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 on a listen-only mode. Later, we will conduct a -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 Security's 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-GAP measures of financial performance. The reconciliation to GAP and definition of operating income can be found in the company's current report on Form 8K furnished for 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 cash with the 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 percent for the fourth quarter and 12 percent for the full year, while book value per share grew 3.2 percent for the quarter and nearly 23 percent for the year. While property and cash 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 read 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 continuing uncertainty regarding losses from the recent soft policy years. While there are some lines of business where the rise in 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 improved 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 US and internationally, property rate increases, particularly ENS risks 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 DNO 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 seating conditions ranging from one to three percentage points. Seating conditions remain elevated, however, and are 500 bips above the level seen in the last hard market. Focusing on the January 1st reinsurance renewal for a minute, rate increases in what is primarily a property cat 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 one and two 50-year PML stands at only 6% of equity capital. Turning now to our mortgage insurance segment, RTI continue 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 in force in the quarter. 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, ARCH's position following years of de-emphasizing the most commoditized and soft business lines and 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 Frantzler.

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 segment, i.e. the operations of Wanford Holdings Limited. In our filing, the term consolidated includes Wanford. After-tax operating income for the quarter was $308.4 million which translates to an average common equity and 74 cents per share. Book value per share grew to $26.42 at December 31st, a .2% increase from last quarter and a .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 reins segments and were primarily due to Typhoon Agabus 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 segment of .7% over the same quarter one year ago. The insurance segment's accident quarter combined ratio excluding CATS was .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 .3% from the same quarter one year ago and the accident quarter combined ratio excluding CATS stood at .3% compared to .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 segments 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 US primary MI operations. The calendar quarter loss ratio of .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 .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 US dollar basis as our high quality portfolio continued to perform well. For the 12 month period our portfolio returned .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 .9% and reflects the geographic nicks 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 archcom and shareholders by 12.4 million or three 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 capacity 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 limit at the single event one and 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 year end 2019 the in-fours 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 .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 31st 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 Canar 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 still lukewarm in terms of the market opportunities and the rate of 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 you know we're in the early stages of great 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 want to make the 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 it 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 you know on 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 a premium written was you know 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 ask Yarm whether we can grow based on the conditions. If conditions continue on and we're seeing right now 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?

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 current, the new business coming on relative to the overall portfolio and insurance? What's 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 you know enough above the cost trend since the middle of 2019. So 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 you know things could develop on historic history all the accident years prior to 2019. So 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 no six to seven quarters to really see some good tractions and you know see some movement there.

Understood thank you and best of luck in your hand.

Thanks Aaron.

Thank you and our next question comes from Jimmy Bular from JP 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 or and what's your expectation or sort of likely range for 2020?

Well yeah a couple of points here I think the it was a bit lower than what we had I guess given the range earlier in 2019. There is 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 etc. 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 we 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 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 same with the business that you go 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'll take a while for your overall shift towards new business ROE.

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 Sandy 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 on any comments on one one renewals and specifically were they better worse than your expectations and anything any sort of views on the sort of upcoming four one renewals in mid-years?

The one one renewals were in continuation. You had some rate increase in the third quarter broadly in the industry fourth quarter was a bit better. The first quarter lined up to be you know you had better yet so yes better rate and rate environment at one one clearly for the first quarter. We don't know what it means for four one. I am done for not speculating what the future will hold. I you know it's the law of supply and demand of 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 four one and seven one will will end up. But clearly if the momentum of one one continues you know it's going to be it's 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. Hello. My first question. Hi my first question is I guess on one one a little bit. You know we heard about the retrofessional 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 one one? And is that a sign of potentially better things to come or would you think it would be for some of the four one and six one renewals?

