Arch Capital Group Ltd.

Good day, ladies and gentlemen, and welcome to the fourth quarter 2020 Arch Capital Group earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the 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 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. Frantz LaMourin. Sirs, you may begin.

Thank you, Liz. Good morning and welcome to our fourth quarter earnings call. Overall, we are pleased with the current market conditions and the opportunities available to ARCH as we close out 2020 and spring into 2021. One of our fundamental principles is that achieving growth and book value per share above the cost of capital over the long run is the best way to create and sustain shareholder value. We believe we delivered on that front in 2020. Our disciplined underwriting and diversified business model enabled ARCH to grow its year-end book value per share by .4% over the third quarter and by .7% for the last 12 months. We responded to broadly hardening market conditions and, as a result, all three of our segments grew their premium writings in a quarter. In particular, the hardening markets allowed for significant growth within our P&C units, increasing our net premium written for the P&C by 32% for the full year. On the whole, for 2020, we achieved an operating profit of $557 million and grew book value to $30.31 per share. Now as most of you know, cycle management is core to who we are. ARCH leans strongly into improving markets because history has shown that times like these are when superior risk-adjusted returns gradually compound and accelerate book value growth. And ARCH is positioned to significantly expand as others de-risk, rethink their underwriting strategies or even retrench. As we look at the opportunities ahead for ARCH, I'm reminded of a situation in hockey that is exciting for any fan. In hockey, you get a one-player advantage if the other team takes a penalty. It's called a power play. When that happens, a few things need to be kept in mind as you deploy your specialty power play unit to try and improve the odds of scoring. You need to have a clear -on-four strategy. You need to be defensively savvy enough to not forget to protect your own zone. And you need to have a sense of urgency because the clock will tick down and you will soon be back to even strength. These are the few moments that make a difference in a hockey game. The advantageous position we find ourselves in is similar to that hockey power play where the odds are in our favor. I'm proud of how our team performed last year during the challenges of 2020. Now after spending a good portion of their last several years in a defensive position, we're embracing a more offensive mindset. Here's what that looked like in a fourth quarter. Let's begin with our insurance segment. Across our worldwide insurance group, renewal rate changes increased approximately 12 percent, up 200 bips from the prior quarter's rate changes. Our fourth quarter growth occurred in many lines with D&O, property, energy, and marine all exhibiting strong advances. E&S casualty and our alternative markets business also grew this quarter. We believe that rate momentum in these lines is healthy and we also see it building in other lines, albeit at a slower pace. Increasing margins helped improve our insurance accident year X-cat loss ratio which decreased by 4.6 percentage points in a fourth quarter. As you may know, the full effects of increased rate levels can take approximately five quarters to become fully reflected in underwriting margins, so today we are earning the higher rates from the past year. In addition, our operating expense ratio has benefited from rising production this past year. We are pleased with the continuing progress achieved by our insurance group in the last two years. Turning next to our reinsurance segment, underwriting results were significantly better than the fourth quarter of 2019 despite the impact of $94 million worth of cat losses. While market conditions are not uniformly strong in the reinsurance sector, dislocation from other carriers that are reducing their positions is creating pockets with hardening rates that ARCH is well positioned to capitalize on. Reinsurance also benefits from the underlying insurance market rate increases through its clients. For 2020, we grew reinsurance net written premium by 53% with the two main areas of being non-cat property and specialty. At the January 2021 renewals, we saw continued rate increases in most areas. However, we agree with the market consensus that property cat pricing moves were more subdued than expected or hoped as capacity for that risk still remains strong. Accordingly, we maintain a cautious approach to this business. Our mortgage segment delivered good returns in both the fourth quarter and for the entire year despite the economic headwinds. We are confident in the continued earnings strength of this segment and frankly, the uncertainty we were facing during the early stages of COVID has been largely mitigated. Both premium rates and the credit quality of the new insurance written improved in 2020 and accordingly, the return on capital for our new US MI business is essentially back to 2018 level which was a strong year. Here's why MI has done well this past year. First, housing markets have remained strong despite the difficult economic conditions. Second, the government forbearance program achieved largely what it was intended to do which was to provide financial respite to many homeowners. And third, credit criteria in the mortgage sector tightened in 2020 and as you know, credit quality is a critical factor in determining underwriting profitability. On a side note, just yesterday the FHFA announced that the forbearance program has been extended an additional three months which should help further mitigate the risk in our delinquency inventory. The delinquency rate of our portfolio decreased by 50 bips sequentially in the fourth quarter. At year end, roughly two-thirds of our delinquent loans were in the government sponsored forbearance program. We currently estimate that 89% of delinquent borrowers in our portfolio at year end have at least 10% equity in their homes and as we have discussed on prior calls, the amount of equity in a home is the single most important factor in determining MI losses as it plays a significant role in mitigating claim activity. We are cautiously optimistic that delinquencies will continue to cure as vaccines enable the economies to reopen. Importantly, record home purchases in the US in 2020 supported a 5% price appreciation nationwide while historically low interest rates accelerated housing and refinance demand. This enabled ArchUS to report record NIW of $38 billion in the fourth quarter of 2020 up nearly 60% from the same period in 2019. Our outlook for continued growth in 2021 remains positive. Turning back to the current phase of the PNC cycle, there are three conditions that we need to help sustain the improved underwriting environment. One, social inflation and reserving problems are now starting to apply pressure for companies that haven't been prudent enough. Two, anemic investment yields require a sharper focus on underwriting profit. And three, a return to a post-COVID world should accelerate economic activity and increase the demand for insurance. Each of these conditions will put pressure on results for the industry. Our conservative approach to reserving over the past several years means that we are well positioned to drive results in PNC going forward since we expect our future returns to better reflect current and forward pricing. Finally, with better visibility into the overall economic conditions and with more clarity on the mortgage and PNC prospects, along with our strong capital generation, we see a compelling opportunity to invest in our shares at very attractive returns. Profit will talk to it in a moment. This recent share repurchase is a testament to our capital strategy and designed to enhance shareholder value over the long term. We still have ample resources to deploy towards new growth and feel confident in our team's ability to be creative in order to capitalize on the opportunities before us. This is a time in the game where our cycle management strategy allows us to play offense and deploy capital dynamically to generate above average returns. And now I'll turn the game commentary over to Francois.

