

Hey, good morning. First question on USMI. One of your competitors this morning spoke to expected decline in premium yields in 2020. Any color there, whether you expect some more dynamic, given pricing on new business might be a little tighter versus using risk-based pricing?

I think that the phenomenon that's going on as a result of refinancing clearly – points you to a lower price, a lower premium rate, and that's because the risk is lessened, right? A lot of the refinancing we saw in the last two quarters and accelerated in the fourth quarter is people sort of refinancing because the interest rates are just that much better and it makes sense for them to refinance. By doing so, the LTV that was originally put in our book of business two or three years ago is actually lower, which is lowering the risk. And everything else being equal, it also has a knock-on effect on DTI, right, on the debt to service, to income servicing. It improves them as well. So that risk that you, same people, same house, same environment, and there was also some house price depreciation. So you get all these things going on. This is not as risky a proposition now as it was two or three years ago. So it would lend itself to say that the pricing is should indicate a lower pricing because of all these various moving parts. But it doesn't mean the return has changed. And that's really the key that we want to share with you guys is top line in MI is really, really hard to pin down. There's singles, there's cancellations, and it's very hard to see how it all evolves. But in the end, what we care about and what we've seen is that the return characteristics are the things that will be financed, which one could say is underlying this somewhat decrease in price and premium rate, is actually just a top-line phenomenon. It's not a return phenomenon. The returns are still very healthy, and that's what we're actually focusing on.

Okay, that's helpful. Next, just kind of a broad question about the reinsurance segment. If I kind of look at the combined ratio of the last couple of years, it's been the mid-'90s. I think that translates into a single-digit ROE, but you can please correct me if that's not right. And I guess catastrophe levels don't appear to have been, you know, materially higher than expected either. So just kind of thinking about the future, you know, is it largely reflective of just simply the competitive operating environment? And I guess, you know, hopefully there's continued momentum, which does in 2022, to improve the ROE profile of the segment?

So, first, you're wrong. It's not in the single digit, but let's make sure we're clear here.

Okay, great.

Thank you. Yeah, I think it's much better than this. I think that our reinsurance portfolio is a different one, and there's been mixed shifts over the last two or three years. We were a lot more property capital 10, 12 years ago. So there's always moving parts in the reinsurance platform, and I would say that Our play, for instance, in mortar in Europe will, by definition, lead us to a higher combined ratio, but the returns are still very well in excess or well in the range of where we would want them to be to write that business. So I think the combined ratio in reinsurance is just a reflection of this. constant culling, pulling, pushing through, realigning capital within the various lines of business. And I think what you're seeing is a combined ratio that is just reflective of what we see in terms of opportunities. In terms of returns, I can tell you for certain that our reinsurance group has a very, very ambitious return on equity expectation when we write the business. And that's what every underwriting decision is based on, not on combined ratios.

Okay, got it. So I was wrong that your portfolio holds probably less capital than I was assuming versus some peers. Thank you.

But the one thing I'll add to that, Mike, just quickly on the returns, and that really is all about our cycle management, where our premium volumes went down quite a lot over the last number of years on the reinsurance segment. If the market gets healthier, which it's showing some signs of that, I don't think our returns will necessarily get that much better, but I think we'll be able to have a bit more growth on the top line, expand the platform, and see more opportunities.

Thank you.

Thank you. And our next question comes from Brian Meredith from UBS. Your line is open.

Yeah, thanks. A couple questions here. First, just on the insurance segment, You talked about how Barbican is going to impact your expense ratio. Will it have any impact on your underlying loss ratio? I guess just to add on to that, is it going to prevent you from maybe achieving an underlying combined ratio below 100 in that insurance area in 2020?

Well, Barbican is – In the big picture, it doesn't really move the needle. It brings a lot of nice trades with it. It has some fee businesses that we like. It also makes us more relevant than London. But the one thing that you should be aware of is a lot of the capacity that Barbican is deploying is actually third-party capital. So that doesn't stick to our ribs in terms of the combined ratio. Yes, we'll have some benefits on the fees and et cetera. But, you know, big picture, you know, Barbican, on a net basis, wrote about $125 million of premium last year in 2019, split roughly 50-50 between insurance and reinsurance. Whether that business, you know, we're certainly going to shut down some lines. We're going to do some re-underwriting along the way. So, you know, once you do a bit of math on it, you'll quickly hopefully appreciate that, you know, for the insurance segment on its own, I mean, Barbican is not going to be a big factor in how 2020 plays out in terms of the combined ratio.

