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 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 touch-tone telephone. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release, and discussed on this call, may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied.
For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K, 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. Marc Grandisson and Mr. François Morin.
Sirs, you may begin.
Thank you, Crystal, and good morning to you. Arch completed 2019 on strong footing as the mortgage insurance market remains healthy and our property and casualty operations are well-positioned for the pricing improvements taking place in many areas of the market. Our operating income produced an annualized return on common equity of 11.7% for the fourth quarter and 12% for the full year, while book value per share grew 3.2% for the quarter and nearly 23% for the year. While property and casualty rates are increasing in several lines of business, we believe the market remains in a transitioning phase between soft and harder conditions. Given the uncertainty of current claim trends, we believe our industry needs further rate increases to provide a more clear risk-reward proposition. In this transitional environment, risk selection and thoughtful capital allocation remain critical to generating superior returns.
As we discussed last quarter, strengthening market conditions are evident to us from both the rise in our submission activity and our ability to achieve significant rate increases. This evolution 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 the foreseeable future due to the continuing uncertainty regarding losses from the recent soft policy years. While there are some lines of business where the rise 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. 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 U.S. and internationally, property rate increases, particularly E&S risks in cat-exposed areas in the U.S., are up more than 25%. We have also seen rate increases ranging from 10%-20% in large commercial general liability and public company D&O policies. 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 treaty market conditions historically, and we like the positive signal FAC is giving us at this point. On the treaty side, we are beginning to see modest improvements in terms and conditions, including declines in ceding commissions ranging from one to three percentage points. Ceding commissions remain elevated, however, and are 500 basis points above the level seen in the last hard market. Focusing on the January 1st reinsurance renewals for a minute. Rate increases in what is primarily a property 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 250-year PML stands at only 6% of equity capital.
Turning now to our mortgage insurance segment, Arch MI continued to perform well. As I mentioned earlier, the operating environment is characterized by strong credit quality and a healthy housing environment. In addition, lower interest rates led to strong new mortgage originations in the quarter. Accordingly, our new insurance written at Arch MI U.S. 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 the 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. With that, I'll hand over the call to François.
Thank you, Marc. 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 Watford Holdings Limited. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $308.4 million, which translates to an annualized 11.7% operating return on average common equity and $0.74 per share. Book value per share grew to $26.42 at December 31st, a 3.2% increase from last quarter and a 22.8% increase from one year ago. This result reflects the effect of strong contributions from both our underwriting and investment operations.
Starting with underwriting results, losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $30.4 million or 2.2 combined ratio points compared to 9.7 combined ratio points in the fourth quarter of 2018. These losses impacted both our insurance and reinsurance segments and were primarily due to Typhoon Hagibis and a series of smaller events. 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 28.7% over the same quarter one year ago.
The insurance segment's accident quarter combined ratio, excluding cats, was 101.6%, higher by 330 basis points from the same period one year ago. Approximately 220 basis points of the difference is due to an elevated level of large attritional claims in the quarter, primarily from our surety unit, which can experience some volatility from quarter to quarter. The balance is primarily due to a higher expense ratio driven by investments we are making in the business and the integration of our U.K. regional book and other smaller acquisitions. Moving on to our reinsurance operations, where we had a relatively stable quarter. Net premium growth was at 4.3% from the same quarter one year ago, and the accident quarter combined ratio, excluding cats, stood at 92.3% compared to 96.2% on the same basis one year ago.
The difference is mostly attributable to the presence of a large attritional casualty loss arising from the California wildfires in the same quarter one year ago. Our expense ratio remained essentially unchanged at 26.9%. The mortgage segment's accident quarter combined ratio improved by 200 basis points from the fourth quarter of last year as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 0.9% is lower by 120 basis points than the result recorded in the same quarter one year ago, mostly as a result of better-than-expected claim experience. The benefit to the loss ratio from current year favorable development was 510 basis points in addition to the 940 basis points related to prior years. The expense ratio was 20.7%, consistent with the result from the same period one year ago.