Thank you, Mark, and good morning to all. We at Arch hope that you are in good health and that 2021 is off to a good start. On to the fourth quarter results. As a reminder, and consistent with prior practice, the following comments are on a core basis which corresponds to Arch's financial results excluding the other segment, i.e. the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $230.4 million, which translates to an annualized .7% operating return on average common equity and 56 cents per share. For the year, our operating return on average common equity stood at 4.8%, while a return on average common equity stood at 11.8%. Book value per share increased to $30.31 at December 31st, up .4% from last quarter and .7% from one year ago. Again, an excellent result despite the strong headwinds from catastrophe losses this year, which is a testament to the resilience of our operations and our superior diversification strategy. Losses from 2020 catastrophic events in the quarter, including COVID-19, net of insurance and reinstatement premiums, stood at 156.4 million or 9.4 combined ratio points compared to 2.2 combined ratio points in the fourth quarter of 2019. The losses impacted both are insurance and reinsurance segments, primarily as a result of a series of natural catastrophes in the quarter, including hurricanes Delta and Zeta and other smaller events, as well as adjustments to our estimates for events that occurred earlier in 2020. Our best estimate of ultimate losses for COVID-19 for occurrences through December 31 remained essentially unchanged from prior estimates. As of December 31st, the vast majority of our COVID-19 claims are yet to be settled or paid, with approximately two-thirds of the inception to date incurred loss amount recorded as incurred but not reported, IB&R reserves, or as additional case reserves within our insurance and reinsurance segments. As regards to potential impact of COVID-19 on our mortgage segment, as Mark alluded to, the delinquency rate at the end of the quarter was 4.19%, down from .69% at September 30th. We are encouraged with a downward trend in delinquency rates over the last few quarters, which continue to come in significantly better than our earlier forecasts. Our latest assessment of the situation assumes a progressively improving economy in 2021, which should bode well for the housing sector and the performance of our book as we move forward. In the insurance segment, net written premium grew .6% over the same quarter one year ago, .6% if we exclude the impact of the pandemic on our travel, accident, and health unit. The insurance segment's accident quarter combined ratio excluding CAATS was 93.6%, lower by 800 basis points over the same period one year ago. Approximately 360 basis points of the difference is due to our lower expense ratio, primarily from the growth in the premium base from one year ago and continued lower levels of travel and entertainment expenses. The lower XCAT accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business. Prior period net loss reserve development net of related adjustments was favorable at 1.2 million. As for our reinsurance operations, we had strong growth of .9% in net written premiums on a year over year basis, which was observed across most of our lines and includes a combination of new business opportunities, rate increases, and the integration of the Barbican reinsurance business. The segment's accident quarter combined ratio excluding CAATS stood at .1% compared to .3% on the same basis one year ago. The year over year movement is primarily driven by rate change activity over the last 12 months in a more normal level of large attritional losses compared to a year ago. Most of the remaining difference is explained by operating expense ratio improvements, primarily resulting from the growth in earned premium. Favorable prior period net loss reserve development net of related adjustments was 40.5 million or 6.9 combined ratio points compared to 4.9 combined ratio points in the fourth quarter of 2019. The development was mostly in short tail lines. The mortgage industry had a second consecutive record breaking quarter in terms of mortgage originations, which allowed Arch MI to produce 38 billion of NIW in the fourth quarter, a full .9% higher than our prior high water mark. With refinance activity leveling off from prior peaks, we saw our insurance and force increase by .5% across the mortgage segment. The combined ratio was 45.1%, reflecting the lower level of new delinquencies reporting during the quarter. The expense ratio was slightly lower over the same quarter over one year ago, and prior period net loss reserve development was favorable at 8.2 million this quarter, mostly from our second lean runoff portfolios. Improving investor sentiment enabled Arch to issue two Bellamy transactions during the fourth quarter at terms that are getting closer to pre-pandemic levels. You will recall that we discussed our 2020-3 transaction on the last call, an on the run deal covering our production from June through August of 2020. Our latest transaction, Bellamy 2020-4, provides additional protection on mortgages we insured in the second half of 2019 and already covered by our 2020-1 Bellamy transaction by effectively reducing the original retention from .5% to .85% of the risk and force. At Yiren, the Bellamy structure has provided approximately $4 billion of aggregate re-insurance coverage. Total investment return for the quarter was positive 246 basis points on a U.S. dollar basis, and we ended the year with our investment portfolio producing a .77% total return. While our fixed income portfolio generated an excellent return of 188 bips in the quarter, contributions from our equity and alternative investments were also significant and represented approximately 40% of the total return for the quarter. The duration of our investment portfolio decreased modestly to 3.01 years at Yiren, reflecting our ongoing positioning of the portfolio towards shorter-term maturities. The effective tax rate on pre-tax operating income was .8% in the quarter, reflecting changes in the full-year estimated tax rate, the geographic mix of our pre-tax income, and a benefit from discrete tax items in the quarter. We currently estimate the full-year tax rate to be in the 10 to 12% range for 2021. Turning briefly to risk management, our natural cap PML on a net basis decreased slightly to 860 million as of January 1, which, at approximately .4% of tangible common equity, remains well below our internal limits at the single-event 1 and 250-year return level. The decrease in our peak zone PML this quarter is mostly attributable to our E&S property unit within the insurance segment, where we reduced property aggregates into Florida Tri-County Peak Zone and made selective additions to our reinsurance purchases. Our balance sheet remains strong, and our -to-plus preferred leverage ratio stood at .1% at Yiren, well within a reasonable range. Finally, on the capital front, we repurchased approximately 251,000 shares at an aggregate cost of $8 million in the fourth quarter of 2020. It is worth noting that we have since repurchased an additional 2.6 million shares at an aggregate cost of $83.6 million in the first quarter of 2021 under a Rule 10b-5 plan that we implemented during this quarter's closed window period. Our remaining share purchase authorization currently stands at $833 million. With these introductory comments, we are now prepared to take your questions.

