Good day, ladies and gentlemen, and welcome to the Arch Capital Group fourth quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. 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 and 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 will also make reference to some non-GAAP measures of the financial performance. The reconciliation to GAAP and the definition of operating income can be found on 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. Dino Iordanou. You may begin.
Thank you, Abigail. Good morning, everyone, and thank you for joining us today. We would like to begin our call by first welcoming Marc Grandisson, who has joined us this morning, and he will be part of our future presentations to you. For those of you who may have missed our recent release announcing Marc's promotion to President and Chief Operating Officer, let me remind you that all of our operating businesses now report directly to Marc. Many of you already know him, as he was an integral part of the original reinsurance team, with Paul Ingrey and others that helped establish Arch Reinsurance Group as the best-in-class global reinsurer. In addition, Marc played a prominent role in establishing a mortgage business, which has become a significant contributor to our group results.
You will hear more about the business environment from Marc in a few minutes, let me very briefly describe how I see the operating conditions in the markets we participate in. To invoke a bit of a sailing analogy, we're facing headwinds in our reinsurance group over capacity, pressure on ceding commissions, more excess of loss purchasing at inadequate pricing. That describes a bit the reinsurance market conditions. We see reasonably calm conditions in our insurance group. Some sectors under pressure from a pricing point of view, but other sectors offering good opportunities, especially in small customer segments. Of course, there is tailwinds in our mortgage segment. The underwriting is very strong in this particular sector, and the macroeconomic conditions affecting the housing market, they're very favorable.
Turning to our operating results, our fourth quarter earnings were driven by solid reported underwriting results while investment returns were challenging, continue to be affected by yields available in the markets. Group-wide and on a constant dollar basis, our gross written premium decreased by 3.6% in the fourth quarter over the same period in 2014, while net written premiums were down 8.2% as underwriting actions in our insurance and in reinsurance business were only partially offset by growth in our mortgage business. We continue, and I know Mark will emphasize this, to emphasize underwriting discipline with all of our operating units. On an operating basis, we earned $143.6 million or $1.15 per share for the fourth quarter, which produced an annualized return on equity of just shy of 10%, 9.8% for the 2015 fourth quarter.
As it compares to a 9.7% return on average common equity for the year ending December 31, 2015. Net income movements on a quarterly basis can be more volatile, as these earnings are influenced by changes in foreign exchange rates and realized gains and losses in our investment portfolio. Investment volatility during the fourth quarter and for the full year 2015 caused net income to fall below operating returns. This is, I believe, for the first time in the last five years that our operating returns were below net income returns. On a net income basis, our earn $4.09 for all of 2015, which equates to a return on equity of 8.8% for the year.
While operating return on equity generally produces a more stable stream of earnings in the short-term, we believe that net income provides a better view of value creation and book value growth over time. Over the past five years, on average, net income ROE has added 230 basis points to our operating return. Our reported underwriting results remain acceptable in the fourth quarter, as reflected by a strong combined ratio of 86.8%, and were aided by low level of catastrophe losses and continued favorable loss reserve development. Group-wide, we believe that on an expected basis, the present value ROE on the business written in the 2016 underwriting year will produce ROEs in the range of 10%-12% on allocated capital. Net investment income per share for the quarter was $0.53 per share, down $0.01 sequentially from the third quarter of 2015.
Positive returns on equities in the quarter were not enough to offset negative returns on fixed income as a total return on a constant dollar basis on our investment portfolio was a -10 basis points in the fourth quarter of 2015. The strengthening of the U.S. dollar also impacted total return, which was a -33 basis points for the quarter on a reported basis. Our operating cash flow, excluding Watford, was approximately $100 million in the fourth quarter as compared to approximately $225 million in the same period last year. Mark Lyons will discuss the changes in cash flow in a few minutes, but approximately one-third of the decline in cash flow reflects the timing of premiums paid to Watford.
A book value per common share at December 31, 2015, was $47.95 per share, a slight increase from the third quarter of 2015, and a 5.2% increase from December 31, 2014. With respect to capital management, we continue to have capital in excess of our targeted levels. However, we did not find any opportunities to purchase shares in the fourth quarter that will meet our previously stated criteria for share repurchases. We have found some of those opportunities to repurchase shares in the first quarter of 2016. Through February 5, 2016, Arch purchased 1,050,000 shares under our 10b5-1 program, $69 million. With those purchases, we have approximately $450 million remaining on our board authorization. We will review that in a board meeting in May of 2016.