Total investment return for the quarter was a positive 107 basis points on a U.S. dollar basis, as our high-quality portfolio continued to perform well. For the 12-month period, our portfolio returned 7.3%, an excellent result driven by particularly strong returns across our fixed income and equity investments. The duration of our investment portfolio at December 31st was down slightly to 3.40 years from 3.64 years at September 30th, and was overweight relative to our target allocation as we continue to expect a lower for longer global interest rate environment. The corporate effective tax rate in the quarter on pre-tax operating income was 6.9% and reflects the geographic mix of our pre-tax income and a 30 basis point benefit from discrete tax items in the quarter. The 2019 fourth quarter effective tax rate on operating income includes an adjustment to interim period taxes recorded at an annualized rate.
This adjustment increased the company's after-tax results on pre-tax operating income available to Arch common shareholders by $12.4 million or $0.03 per share. As always, the effective tax rate could vary depending on the level and location of loss or income and varying tax rates in each jurisdiction. Turning briefly to risk management. With the recent improvements in catastrophe pricing, we have increased our natural cap PML to $612 million as of January 1, which at slightly more than 6% of tangible common equity on a net basis, remains well below our internal limits at the single event one in 250 year return level. This change demonstrates our ability to deploy incrementally more capital in an improving market to opportunities that offer adequate returns on an expected basis.
In our mortgage segment, as mentioned on our prior earnings call, we completed our tenth Bellemeade transaction in the fourth quarter with coverage of $577 million. As of year-end 2019, the in-force Bellemeade 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 on December 31st. Our debt to total capital ratio stood at 13.1% at quarter end, and debt plus preferred to total capital ratio was 19%, down 350 basis points from year-end 2018. Finally, as you know, we closed on the Barbican acquisition in November of last year. The integration of their platform is well underway. For the 2020 calendar year, we expect to incur approximately $65 million of intangible amortization across all acquisitions we have made prior to December 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 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. Once again, to ask a question, please press star and then 1 now. Our first question comes from Yaron Kinar from Goldman Sachs. Your line is open.
Hi, good morning. My first question just goes to growth in the insurance segment. If I heard your comments correctly, it sounds like you're so kind of lukewarm in terms of the market opportunities and the rate environment and rate adequacy. Yet, I think even excluding the acquisitions, you grew at a good 20% clip or so. I guess, where are you seeing the opportunities? If you were to become more constructive on market conditions, where do you see that growth kind of capping?
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 we're in the early stages of rate changes, we don't know how long that's going to last. I also made comments about the fact that the industry has an all-time capital high and still printing very reasonable combined ratio numbers. I just wanted 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, is in the areas where markets are coming back to our pricing level and return expectations. We had de-emphasized those lines of business for quite a while, actually, as the softer years were eating into our production.
I think of late, we've seen a resurgence of submissions, and we're able to hit and get our pricing and return. 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. I also want to remind that we had not grown as much as the market could have indicated over the last year. This is good growth on a lower number. For instance, on the D&O side, our premium written was about half of what it was last year versus five years ago. You don't need much of an increase to really make a dent.
In the overall price increase. The second question is, we can grow a lot. As we saw, you asked Yaron whether we can grow based on the conditions. If conditions continue on, and we're seeing right now still being very good, I think we can still grow a fair amount. I think our people have been very busy, even in those softer years, but I do believe that we have extra capacity and appetite to write quite a bit more if it happens. How much will depend and be dictated by overall rate level in 2020.
It sounds like that premium growth could accelerate then in the right market conditions.
That is a fair statement.
Okay. Do you have any sense where you're booking the new business coming on relative to the overall portfolio in insurance? Like what the adequacy of returns there is?
Yeah. We haven't changed much of a loss pick. I want to put things in perspective as well, is that the rate changes that have taken place, that we're talking about, really started to be, we believe, enough above the loss cost trend since the middle of 2019. It's a bit early and premature to make any changes to your booking your loss ratio. You look at it on an accident year basis. Things could develop on history, all the accident years prior to 2019. It's premature to make any comment into loss pick as we speak. Frankly, loss pick, if they are to improve, and we believe everything else being equal, they should improve over the next couple of years. They'll take six to seven quarters to really see some good tractions and see some movement there.
Understood. Thank you, and best of luck in the year ahead.
Thanks, Yaron.
Thank you. Our next question comes from Jamminder Bhullar from J.P. Morgan. Your line is open.
Hi, good morning. I just had a question on the tax rate. It improved a lot 2018 to 2019, I think it was lower than what you'd expected as well. What's driven that? Is it just the geographic makeup of income, what's your expectation or likely range for 2020?