Thank you. If you have a question at this time, please press the star, then the 1 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. If you're using a speakerphone, please lift the handset. Your first question comes from Elise Greenspan of Wells Fargo.

Hi, thanks. Good morning. My first question is related to your retirement. I think in the prepared remarks, you associated with mortgage business going back to return on capital levels from 2018. I'm hoping just for all three businesses, insurance, reinsurance, mortgage, can you give us a sense of the return profile of the business you're writing today versus what you would have said if I had asked the same question 12 months ago?

I think the high level of 2018 long-term expected return on EMI was roughly in the mid-teens. So we're going back to that level, which is a really good place for us to be. On the insurance, I think that we had a bit of a decrease in expected returns, even though the combined ratio did not get that much better for the industry. But right now, if you factor in the rate changes and everything, we think we're in the double-digit in insurance return. We think that reinsurance is a little bit in between those two. So we have a really, really different risk-adjusted return profile in our portfolio that has improved, in large here as a result of the price increase, not certainly as a result of the investment return, as you know, Elise.

Yes. And then my second question on, you know, I think you alluded to this a little bit in your prepared remarks, Mark, when you were mentioning on, you know, a few issues that would help from the pricing momentum side, like persisting from here. A big question, you know, that I get is, you know, does this momentum persist through 2021 and perhaps beyond? And, you know, can you obviously different dynamics in the insurance and reinsurance P&C markets, but, you know, could you just give us a sense based off of what you know today, do you think that the pricing momentum can persist through 2021 in insurance and also reinsurance?