Before I turn over the call to Marc Grandisson, I would like to discuss our PMLs, which continue to decline from underwriting actions we have taken in our CAT portfolios. As usual, I would like to point out that our CAT PML aggregates reflect business bound through January 1, while premium numbers included in our financials are through December 31. And that the PMLs are reflected net of all reinsurance and retrocessions we purchase. As of January 1, 2016, our largest 2050-year PML for a single event remains the Northeast at $489 million, or approximately 8% of common shareholders' equity. I believe that's the lowest level on a percentage basis in our history. Our Gulf of Mexico PML decreased to $444 million on January 1, and our Florida Tri-County PML decreased to a low $362 million.
I will now turn it over to Marc Grandisson to comment on market conditions as he sees them before Mark Lyons discusses our financial results. After Mark Lyons, we will take your questions. Mark, welcome, and go at it.
Thank you, Dino. It's great to be here. I already know many of you, and I look forward to getting to know you better as I move into my new role. As we look across our three segments, insurance, reinsurance, and mortgage, we see not only the challenges of competitive conditions, as Dinos mentioned, and soft pricing, but we also see opportunities in each of our three business segments. While macro events and the interest rate environment have brought down total ROE expectations to a new normal level, we are positioning ourselves in all of our underwriting units, focusing on specialty niches that have some inherent competitive protection and for which we believe we will achieve our 15% ROE target over the cycle. As far as the overall insurance markets are concerned, commercial pricing remains under pressure, especially in the more commoditized product lines.
Primary P&C rates are declining in the mid to low single-digit range, although there are pockets of rate strengthening. Terms and conditions in general are stable. Turning first to our insurance operations in the U.S., we saw a 140 basis point effective rate decrease this quarter, but a rate decrease of only 20 basis points for the full 2015 policy year versus 2014. Expected ROEs on allocated capital in many lines are still comfortably in the double digits. Those lines of business include construction, national accounts programs, some areas of low capacity, executive assurance, and professional liability. Together, these lines represent over 70% of our 2015 volume. In contrast, we have seen worsening, as mentioned by Dinos, of the rate levels in property, also in healthcare and higher capacity executive assurance. As a result, we are writing less in those lines.
Our insurance group's premium written decreased 2.5% in the fourth quarter 2015 versus 2014 on a gross basis, but 6% down on a net basis. The changes in our gross versus net reflects the change in our underlying mix, as well as our ability to buy reinsurance on more favorable terms. Ceded written premium increased 6.1% in our insurance group this quarter over the same period last year. Our international insurance operations, which are based in the U.K. and underwrites risk globally, are under heavier pressure from a rate level perspective. Rate changes there were minus 7% across all of our product lines. Needless to say, we are continuing to actively underwrite and manage this portfolio and are trying to move into areas such as accident and health, where competition, we believe, is less intense. Turning to our reinsurance group now.
We continue to develop and allocate our resources to specialty markets and products that are somewhat more shielded from competition. Business lines such as property, including catastrophe, excessive loss, and marine, are yet again experiencing rate declines in the 10% range. At the same time, some segments like U.K. motor and U.S. professional liability have experienced small rate increases, and that has created some opportunities for Arch Re. We find it challenging, if not impossible, to uncover opportunities in the broader U.S. casualty, global aviation, and medical malpractice reinsurance markets. The returns there are just not satisfactory. In our view, capacity is plentiful. In short, the lines of business where we are focusing our efforts still provide us with expected ROEs on allocated capital in excess of 10%, but the days of low-hanging fruit are gone.
Our reinsurance group net premium written has declined 26% in the fourth quarter of 2015 versus fourth quarter of 2014, led by decreased writings in our short tail segments. Our property cat portfolio for the full 2015 year is down over 30% over prior year 2014 on a net basis. In addition, we have seen and reacted to rate erosion by writing less in many other product segments, such as international credit and surety, workers' comp flash, and French motor third-party liability business. Cheaper retrocessional protection has also led us to lower retention in our reinsurance group on the shorter tail line. Switching now to our mortgage insurance segment, which includes, to remind you, our primary operations in the U.S., our mortgage reinsurance on a global basis, as well as the GSE risk sharing transaction business.
We had another solid quarter of growth in written premium, growing this quarter by 30% over the third quarter of 2015 and 65% over the same quarter last year. The growth came mostly from the U.S. GSE risk-sharing programs and from a reinsurance contract with one of the major Australian lenders. We continue to make progress in the expansion of our U.S. market share. Our USMI has approved 904 master policy applications. 460 of these clients have submitted loans to Arch MI. In addition, we are capturing additional share of the USMI market through our GSE risk-sharing programs. At December 31, 2015, our total mortgage segment risk in force is $11.5 billion, which includes $6.8 billion from our U.S. mortgage insurance operation, $3.5 billion through worldwide reinsurance operations, and approximately $1.2 billion from the GSE risk-sharing transactions.