Yeah, a couple of points here. I think it was a bit lower than what we had given as a range earlier in 2019. There's a couple of discrete items that played out throughout the year, which helped out in terms of publishing the final tax rate. I took some notes, I looked back and, 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%. Very close. Ultimately, we had some additional benefits that brought it down to 10.4% for the year. As 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. Whether there's a CAT or favorable or unfavorable developments on prior years, et cetera.
Looking at 2020, I'd say we're very comfortable saying that we're going to probably be in the same range. If you want to expand it, maybe to try to make sure we're in the range, maybe 10%-14%. In years past, last year we said 11%-14%. Maybe potentially it could be a bit lower, but I think it's a bit early again. I mean, we're early days of 2020, hopefully that's enough for you to update the models.
Okay. On the MI business, obviously your overall margins have been very strong and same goes for peers as well, and a lot of that's just the strong results on the legacy block. If you look at new business ROEs, are those in the double-digit range, or is it more of a single-digit ROE type business in terms of new sales? I realize it'll take a while for your overall book to shift towards new business ROEs.
I almost choked up. No, we're solidly well in the double-digit returns 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. I think that had to do with Fannie and Freddie sort of putting a bit more constraints around the risk layering in the business. No, still very healthy returns. Very healthy.
Just lastly, any comments on 1/1 renewals, and specifically, were they better or worse than your expectations, and any sort of views on the upcoming 4/1 renewals and mid-years?
The 1/1 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 yet better yet. Yes, better rate environment at 1/1, clearly for the first quarter. We don't know what it means for 4/1. I am done prognosticating what the future will hold. The law of supply and demand and perception of relative risk is a market-based thing. Sometimes I think markets should go up and it doesn't, and sometimes it goes down and it's all over the place. It's too early to tell where 4/1 and 7/1 will end up. Clearly, if the momentum at 1/1 continues, it's an improving market. Clearly.
Thank you.
Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open.
Hi, thanks. Good morning.
Hello.
Hi. My first question is, I guess on one-one a little bit. We've heard about the retrocessional market being pretty strong this year. Has Arch written more of that business? 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?
You see that a little bit in our cat PMLs. They went up in large portion because of additional retro business that we wrote that I would say was very much opportunistic. Whether that sticks and whether that tells us something about four-ones or six-ones, we just don't know. For sure, we saw some definite good opportunities specifically in the retro space at one-one. We were happy to have the capital to be able to deploy and take advantage of the opportunities.
With the insurance book, I know you guys in the past have talking about that expense ratio being elevated, just due to the accounting and the earn in from 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. Can you just kind of give us a sense to think about, if you have Barbican coming on, how we should think about the expense ratio within the insurance book in 2020?
As I said in my remarks, I think the expense ratio was roughly, call it 130 basis points or so in this quarter, was the result of the effectively bringing online the U.K. regional book. We're now a year into it, so everything else being equal, 2020, we should see the premium being earned out and the expense ratio coming down. The new twist is Barbican, and as you know, the Lloyd's market in particular has a slightly higher elevated expense ratio, which we think there's an offsetting benefit on the loss ratio. To give you 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. 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.
Lastly, on the insurance pricing, Marc, you seem to be pretty positive, especially relative to where your comments have been for most of 2019. It's a developing market, I guess every market seems to be different and capital, obviously, a lot more robust than if we went back to past upturns.
Right.
Is there any market, like if you think back through Arch's history, does this compare to the early 2000s? Does this compare to kind of 2013? Is there a market that this feels similar to when we can kind of think about pricing improvement, or does it feel because of the social inflation issue, maybe different than any of these past markets?
It's different in terms of the health of the industry and the combined ratio, as I mentioned, that's for sure. That makes it a very unique opportunity. I do believe we have major players pulling capacity out. Even though it's printed capacity, effectively used capacity is definitely lower in the overall market, specifically on the large risks. You know some of the players, and we've talked about them, Lloyd's being clearly one of them. I think I would tend to think it feels a bit more like a 2005 after Katrina, Rita, and Wilma because capital was still plenty. People paid their claims. A couple of companies had some issues, but by and large the pricing went up, and it was larger as a result of perceived risk. I think this is what's going on.