We expect it to be the case, Elise, because of all the factors I mentioned, you know, the social inflation, there's a lot of uncertainty in terms of loss ratio picks for years, specifically 2015 through 19, as we all know. You know, it sort of makes for correcting some of the ongoing pricing. So that's definitely sustainable. We do not have as much, you know, protection from the investment returns. So that really puts a lot of pressure on the returns for the industry. And uncertainty and lack of, if you will, coverage. And we also had, you know, a fair amount of cat losses in the last, you know, three or four years. So there's a lot going on, a lot more risk out there. So I think overall, collectively as an industry, you know, we all collectively think and know and believe that we need to get better rates and better pricing because the risk is not being rewarded accordingly. As in every hardening market, you know, the length is like how long is a piece of string. But I think that our hardening market does not, you know, only last four or five quarters. I think that you have this initial stages of the initial reaction of rate increases, then you get momentum building in the underwriters' mentality. The brokers are sort of, you know, accepting as being sort of a new way to deal and do the business. And eventually that builds upon itself. I would fully expect to be lasting to 2021 and into 2022. This is what we believe at this point in time.

Okay. And one last numbers question. You guys mentioned the PML going up a little bit. But in terms of your cat load, I think in the past, Art used to talk to like a 40 million of quarterly cats. Obviously, we've seen growth in cat reinsurance and, you know, in other property related lines like you mentioned. How should we think about the cat load from here?

Yeah, I mean, no question that we've written a lot more property premium in the last, you know, in the last, I want to say four to six quarters, we've really ramped up our property exposures. I mean, there's a lot of, you know, in different areas, as you know, with different lines of US international, et cetera. Yeah, so the cat load, I think on a quarterly basis has definitely gone up from what we were, you know, in the old days, thinking about like 40 million a quarter. It's, you know, it's still evolving, but I'd say it's probably more in the 60 to $70 million range right now.

Okay, that's helpful. Thanks for the color.

Thanks, Lee. You're welcome.

Our next question comes from Mike Zyrinski with Credit Suisse.

Hey, good morning. Follow up on mortgage insurance and Elise's question. You know, if you're talking about kind of, you're encouraged about the downward delinquency rates and assuming the economy progressively improves and you mentioned mortgage bids can throw off returns somewhere at 2018 levels, so are you saying kind of directionally we should be thinking about a combined ratio that continues to move south kind of towards 2018 levels or have the capital assumptions changed since then?

You know, Mike, it's a different combined ratio. The capital is a different story because it's a bit of a lagging indicator based on the delinquencies we have. But if you look at the combined ratio, yeah, we think that we're tending to go towards more, you know, for the run rate that we had in 2018. I would just caveat that there was some prior development, you know, favorable development in 2018, so I would probably adjust for that. But certainly the, you know, the long-term range of 35 to 45 is not something that is out of the realm of real possibility if you look at 2018. And I think depending on what, how the economy recovers, you know, that could be in the lower end of that and if a couple things still develop, you know, in a different direction, it might be a bit on the higher side, but you're right. It should be getting closer to where we were in 2018 in terms of combined ratio.

Okay, that's helpful. Switching gears to the non-MI insurance segments, you know, you've been, the expense ratio has been better than expected for a number of quarters. I know you guys have called out some items. Maybe you can kind of remind us and talk to kind of what you think is kind of cyclical and, you know, and what's kind of structural in terms of the expense ratio improvements.

Yeah, I think this is more structural, I would say, Mike, because right now you have to factor in the fact that our platform grew, you know, on both sides, both in the sense of growing the top line for in our organic, you know, pushed to be much more relevant, much more bigger in London. So our international operations also gained scale. So if you now look at the overall structure or the way the company is laid out in terms of top line and the way the expenses is constructed between the units, I think it's much more of a structural change. You know, I would say that it's probably 50-50, but the growth is certainly something that's really important in terms of, you know, helping that growth. So that could also get presumably a bit better over time. But I would also tell you that the growth in our operating expense on the insurance side has lagged the growth in our top line, which is what we should expect, right? Because a lot of the increase is not more work, even though we are writing more business, a lot of the increase in premium is just rate, you know, in and of itself. So I think that the company is flexing itself in terms of top line growth and expense, you know, deployment very, very nicely. So a bit more structural than I would have told you, Bobby, two years ago.

Thank

you.

Our next question comes from Yaron Kinnar with Goldman Sachs.

Hi, good morning, everybody. I guess my first question revolves around MI. Do you have any comments or thoughts around the potential changes to FHA fees and its potential and their potential impact on the MI business?