Our primary U.S. mortgage operation had $2.6 billion of new insurance written during the fourth quarter of 2015, which was approximately 60% through the bank channel and 40% via our credit union clients. Our credit union channel continues to perform exceptionally well as our bank channel business development efforts gain traction. Our lender-paid mortgage insurance single net insurance written was only 18% of the total production as Arch MI responded to competitive conditions and lower returns as we see on this business. Last quarter, we introduced our new risk-based pricing model, RateStar, and have rate filings approved in 46 states. Through December 31, 2015, 783 customers have elected to use RateStar and the technological transition has gone smoothly. We believe that RateStar enables us to improve our assessment of risk and will help Arch MI create better risk-adjusted ROEs.
We are very pleased with the initial response and the applications that we are receiving through RateStar at this point. We estimate the overall mortgage markets NIW that was down actually for the fourth quarter versus third quarter by 20%. Most of the drop occurring in November and December as both purchase and mortgage refi volume declined. As one of the newer player in the mortgage insurance market, we are well-positioned to take market share with our innovative approach to MI and the high credit ratings that our diversified business platform allows. With that, I will hand it over to Mr. Lyons to cover the detailed financial results.
Great. Thank you, Mark, and welcome aboard. It's good to have two Marks and one Dino, I think, on the call.
Yeah.
Let me just begin by saying what I've said the last few quarters, that terminology-wise, when I use the term core, I refer to our aggregate results excluding Watford Re. When I use the term consolidated, the term is results inclusive of Watford Re. Since we're here talking about year-end results, I'd like to take a minute and put our changing mix of business into perspective. On a full year net written premium basis, the insurance segment reduced by approximately 6%, as Mark just mentioned. The reinsurance segment declined by about 25%. There's an asterisk on that that I'll get to later. The mortgage segment increased substantially by 65%. More importantly, though, this results in a mix change on a core basis as follows. The insurance segment changed from 59 to 61% of total core net written premiums.
The reinsurance segment shrunk from 35 to 31%, and the mortgage segment increased from 5.7 to 8% of the core net written premiums. The mortgage segment's total contribution is actually larger, though, since some GSE risk-sharing transactions received derivative accounting treatment and therefore contributed no net written premium. As we shall discuss shortly, the mortgage segment and its growth mode, combined ratio on an accident year basis, which also has an asterisk, that I'll get into in a bit, decreased by 530 basis points over that of 2014. You can see we're growing and shifting in areas of improved profitability. Moving to this quarter's results. The core combined ratio for this quarter was 86.8%, with 1.9 points of current accident year cat-related events, compared to the 2014 fourth quarter combined ratio of 87.5%, which reflected 2.3 points of cat-related events.
Losses recorded in the fourth quarter from these catastrophic events of this year, net of reinsurance recoverables and reinstatement premiums totaled just shy of $16 million, primarily stemming from U.K. storms and other global events emanating mostly within our reinsurance operations. The 2015 fourth quarter core combined ratio reflects 8.6 points of favorable prior year development, net of reinsurance and related acquisition expenses, compared to 8.3 points on the same basis in the 2014 fourth quarter. This results in a 93.5% current core accident quarter combined ratio, excluding cats for the fourth quarter of this year, compared to an identical 93.5 accident quarter combined ratio in the fourth quarter of last year. In the insurance segment, the 2015 accident quarter combined ratio, excluding cats, was 96.3%, essentially unchanged from the accident quarter combined ratio of 96.4 a year ago.
The reinsurance segment 2015 accident quarter combined ratio ex cats was 90.1%, compared to 87.3 in last year's fourth quarter. As noted in prior quarters, the reinsurance segment's result reflect changes in the mix of premium earned, including a much lower contribution from property catastrophe business, as Mark has alluded to. The mortgage segment 2015 accident quarter combined ratio was 83.1%, compared to 98.9 for the fourth quarter of 2014. It's important to recall that the concept of accident year is more of a P&C concept and not directly analogous to the mortgage business due to their accounting conventions. Theirs is much more of a report year convention. The full year now, the full accident year 2015 core combined ratio excluding cats was 94.5% versus 94% even for the full 2014 accident year.
By segment, the insurance group's full accident year ex cats was 96.1% versus 96.3% in the 2014 year, and the reinsurance group's full 2015 accident year was 93.3% versus 90.7% for the 2014 full accident year. Mortgage segment, on the same basis, was 84.1% versus 89.4% for the full year from 2014. That's the 530 basis points improvement I referenced earlier. The insurance segment accounts for roughly 14% of the total net favorable development in the quarter. This was primarily driven by shorter-tailed lines from the 2010-2013 accident years and longer-tailed lines from the 2003-2011 accident years.