Yeah I mean certainly on the I mean you see that a little bit in our CAT PML. 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 four ones or six ones we just don't know. But for sure we saw some definite some some some good opportunities in the specifically in the retro space at one one. And 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 talking about that expense ratio being elevated just you know due to the accounting and the earning 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 barbecuing 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 a hundred and a hundred and thirty bits or so was in this quarter was the result of the effectively bringing on online the UK regional book. So we're now a year into it so you know 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 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 then lastly on the insurance pricing Mark you know you seem to be you know pretty positive especially you know relative to where you've your comments have been you know for most of the most of 2019. And it's a developing market and I guess you know every market seems to be different and you know capital obviously a lot more robust than if we went back to past upturns. Is there any market like if you think back through our just history does this you know compare to the early 2000s just compare to you know kind of 2013 is 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. Maybe different than any of these past markets.

Oh 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. 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 looks a little bit more like 2005 after Katrina returned one month because you know capital was still plenty people paid their claims a couple of companies had some issues but by and large. You know 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 are as an industry this uncertainty about around social inflation. It's creating a lot of uneasiness and 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 re insurance driven necessarily market term so it's a blend of a few of those parts you know every mark. 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 color.

Thank you. Thank you.

Thank you and our next question comes from Mike from credits please your line is open.

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

I think that we 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 less than right a lot of the refinancing we saw in the last two quarters and accelerate the third and the fourth quarter. Is people sort of refinancing because the interest rates are just that much better and it's a you know make sense for them to to to refinance by doing so the LTV that was originally you know put in our book of business two three years ago is actually lower which is lowering the risk and everything else being equal. It also has a knock on effect on the DTI right on the debt to service to the income servicing it improves them as well so that risk that you same same people same house same environment. But in this there was also some house price appreciation so you get all these things going on this is a not as risky a proposition now that it was two three years ago. So would lend itself to say that the pricing should be you know indicate the 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 with you guys is. Top line in MI is really really hard to pin down or singles as 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 of the things that were refinanced which one could say is underlying just somewhat decrease in price and premium rate is actually just just a top line you know 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 broad question about the reinsurance segment if I kind of look at the combined ratio the last couple years it's been in 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 the task levels don't appear to have been. You know materially higher than expected either so just not thinking about the future you know is is is it largely reflective of just simply the competitive operating environment and and I guess you know hopefully there's continued momentum which doesn't 20 to to improve the the ROE profile of the segment.

So first you're wrong it's not in a single digit so let's make sure we're clear here. Okay. Yeah I think it's much better than this I think that the range our range portfolio is not a is a different one and then there's been mixed shift over the last two three years we were a lot more. We're a lot more property cap of the 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 general will by definition lead us to a higher combined ratio but it returns us to a pretty you know 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 re insurance is just a reflection of this constant calling pulling pushing through realigning capital within the various lines of business and I think what you're seeing is a is a combined ratio that is just reflective of what we see in terms of opportunity in terms of returns. I can tell you for certain that our re insurance group has a very very ambitious you know we're telling equity expectations when we write the business and that's what every underwriting decision is based on not on combined ratio.

Okay that's I was I was wrong that there's your portfolio at the whole probably less capital than I was assuming that versus appears. Thank you for

the one thing I'll add to that my just quickly on the returns I mean 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 range segment. If the market gets healthier which it's showing some signs of that I think 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.

Yes 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 underlying loss ratio. I guess just to add on to that is it going to prevent you from you know maybe achieving an underlying combined ratio below 100 in that in that insurance area in 2020.

Well Barbican is in the big picture doesn't really move the needle it's it brings a lot of nice traits with it it has some few businesses that we like it has also gives us that makes us more relevant in 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 reds in terms of the combined ratio yes we'll have some benefits on the fees and etc. But you know big picture you know Barbican on a net basis wrote about one hundred and twenty five million dollars a premium last year in 2019. Split roughly fifty fifty 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. No 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 order to the combined ratio.

I saw that note that the process point you know realistically Brian we need to focus on as we are right now growing growing and seizing the opportunities are represented into our insurance segment. And if anything that will bring us to you know the combined ratio that will lead us to a twelve ish know our return on equity I think is going to come through the current opportunities that we see in our ability to seize upon it which is no plenty.

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

That's right if you look Brian the rates you know really move starting middle of last year and a lot of stuff is being renewed still in the new or unquote great environment. So we have to write the business first you have to earn it so 2020 and you're exactly right you're exactly where we are yeah 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.