Yeah, I can, listen, it's still early on. It's a new administration change. There's a couple of things going on all over the place. Washington, I'm sure they're very busy right now trying to, you know, changing things. You know, we hear the same things that you guys hear about the 25 bips, you know, potential price cut that FHA could put in there. And as a reminder for everyone, if you take a step back, the FHA, you know, was a large market share provider of MI insurance, you know, in the years where the PMI, the private mortgage insurers were not in that great of a shape. And frankly, that was needed to fill the gap and fill the void, if you will, of the need for the homeowners and the mortgage providers. So this has changed. I think that the FHA also, ultimate role and core role is to provide, you know, mortgage insurance for the ones, those that are probably could be perceived a bit more risky for the private sector. And so we've done the analysis, which means that if you look at our portfolio, Yaron, we're, you know, high FICO, very high quality. Most of our, the borrowers that we have on our portfolio do not really need to consider FHA. So from our perspective, we'll react obviously to whatever's out there. But we believe that this, if it comes to fruition, that 25 bips rate cut in FHA will help the lower FICO and higher LTV, you know, borrower, which, you know, is really not the ones affecting and the ones that we're, you know, currently having success with because our pricing is actually better. If you compare pricing versus the FHA in that sector, our pricing is better and execution is cheaper for the borrower. So we're not losing sleep over that.

Got it. That's helpful. And then my second question, you know, you previously talked, I think, about shifting capital deployment from MI more into PNC. I think last call you used more of a basketball analogy that was easier for me to follow than Harky. But thank you for explaining. But I guess as market conditions kind of, your views on market conditions change a bit, it seems like reinsurance may be a little less exciting than maybe a quarter or two. The outlook was a quarter or two ago and MI may be a little better than the outlook was a quarter or two ago. Does your appetite for capital deployment between the three segments, has that shifted or will it shift into 2021?

I wouldn't say it shifts in any major way. I think we see all three segments with very good opportunities in front of them. And maybe, we'd argue some were overdue, especially on the PNC side. So we're bullish there. Mortgage has always been, you know, in basketball, you know, our six, seven foot six guy down low and ready for dunks. And that hasn't really changed in our view. So yeah, I mean, we certainly have more visibility into what the ultimate or what the current market conditions are, especially in mortgage, given what we know, the second half of the year, how things progressed. And that's good. I mean, that's something that we take, you know, I think it works in our favor. But in a big picture, we don't see major changes in how we deploy capital.

And Yaron, one thing I would mention to you that it's always, it's hard for people not to see us being in Bermuda as being a property cap rider on the re-entrant side. But I would argue that yes, the property cap side is not as good. And you've heard it from other people and we certainly agree with that. But, you know, we're still growing in areas that are non-property cap, right, exposed. So we're seeing a lot of other lines, to be honest, between United are actually better now, or the prospects for 2021 are better than they were, you know, in 2020. It's just that, you know, we're not, you know, growing necessarily in the one that I get the better headline, if you will, from your perspective. But by and large, I think that our prospects are very, very good on the re-entrant side, very much so.

Got it. Thank you. And thanks for translating hockey into basketball for me.

You're welcome. Our next question comes from Jimmy Buller with JPMorgan.

Hi, good morning. I had a couple of questions. First, if you could just talk about your sort of comfort level with your BI reserves, given that the developments in the US seem to be favoring the industry for the most part. So do you feel like you're overly conservative on your reserves? And obviously, internationally, things haven't gone as well. And then I default on another one as well.

Yeah, I think we never would say that we're overly conservative. We want to be prudent and conservative, for sure, in how we set reserves. I'd say starting again with international, which maybe has gotten a bit more of a headline, you know, made the headlines a bit more. You know, our position hasn't changed in the UK. Again, the book we have is a small regional book, well protected by reinsurance protection. So we feel that the reserves we have there even after the call it slightly adverse rulings from the courts in the UK are going to affect our bottom line. So we're no changes from our point of view there. And in the US, for the most part, as you said, all the rulings have kind of been in favor of the industry. A couple of places where there is maybe some that didn't go as expected. But on those, our view is that the policies that were being challenged were manuscript policies, so not the standard ISO form that we typically use without necessarily the strong wording around virus exclusions and property damage to trigger coverage. So on both those fronts we get, as we said before, a vast majority of our policies well north of 90% across the book that has both of these call it protections. So we're very confident that our results, our reserves at this point won't develop adversely and we'll keep looking at it, but we're in a good spot.

And I think you said about two-thirds or three-fourths were IB&R as of last quarter. What's that number now?

Two-thirds. It went down a little bit. So roughly from 75 to 67, roughly. I mean, it doesn't change much. And some of that is around, as you can expect, mostly on the reinsurance side, right, where a lot of our reserves are still on the reinsurance side with significant IB&R and ACRs on that book.