I think people, as an industry, this uncertainty around social inflation is creating a lot of uneasiness and pushes us to want to charge more to make sure we cover as much of the eventuality as we can. That's sort of what I would say the perceived, the heightened risk perceived is higher. It's not a bankruptcy driven, reinsurance driven, necessarily market turn. It's a blend of a few of those. It's hard. I guess you live and learn and experience new things as you go. Yeah, that's what I would summarize it to be.
Okay. Thank you so much. I appreciate the color.
Thanks, Elyse. Thank you.
Thank you. Our next question comes from Michael Zaremski from Credit Suisse. Your line is open.
Hey, good morning. First question on USMI. One of your competitors this morning spoke to expected decline in premium yields in 2020. Any color there, whether you expect a similar dynamic, given pricing on new business might be a little tighter versus using risk-based pricing?
I think that the phenomenon that's going on as a result of refinancing clearly points you to a lower price, a lower premium rate, and that's because the risk is lessened, right? A lot of the refinancing we saw in the last 2 quarters and accelerated in the 4th quarter is people sort of refinancing because the interest rates are just that much better, and it makes sense for them to refinance. By doing so, the LTV that was originally put on our book of business 2, 3 years ago is actually lower, which is lowering the risk. Everything else being equal, it also has a knock-on effect on the DTI, right, on the debt to income servicing. It improves them as well. That risk
It's the same people, same house, same environment, but there was also some house price appreciation. You get all these things going on. This is not as risky a proposition now as it was 2, 3 years ago. It would lend itself to say that the pricing should indicate a lower pricing because of all these various moving parts. It doesn't mean the returns have changed, and that's really the key that we want to share with you guys, is top line in MI is really, really hard to pin down. There's singles, there's cancellations, and it's very hard to see how it all evolves.
In the end, what we care about and what we've seen is that the return characteristics of the things that we financed, which one could say is underlying this somewhat decrease in price and premium rate, is actually just a top-line phenomenon. It's not a return phenomenon. The returns are still very healthy, and that's what we're actually focusing on.
Okay. That's helpful. Next, just kind of broad question about the reinsurance segment. If I kind of look at the combined ratio the last couple of 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. I guess catastrophe levels don't appear to have been materially higher than expected either. Just kind of thinking about the future, is it largely reflective of just simply the competitive operating environment? I guess, hopefully, there's continued momentum in 2020 to improve the ROE profile of the segment.
first, you're wrong. It's not in the single digit, let's make sure we're clear here.
Okay, great.
I think it's much better than this. I think that our reinsurance portfolio is a different one, there's been mix shift over the last two, three years. We were a lot more property cat probably 10, 12 years ago. There's always moving parts in the reinsurance platform, I would say that our play, for instance, in motor in Europe will, by definition, lead us to a higher combined ratio, the returns are still very well in excess or well in the range of where we would want them to be to write that business. I think the combined ratio in reinsurance is just a reflection of this constant culling, pulling, pushing through, realigning capital within the various lines of business. I think what you're seeing is a combined ratio that is just reflective of what we see in terms of opportunities.
In terms of returns, I can tell you for certain that our reinsurance group has a very, very ambitious return on equity expectation when we write the business, that's what every underwriting decision is based on, not on combined ratio.
Okay, got it. I was wrong. That your portfolio holds probably less capital than I was assuming then versus some peers. Okay. Thank you.
Yeah, the one thing I'll add to that, Mike, just quickly on the returns, I mean, that really is all about our cycle management, where our premium volumes went down quite a lot over the last number of years on the reinsurance segment. If the market gets healthier, which it's showing some signs of that, I don't think our returns will necessarily get that much better, but I think we'll be able to have a bit more growth on the top line, expand the platform, and see more opportunities.
Thank you.
David.
Thank you. Our next question comes from Brian Meredith from UBS. Your line is open.
Yeah, thanks. A couple of questions here. First, just on the insurance segment. I know you talked about how Barbican's going to impact your expense ratio. Will it have any impact to underlying loss ratio? I guess just to add on to that, is it going to prevent you from maybe achieving an underlying combined ratio below 100 in that insurance area in 2020?