Catch

it

and then under the reinsurance mark I'm just curious I know a lot of the businesses you write is is is quote a share type business how much of your reinsurance business is. Code exposed to areas where you're seeing a significant amount of pricing increase the DNS property lines and then you might see a benefit from the subject premium pricing coming through.

I think the beautiful thing about our friends the reassurance 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. DNS casualty property whatever so there we have a we've been around for 18 years you know we've written a lot of reinsurance we still a billion and a half plus you know we're not as small we're smaller the grand scheme of things but we still have a lot of. Selling points you know in London and Zurich in the US and Bermuda so we're able to grow it's a growth opportunities are there there's no no 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 you need for 2020 we don't give guidance obviously as you know right nice right nice try. But if rates keep on increasing and keep on keep at the level they are at the healthy you know positive rate and and if it keeps in 2020 2021 we will we will have a more premium clearly. I'm not sure what you're asking for not to answer the right questions i'm trying to get them the right.

Okay yeah I think I just what i'm trying to get at is that I get the premium growth situation right and then it's more. The underlying obviously businesses is actually seeing improved price to write and rate you know just like you know you're seeing in your own business and just would impact that potentially have on your reinsurance margins.

Oh yeah of course yes you're right we're seeing you through the quarter share the new relatively newer phenomenon it's anecdotal it seems to be starting. Even the excess of loss pricing now is is picking up in in in speed so that's also encouraging so we may have you know some you know with 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 yeah we're benefiting from our quarter share participants and companies, yes, we are. Thank

you

thank you Brian.

Thank you and our next question comes from my shield from KVW your line is open.

Thanks there's 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 US paper versus. seated 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 in offshore just because it's a better. 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 V tax issue so at this point no no plans to change anything.

Okay perfect. Second, I know in the past you talked about capital employment opportunities that ended up as bar to can and in the UK and as long as you give us a sense that to what you're seeing now in the pipeline in terms of other types of opportunities.

I think we're we're seeing a bit less after I think people are busy more looking at their stuff and trying to improve their book of business, I think there's really more of an inward focus. I think you know M&A we have we see all of them, or we believe we see most of the transactions that are been talked about, I think we were a bit more open and we're 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 somewhere the decrease 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 third question. I'm wondering whether you talked about how combined 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 combined ratios aren't as good. Does that Delta look any different now than it is before past hard or hardening 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 99 2000. You know we were running a 1.3 1.4 premium to surplus, now we're at 0.7, 0.65, 0.8 whatever, so a lot less levered 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 it's, you know we're probably in a similar position, meaning that the loss, the losses or if you combine the unranking income with the, which was negative at the end of 99 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, 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, I you know I understand why that could be a challenging, why that could be challenging for some, but I think when I look at arts relative to competitors, there's more of a short tail mix, you know whether it's in primary insurance or also faculty degree. So I guess like if you could just comment on, you know 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 -75% liability in terms of premium written, so that would sort of dampens, if you will, the acceleration or the recognition of the improvement in terms and conditions, so make us a little 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, you know, again like I said, significant improvement in rates really took place, you know, starting you know middle of middle-ish of 2019, so it does still take a while to recognize, you know, and really see the earnings coming through, the earned premium is a combination of, 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, delivered 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 that, you're right, we should probably see whether we were, you know, what margin expansion there was and we believe it there, we should see it, but again it was written, you know, last third, fourth quarter, so it'll come again over the next, you know, 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 reinsurance 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 do you see 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 what and how we might see more paid losses, I guess, on the reinsurance side?

It's a very, very good question. I think when we, we do have a tale of two cities here, I think that our insurance, you know, our senior claims, of course, we have the, you know, 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 what not, 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, 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, you know, inform their reinsurance partners. On the quarter share, it's a bit easier because you're able to do more claims review and be on top, you know, side by side with them. You can also compare whether, you know, we have other of our clients on similar risks and what not. 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 and try 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, you know, on the reinsurance side. Thanks, Ryan.

Thank you. And I am showing no further questions from our phone lines. I'd now 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. You may all disconnect. Everyone, have a wonderful day.