So on that note, to Dr. Francis' point, you know, realistically, Brian, we need to focus on, as we are right now, growing and seizing the opportunities as they're presented into our insurance segment. And if anything that will bring us to, you know, the combined ratio that will lead us to a 12-ish return on equity, I think it's going to come through the current opportunity that we see in our ability to seize upon it, which is, you know, plenty.

So I guess what you're saying is that it could be the underlying combined ratio kind of dropping below 100 and getting to those returns. We may not see it here in 2020, but it's 2021 or whatever as the opportunities continue to come in.

That's right. If you look, Brian, the rates really moved starting middle of last year, and a lot of stuff is being renewed still in the new quote-unquote rate environment. So we have to write the business first. You have to earn it. So 2020 and 2021, you're exactly right. You're exactly where we are. That's why it takes a while to see the good deeds being reflected. The same way it takes a long time for bad deeds to get reflected, may I add. Gotcha.

And then on to the reinsurance, Mark, I'm just curious. I know a lot of the businesses you write is quota share type business. How much of your reinsurance business is, call it, exposed to, areas where you're seeing a significant amount of price increase via DNS, certain property lines, and then you might see a good benefit from the subject premium pricing coming through.

I think the beautiful thing about our friends in the reinsurance group is that they're a go-anywhere kind of company. They can do anything, go anywhere, do anything. So, In general, they have access and are able to see the deals that are ENF, casualty property, whatever. So we've been around for 18 years. We've written a lot of green insurance. We're still a billion and a half plus. We're not as small. We're smaller in the grand scheme of things, but we still have a lot of selling points in London and Zurich in the U.S. and Bermuda. So we're able to grow if the growth opportunities are there. There's no issue there whatsoever.

Got you. But what about your subject premium basis, you know, already on the books? Are you seeing kind of growth there?

I think that by virtue of the improvement for 2020, we don't give guidance, obviously, as you know. Right. Nice try. If rates increase, keep on increasing and keep at the level they are at the healthy, you know, positive rate. And if it keeps into 2020, 2021, we will have a more premium, clearly. I'm not sure that's what you're asking. I'm trying not to answer the right question, so I'm trying to get the right pitch here, Brian. Help me out.

Okay. I think what I'm trying to get at is that I get the premium growth situation, right, and it's more – the underlying, obviously, business is actually seeing improved price too, right? And rate, you know, just like, you know, you're seeing in your own business and just what impact that could potentially have on your reinsurance margins.

Oh, yes, of course. Yes, you're right. We're seeing it through the quarter share. The relatively newer phenomenon, it's anecdotal. It seems to be starting. Even the excess of lost pricing now is picking up in speed. So that's also encouraging. So we may have, you know, At your point, you're right. We're not a huge excess of loss, at least in the traditional general liability lines and professional lines. You're right. We're benefiting from our quarter share participants and companies. Yes, we are. Great.

Thank you.

Thank you, Brian.

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

Thanks. There are a couple of small questions to start off with. First, Are there any plans to change the amount of mortgage insurance that's retained on U.S. paper versus ceded to Bermuda in 2020 versus 2019?

No plans at this point. I mean, as you know, it's all about we try to have as much capital as we can in offshore just because it's a better domicile, gives us more flexibility. But at this point, and as you know, there's tax implications, we don't want to trip the VTACs issue. So at this point, no plans to change anything.

Okay, perfect. Second, I know in the past you've talked about capital deployment opportunities that ended up as Barbican and in the U.K. And I was wondering if you could give us a sense as to what you're seeing now in the pipeline in terms of other potential opportunities.

I think we're – We're seeing a bit less. Actually, I think people are busy more looking at their stuff and trying to improve their book of business. I think that's really more of an inward focus. I think, you know, M&A, we see all of them, or we believe we see most of the transactions that have been talked about. I think we were a bit more open and were able to strike, you know, some transactions over the last year because the pricing was right and the opportunities were there. But, yeah, no, we don't see acceleration or, you know, somewhat of a decreased activity, but I think just as a result of the, you know, this current marketplace being a bit more dislocated. That's really what I would say.

Okay. And then that brings me to the third question. I'm wondering whether – you talked about how commodity ratios are still being reported as profitable, but there's also the soft market impact, which at least I would interpret as suggesting that maybe the real commodity ratios aren't as good. Does that delta look any different now than it did before past hard or hard lean markets?