Well, Barbican, in the big picture, doesn't really move the needle. It brings a lot of nice traits with it. It has some fee businesses that we like. It also makes us more relevant in London. The one thing that you should be aware of is a lot of the capacity that Barbican is deploying is actually third-party capital. That doesn't stick to our ribs in terms of the combined ratio. Yes, we'll have some benefits on the fees and et cetera. Big picture, Barbican, on a net basis, wrote about $125 million of premium last year in 2019, split roughly 50/50 between insurance and reinsurance. We're certainly going to shut down some lines. We're going to do some re-underwriting along the way.
Once you do a bit of math on it, you'll quickly, hopefully appreciate that for the insurance segment on its own, I mean, Barbican is not going to be a big factor in how 2020 plays out in terms of the combined ratio.
On that note, to add to François' point, realistically, Brian, we need to focus on, as we are right now, growing and seizing the opportunities as they're presented into our insurance segment. If anything, that will bring us to the combined ratio, that will lead us to a 12-ish return on our own equity, I think is going to come through the current opportunity that we see and our ability to seize upon it, which is plenty.
I guess what you're saying is that it could be the underlying combined ratio kind of dropping below 100 and getting to those returns. We may not see it here in 2020, but it's 2021 or whatever as the opportunities continue to come in.
That's right. If you look, Brian, the rates really moved starting middle of last year, a lot of stuff is being renewed still in the new "rate environment." You have to write the business first. You have to earn it. 2020 and 2021, you're exactly right. You're exactly where we are. That's why it takes a while to see the good deeds being reflected. The same way it takes a long time for bad deeds to get reflected, may I add.
Got you. Out of the reinsurance, Marc, I'm just curious, I know a lot of the business that you write is quota share type business. How much of your reinsurance business is, call it, exposed to areas where you're seeing a significant amount of price increase, be it E&S, certain property lines, then you might see a big benefit from the subject premium pricing coming through?
I think the beautiful thing about our friends on the reinsurance group is that they're a go-anywhere kind of company. They can do anything, go anywhere, do anything. In general, they have access and are able to see the deals that are E&S, casualty, property, whatever. We've been around for 18 years. We've written a lot of reinsurance. We're still a billion and a half plus. We're not as small. We're smaller in the grand scheme of things, but we still have a lot of selling point, in London, in Zurich, in the U.S., and Bermuda. No, we're able to grow if the growth opportunities are there. There's no issue there whatsoever.
Got you. What about your subject premium bases already on the books? Are you seeing kind of growth there?
I think that by virtue of the improvement, for 2020, we don't give guidance, obviously, as you know.
Right.
Nice try. If rates keep on increasing and keep at the level they are at the healthy positive rate, and if it keeps into 2020, 2021, we will have more premium, clearly. I'm not sure it's what you're asking. I'm trying not to answer the right question, so I'm trying to get the right pitch here, Brian, so help me out.
Okay. What I'm trying to get at is that I get the premium growth situation, right? Then it's more the underlying, obviously business is actually seeing improved price too, right? And rates?
Yeah.
Just like you're seeing in your own business and just what impact that could potentially have on your reinsurance margins.
Oh, yes. Of course. Yes, you're right. We're seeing it through the quota share. A relatively newer phenomenon, it's anecdotal. It seems to be starting. Even the excess of loss pricing now is picking up in speed. That's also encouraging. We may have some, and to 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 quota share participants and companies. Yes, we are.
Great. Thank you.
Thank you, Brian.
Thank you. Our next question comes from Meyer Shields from KBW. Your line is open.
Thanks. I have a couple of small questions to start off with. First, are there any plans to change the amount of mortgage insurance that's retained on U.S. paper versus ceded to Bermuda in 2020 versus 2019?
No plans at this point. As you know, it's all about we try to have as much capital as we can in offshore, just because it's a better domicile, gives us more flexibility. At this point, as you know, there's tax implications, we don't want to trip the BEAT issue. At this point, no plans to change anything.
Okay, perfect. Second, I know in the past, you've talked about capital deployment opportunities that ended up at Barbican and in the U.K. I was wondering if you could give us a sense as to what you're seeing now in the pipeline in terms of other potential opportunities.