And then on buybacks, you did a decent amount. You've done a lot this year. So what's driving your sort of actions there? Is it the stock price? I'm assuming there's a decent opportunity to deploy capital in your business as given pricing, but what drove the big uptick in buybacks versus what you've done the last few quarters?

Yeah, it's certainly more visibility, right? I think that we said that from the start. At the end of the first quarter last year we said, listen, we're going to take a little bit of a pause because we need to know how things are going to play out and more people mortgage being a major driver in that performance. You've seen the results. So we were a lot more confident where the economy is going. Vaccines are rolling out. So there's a lot of things that, yes, will take some time, but as we look forward, I think that gives us a lot more comfort that the worst is behind us and that gives us more clarity on how do we deploy capital. We're still, in our mind, we're fully capable of doing both. We want to grow the book and also buyback shares. There's no reason why they have to be exclusive. We think our growth is still very strong. We expect to keep growing in 21 and across the book, but we also see a good opportunity at the current level, pricing levels for the stock to buy back at this point.

Thank you. You're welcome. So before we go to the next one, I think I have to stop the broadcast. I think I believe we have breaking news that just hit the wire. So I think we have to go to Francois for some commentary that you want to share with us. Yeah,

that's long overdue, Mark, but just wanted to take advantage of the opportunity to fill everybody on the call on the latest developments with our proposed acquisition of a .5% ownership stake in COFAS, the global trade credit insurer. To confirm what some of you may have seen across the business wire over the last few minutes. They weren't paying attention to what we were saying, but we closed on this transaction with Natixis earlier today. And the reason for the timing is that we have to wait for their markets to close, which they have. So the consideration paid by ARCH was 9.95 euros per share for an aggregate 453 million euros in aggregate, including related fees. In connection with our minority stake in the company, ARCH now has four representatives on the COFAS board of directors. As we stated before, we continue to view this transaction as an investment, and we currently do not intend to increase our ownership position in COFAS. From a financial reporting perspective, you should all expect us to include our proportionate share of COFAS's results in our financials starting next quarter. We intend to report the contribution in a new separate line titled Equity Method Earnings from Operating Affiliates, which will be included in our definition of operating earnings. This line will also include the contributions from other non-consolidated affiliates, such as Premier Holdings. So that's the breaking news, Mark. Thank

you. And Liz, if we can go back to Mr. Dunn, who is waiting in line, I believe.

Jeff Dunn, we have Dowling and Partners. Your line is now open.

Thanks. Good morning. A couple questions on MI. First of all, what was the incidence assumption for the current period provision as well as the average severity factor this quarter?

Yeah, so .4% for the new NODs in the quarter, and the average reserve per DQ was a little bit over 5,000, pretty much in line with the third quarter, Jeff, because the risks that came in were a little bit less coverage in this quarter. So that would explain the average being a bit lower or a bit more in line.

Okay. And so as you think about the first part of 21, there are, to my knowledge, they extended the forbearance period to 15 months, but you can't enter new forbearance activity. So what did your provision for non-forbearance loans or your incidence assumption for non-forbearance loans look like in the fourth quarter?

Yeah, I don't think we did not. The way we reserved it, we sort of tried to make an overall all-encompassing assessment and put that in that number. So I think that's what you might have said, might have thought in the first half that our number could have been a bit higher. So we think that we have enough in the reserving in totality based on the factors we've used.

Okay, but with forbearance options going away, fair to assume that that incidence assumption will probably climb in the first half?

Oh, yeah. Jeff, we might, but we'll have to evaluate when we get there. I think you're right. I mean, you have to until February 28 to actually ask for this forbearance, be under the forbearance program, so we'll see how that develops. We have a surge in a couple of weeks of people asking for forbearance. That might help, again, more. We'll have to readjust, Jeff, as we see at the end of the quarter. We'll have another month of non-forbearance, effective, not new forbearance, but we'll have to reevaluate when we get there.

Okay. And then within the P&L, can you talk a little bit about what drove the pretty notable sequential drop in premium as well as some of the movement on both the expense lines? Was there any reallocation on the expense cut?

Specific to any segment or, I mean,

from the older?

All in MI, right, Jeff? All in MI.

The premium line was down 15 million sequentially, and then you had some just, looks like a little bit of normal movement, particularly in the acquisition expense line relative to the third quarter, but just a little bit more volatility than what we tend to see.

Yeah, the first one I'd say, A, was a, call it an accounting catch-up or true-up on our Australian business, how we, on the written side. So that, I'd say that's more of a one-off kind of blip that we had to adjust for, or actually was present last quarter and wasn't this quarter. So that's how we, you know, that explains that movement. On the acquisition, there's, you know, we entered into a quarter share agreement starting last, middle of the year, covering our USMI book, and that actually, you know, gives us a benefit in terms of the acquisition. It's a reduction to the acquisition in terms of the seating commission. So that is what is starting to flow through in our numbers.