That's a really good question, Meyer. I don't know the answer to this. I haven't looked at the numbers at the end of 99-2000. It doesn't seem, I'll tell you my gut feeling right now, it doesn't feel to be as much of a delta. And also in terms of what impact it could have. On a capital market, I think we were more levered as an industry in 1999, 2000. You know, we were riding a 1.3, 1.4 premium to surplus. Now we're at 0.7, 0.65, 0.8, whatever. So a lot less leverage, so probably more absorbable. But at the same time, there's less investment income. So if you look at – if you think that the market changed as a result of being cash flow negative or having to – not having recurring income, then I think that we're probably in a similar position, meaning that the losses or if you combine the underwriting income, which was negative at the end of 1999, with the investment income, which was very positive, I think we're probably in a combination in a similar place, but we have higher capital, so more cushion to absorb it.

Okay. That's very helpful. Thank you so much. Okay. Great. Thanks, Mike.

Thank you. Our next question comes from Ryan Tunis from Autonomous Research. Your line is open.

Hey, thanks. I just had a couple. I guess first one, thinking about 2020 as a potential year, you know, given what's happening from a pricing standpoint for margin improvement for the industry, you know, I understand why that could be a challenging year. I could be challenging for some, but I think when I look at ARCH relative to competitors, there's more of a short-tail mix, whether it's in primary insurance or also facultative RE. So I guess, Mark, if you could just comment on why isn't there a more constructive near-term outlook for margin improvement, given you're clearly getting rates, in some cases rate-on-rate in some of these property lines where there does seem to be kind of a layup argument for margin expansion.

So let me correct you quickly, Ryan. On the insurance side, you know, we're at 70%, 75% liability in terms of premium written. So that would sort of dampen, if you will, the acceleration or the recognition of the improvement in terms and conditions. So it makes us a little bit more cautious. So that's something you need to bear in mind. This is on the insurance segment. And, again, on the insurance segment, even speaking to the short tail, It still does take a while to get through. Again, like I said, significant improvement in rates really took place starting middle-ish of 2019, so it does still take a while to recognize and really see the earning coming through. The earned premium is a combination, as you know, for other underwriting years. On the reinsurance side, I'm trying to think of it. I think it's also... There's a fair amount of liability as well in there, right, Francois? And there's also a fair amount of property, although property, as we mentioned, is also, you know, deleveraged on the property cap. We did increase the other property. We're running a lot more on the non-cap Excel. This is more opportunistic. And you're right. We should probably see whether we were, you know, what margin expansion there was, and we believe it's there. We should see it. But, again, it was written, you know, last, third, fourth quarter, so it will come again over the next, you know, over the next 12 months. So it takes a while. It takes a while. You have to be patient. Patience is a virtue in our industry.

Understood. And then my second one is just around, I think it seems like we've heard less from the reinsurers about the casualty environment and, you know, the losses coming in. Maybe you could just talk about, you know, the extent to which you're, what are you seeing on the reinsurance book in terms of claims activity on the casualty side versus primary? Like, is there a real lag? Have the claims started to happen, or is that probably still on the come? I mean, any theory as to when and how we might see more paid losses, I guess, on the reinsurance side?

That's a very, very good question. I think when we, we do have a tale of two cities here. I think that our insurance are seeing the claims. Of course, we have the advantage or the luxury to have an insurance company that's on top of claims and know and participate in the marketplace. When we look at what information our reinsurance folks are getting, there is clearly a lag. I'm not saying it's misinformed or whatnot, but there is clearly a lag, and it's been there forever. This is not a new phenomenon, Ryan. This has been going on for years or for as long as we've been, as I've been in the business, It's been there, and it was there before my time. So there's always information asymmetry and information delay. By the time it gets to the insurance company, they have to look at this, evaluate, book their reserve or not book their reserve, and then they, in turn, inform their reinsurance partners. On a quarter share, it's a bit easier because you're able to do more claims review and be on top, be side-by-side with them. You can also compare whether we have other of our clients on similar risks and whatnot. On excess of loss, as you could expect, it's a little bit more difficult. There's a further lag on that one as well. So we clearly have a lag in recognition, and our reinsurance company has been really, really adamant and proactive in trying to recognize some of the losses that may not be enough reported, and that's also what made us be a bit more careful in our current writings or lack thereof in the liability space. But it's clearly a lag on the reinsurance side. That's helpful, thanks. Thanks, Ryan.

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

Thank you, everyone. Happy Valentine's Day. Make it a happy Valentine's weekend if you have a chance. Talk to you next quarter.

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