I think we're seeing a bit less. I think people are busy more looking at their stuff and trying to improve their book of business. I think that's really more of an inward focus. I think M&A, we see all of them, or we believe we see most of the transactions that are being talked about. I think we were a bit more open, and we're able to strike some transactions over the last year because the pricing was right and the opportunities was there. We don't see acceleration or somewhat of a decreased activity, I think just as a result of this current marketplace being a bit more dislocated. That's really what I would say.
That brings me to third question. I'm wondering whether, you talked about how combined ratios are still being reported as profitable, 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 did 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 1999, 2000. I'll tell you my gut feeling right now, it doesn't feel to be as much of a delta. In terms of what impact it could have on a capital market, I think we were more levered as an industry in 1999, 2000. We were running a 1.3, 1.4 premium to surplus. Now we're at 0.7, 0.65, 0.8, whatever. A lot less lever, it's probably more absorbable, at the same time, there's less investment income.
If you think that the market changed as a result of being cash flow negative or not having recurring income, I think that we're probably in a similar position, meaning that the losses or if you combine the underwriting income, which was negative at the end of 1999, with the investment income, which was very positive, I think we're probably in a combination in a similar place, we have higher capital, more cushion to absorb it.
Okay. That's very helpful. Thank you so much.
Okay, great. Thanks, Meyer.
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, given what's happening from a pricing standpoint for margin improvement for the industry, I understand why that could be challenging for some, but I think when I look at Arch relative to competitors, there's more of a short-tail mix, whether it's in primary insurance or also facultative re. I guess, Marc, if you could just comment on why isn't there a more constructive near-term outlook for margin improvement, given you're clearly getting rates, in some cases, rate on rate in some of these property lines, where there does seem to be kind of a layup argument for margin expansion.
Let me correct you quickly, Ryan. On the insurance side, we're 70%-75% liability in terms of premium written. That would sort of dampens, if you will, the acceleration or the recognition of the improvement in terms and conditions. It makes us a bit more cautious. That's something you need to bear in mind. This is on the insurance segment. And again, on the insurance segment, even speaking to the short tail, it still does take a while to get through. Again, like I said, significant improvement in rates really took place starting middle-ish of 2019. It does still take a while to recognize and really see the earning coming through. The earned premium is a combination, as you know, for other underwriting years. On the reinsurance side, I'm trying to think of it.
I think there's a fair amount of liability as well in there, right, François? There's also a fair amount of property, although property, as we mentioned, is also de-leveraged on the property cat. We did increase the other property. We're running a lot more on the non-cat XL. That you're right. We should probably see what margin expansion there was, and we believe it's there. We should see it. Again, it was written last third, fourth quarter, so it'll come again over the next 12 months. It takes a while. You have to be patient. Patience is a virtue in our industry.
Understood. Then my second one is just around, it seems like we've heard less from the reinsurers about the casualty environment and losses coming in. Maybe you could just talk about the extent to which what are you seeing on the reinsurance book in terms of claims activity on the casualty side versus primary? Is there a real lag? Have the claims started to happen, or is that probably still on the come? I mean, any theory as to when and how we might see more paid losses, I guess, on the reinsurance side?
It's a very good question. I think we do have a tale of two cities here. I think that our insurance are seeing the claims. Of course, we have the advantage or the luxury to have an insurance company that's on top of claims and know and participate in the marketplace. When we look at what information our reinsurance folks are getting, there is clearly a lag. I'm not saying it's misinformed or whatnot, but there is clearly a lag, and it's been there forever. This is not a new phenomenon, Ryan. This has been going on for years, and for as long as I've been in the business, it's been there, and it was there before my time. 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 the reserve or not book the reserve, and then they in turn inform their reinsurance partners. On the quarter share, it's a little bit easier because you're able to do more claims review and be on top, be side by side with them. You can also compare whether we have other of our clients on similar risks and whatnot. On excess of loss, as you could expect, it's a little bit more difficult. There's a further lag on that one as well.
We clearly have a lag in recognition, and our reinsurance company has been really adamant and proactive in trying to recognize some of the losses that may not be enough reported, and that's also what made us be a bit more careful in our current writings or lack thereof in the liability space. It's clearly a lag on the reinsurance side. Clearly.
That's helpful. Thanks.
Thanks, Ryan.
Thank you.
Thank you. I am showing no further questions from our phone lines, and I'd like to turn the conference back over to Marc Grandisson 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.