Yeah. All right, great. Thank you. Sure, you're

welcome.

Our next question comes from Phil Stefano with Deutsche Bank.

Yeah, thanks. I'm just continuing the MI questions, I guess. So you had mentioned that roughly two-thirds of the defaults are in forbearance. I was hoping you could give us a flavor for how many people are nearing the end of their forbearance window and how many people in forbearance does it feel like are current on their mortgages?

Yeah, so the numbers we report to you are those are in forbearance and then I've skipped two payments at least. So we have a few more, as you could appreciate, that are in forbearance and are still current. The data is coming in very, very haphazardly. So it's very, I wish, we are constantly asking and prodding for that kind of information. I think that most of the forbearance that are still there are lower in the year. Most of the forbearance that were declared early in April, May, June, the vast majority of them have cured by now. So it seems to be the pattern of getting to forbearance and sort of staying in there for four or five months and eventually things get back to normalcy. So that's what we would expect to be the case going forward. So I don't have a definite answer for you. No,

no, no. I think the one question that we're trying to get to and I get a lot of questions about is you had mentioned 89% of the delinquents have at least 10% in equity in the home. And you had talked about visibility allowing you to repurchase shares. At what point do we get visibility that maybe the MI reserves are a little more redundant and we can start to see a release there? I mean, how do we think about what you're looking for in the visibility to adjust that?

So from your lips to God's ear, I hope you're right that it's going to be redundant. We'll see. Only time will tell for us. I think the way we look at reserve, Phil, is very simple. It's just we have to wait until we get the data that we feel confident that we're going to get there. And as you know, you've seen us do the reserving on MI and PNC for a long time. You know, you tell me when the four-birth program is done and when the unemployment rate goes down to three or four and the economy picks up again, then I'll have a better sense for what it is. So we hope, but having said all this, I hope that by the summer after the vaccines have been rolled out, that we'll have much, much, much better visibility as to what, if any, the reserve needs to be released or is not necessary to pick lengths.

Okay. And switching gears, on the reinsurance business, I appreciate the remarks you made in response to an earlier question. Is there any way you can help frame for us what the opportunity is for premium volume? So maybe it's, you know, how the one-ones go versus last year or how should we thinking about the growth potential in 2021?

I think that growth in 2021 should be more in line at least with what we've seen last year. I think the opportunities on the reinsurance side, oh, we have an echo here. I think the reinsurance opportunities are still very, very solid, very strong. They're not necessarily, as I mentioned earlier, in a traditional property cat arena, but we're definitely, definitely looking at a lot of transactions. And a lot of them will have to do with what you would expect a reinsurance company to be providing, which is capital, as we get into, you know, harder markets, right? A lot of people are, you know, some clients are looking for capital, at least looking for validation of their plan going forward and want to make sure that they have the re-underwrite and repurpose their book of business that we're there to help them. And we're able in that case to help them get through that transition period. So the opportunity in reinsurance was great last year and I think it's actually very, very good. Again, as we go this year, one interesting fact for everyone that one of the key leading indicator to us, to me at least personally based on my history, as to what is a leading indicator of the treaty reinsurance conditions that are the fact that the facultative industry is still really, really strong. And it's typically you typically have a, you know, a hard market or hardening market for as long as the fact market goes. You'll have a treaty market, you know, staying strong, you know, well beyond that, a year to two years beyond that. So we expect that to be yet again a strong leading indicator and our facultative team is telling us that it's a really good market for them at this point in time, which is encouraging.

Great. Thank you. Sure. Our next question comes from Meyers Shields with KBW.

Great. Thanks. So two questions on the PNC side. First, you know, Arch's confidence in the pricing cycle has clearly borne itself out. But is it safe to say that maybe this is as good as it gets on the property cat side because there is this level of capital available. So that cycle won't play out along historical lines.

Yeah. All I will tell you Meyers, my experience, we did a lot of property cat writing in 01 or 02. And if you remember at Arch, we were not, you know, heavily focused on property cat Excel at the time. We were more on the liability side and the market was going down in 04, well into 05. And we thought we had seen the last of the hard market for a little while and Katrina returned when what happened and changed the whole thing. So my question to you, my answer to you is I don't know. I don't know is the short answer. I think that there's clearly a lot of capital that, again, found its way over the last four or five years. And once capital found its way to a niche, it gets sticky, right? It wants to stay there for a while and will sort of justify itself for a little while longer perhaps than it should. But I think we're always on hopefully doesn't happen. But we could be one major event away from changing the perception of risk in that area. And that I think will mean actually a much harder market than you would expect, Meyer, because the volatility and the knee jerk reaction, it would be like an elastic. Right. When this happens, I think you'll have a you may have a massive exit of capital out of the door and that might create more opportunities for us. I'm not saying it will happen, Meyer, but I could see scenario where your premise does not actually hold true. So there's always there's always a chance.

OK, no, I just wanted to understand what you're thinking about. Second, you talk, I think, on the insurance segment about market dislocation. And I think maybe the sense is out there that that has been a major factor or was a major factor in 2020. But now most companies are kind of settling down and are comfortable with their books of business. Are you still seeing like today that level of market dislocation?

Dislocation is you're right. There's some some real realignment. There's a couple of people, you know, going back to the market. This is truly happening, but it's not across the board. And there are still, we believe, bad news that needs to come find their way through the system. And that might make somewhat of a difference as we go forward. But again, if you if you had a if you had a 20 percent rate increase on one transaction on the insurance side this year and you had this is on top of a 10 percent last year, if you get rate on rate on rate perhaps three times, it's not a bad place to be. And plus, I think what we hear, Meyer, for what it's worth, and it's actually not insignificant. We're hearing terms and conditions finally changing and moving in the right direction. So rates will move first in terms of conditions sort of follow right behind. And we're hearing that this is what's happening in marketplace. So even though we may not have a headline going as high in terms of rate change as much as it was over the last two or three years, I think the underlying conditions in their policies could actually help improve it way beyond the number that we see on the headline number.

OK, understood. Thank you so much.

Our next question comes from Brian Meredith with UBS.

Hey, thanks. A couple of them for you here. The first one, Mark, I wonder if you could just confirm. It used to be that your determination on whether you buy back your stock or not is that if you could actually recoup the premium you paid relative to book value over a three-year period. Is that still the case? And if it is, does that basically mean that you could just continue to be pretty aggressive with your share buyback given where your stock's trading right now?

Yeah, I think that rule of thumb is still in place. I mean, obviously it's not black and white. I mean, there's always factors we consider around deploying, whether there's business opportunities and et cetera. But yeah, we still think in those terms of the buyback, the premium we pay, can we want to earn it back over no more than three years? And you're right. I mean, I think the fact that the stock price is not as, you know, is below that level suggests that maybe we'll be out there buying more stock as we see. We'll see how we go through the year. We'll assess, you know, obviously, you know, as we, you know, every day, every quarter we will look at what's in front of us. But for the time being, I think we're, you know, certainly something we're considering and we probably will do more of.

Gotcha. And then just on that topic, so just maybe a little bit on uses of capital or cash going forward the next 12 months. It sounds like you've got $453 million that's going out here. We've got Watford that I think is yet to get to close. Is that at all going to be constraining to your ability to actually buy back stock, given the also capital you need to fund your growth in your business? And particularly what Mark just said on the reinsurance business is going to be very capital kind of generated type transactions.

No, because we, I mean, we raised a billion dollars of capital, as you know, last summer. We didn't deploy it fully until, you know, right, it was all part of that kind of one-one looking ahead as to what the one-ones would do. We know these transactions were, you know, on the horizon. And, you know, we have a lot of faith in our ability to generate earnings moving forward on our own. I mean, so self-funding the growth I think is something that is part of the plan. And, you know, we don't really have, you know, a whole lot of constraints other than that.

And, Brian, you know, both these acquisitions that you mentioned will actually be accretive and, you know, grow both value for us. So they're capital positive for us.

Gotcha. That makes sense. And then last question I just, now that it's closed, Kofas, maybe you can give us a little bit of color and what the title insurance market looks like, you know, in Europe kind of return profile. What should we expect here?

You know, it's been about, what, 20 minutes that we announced this, so you're going to have to give me a couple more quarters. But you've done your due diligence,

haven't you?

No, we have it. But, listen, we've got to think it through. So what we got, we're going to have directors on there that are going to be working very close in hand with Kofas. We're very excited, as you know, Brian. I think there's more than meets the eye in this one. I think strategically it's going to be a very, very valuable thing for us, way beyond just the initial investment. I think it's a formidable, you know, established company across so many countries with so many client contacts. We're really excited about that. Great. Thank you. Thanks, Brian.

I'm not showing any further questions. I would now like to turn the conference over to Mr. Mark Randerson for closing remarks.

Thank you very much, everyone. Have a nice, you know, several months ahead for the first quarter returns. It's an exciting time to be at ARCH, and we're very pleased that you are there with us to enjoy. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.