The reinsurance segment accounts for approximately 80% of the total net favorable development in the quarter, excluding associated impacts on acquisition expenses, with approximately half of that due to net favorable development on short-tailed lines concentrated in the more recent underwriting years and the remaining half due to net favorable development on longer-tailed lines, primarily from the 2005-2011 underwriting years. The mortgage segment accounted for roughly 6% of the net favorable development this quarter, which translate to an 8.1% beneficial impact on the loss ratio, resulting from continued lower claim rates from the CMG business we acquired in 2014, along with excellent credit experience to date on business written since the acquisition. Some of this favorable development is offset by the contingent consideration earn-out mechanism negotiated within the purchase agreement.
This contingent consideration impact, however, in a geography sense, is reflected in realized gains and losses and not within underwriting income. Our core operations across the full 2015 calendar year experienced $272 million of net favorable development, again, net of reinsurance and reinstatement premiums and related acquisition expenses, which represents 8.2 combined ratio points versus $307 million on the same basis in 2014, which represented 8.8 combined ratio points. The full calendar year net favorable development was approximately 15% in the insurance segment, 80% in the reinsurance segment, and 5% in the mortgage segment. Approximately 68% of our core $7 billion of total net reserves for losses and loss adjustment expenses are IBNR and additional case reserves, which continues to be consistent across the insurance and reinsurance segments.
The core expense ratio for the fourth quarter of this year was 35.6% versus the prior year's comparative quarter of 34.7%, driven by the U.S. mortgage insurance operations, which is operating at a higher expense ratio until this business hits a steady state, as well as the effect of an overall 5.2% smaller core net earned premium base quarter-over-quarter. The insurance segment maintained a 32.4% expense ratio for the quarter, compared to an identical 32.4% ratio a year ago, reflecting a lower net acquisition ratio offset by an increasing operating expense ratio. However, we continue to focus on the total expense ratio as mentioned in previous calls, since the slotting of costs and benefits within the net acquisition and operating expense ratios is somewhat artificial since seating commissions are wholly booked in the net acquisition line and not allocated to every operating expense category that they represent.
The reinsurance segment expense ratio increased from 32.5% in the fourth quarter of last year to 36% this quarter, primarily reflecting a 14% lower net earned premium base. The reinsurance segment expense ratio was also weighted, though, by a reimbursement reflecting a favorable tax ruling affecting federal excise taxes. The ratio of net premium to gross premium for our core operations in the quarter was 71.6% versus 75% a year ago. The insurance segment had a lower 66.4% ratio compared to 69.1% a year earlier, driven by increased sessions on a larger alternative markets book that we've commented on in the past, increased sessions on capacities-driven product lines, and a reduction in our P&C program business, which is kept predominantly net.
It is important to note that on a written basis, the front-end gross commission ratio decreased by 110 basis points, and the average quota share commission ratio improved by 260 basis points in the U.S. operation. These joint improvements will continue to be felt as they are earned over the next few quarters. In the reinsurance segment, the net to gross ratio was 76.2% in the quarter compared to 85.5% a year ago, primarily reflecting sessions to Watford Re. Also, as commented on during last year's fourth quarter call, there was a one-time $50.2 million unearned premium reserve transfer associated with Gulf Re, which correspondingly required a $50.2 million written premium to be recorded as well. This distorts the quarter-over-quarter comparison and can be seen in the financial supplement within the property other than property cat line of business.
Adjusting for this unearned premium reserve distortion results in the net written premiums for the total reinsurance segment this quarter declining by 8.7% quarter-over-quarter. The mortgage segment, in addition to the premium growth that Mark mentioned earlier, had approximately $3.5 million of other underwriting income in the quarter from risk-sharing transactions receiving derivative accounting treatment and $4.6 million of underwriting profit associated with risk-sharing transactions receiving insurance accounting treatment. Over time, it is expected that more income will emanate from transactions receiving insurance accounting treatment than derivative accounting treatment. The other segment, being wholly Watford Re at this point, reported a 103.8% combined ratio for the quarter on $96.2 million of net written premium and $119 million of net earned premiums. As a reminder, these premiums reflect 100% of the business assumed rather than simply Arch's approximate 11% common share interest.
As for business sourcing, approximately 37% of the gross written premium this quarter was written directly on Watford Paper, with the remainder seated by Arch affiliates. It should be noted that the sourcing can vary materially quarter by quarter. The total return on our investment portfolio on a local currency basis was a reported negative 10 basis points in the quarter, as Dinos mentioned, reflecting positive returns in our equity sector that were more than offset by negative returns in both investment grade and non-investment grade fixed income, as well as the alternative investment portfolio. Even with our shift into a greater equity and alternative allocation over time, 80% of the portfolio is still comprised of fixed income securities. On a U.S. dollar basis, total return for the quarter was a negative 33 basis points.
On a full 2015 calendar year basis, total return on a local currency basis was a positive 162 basis points, and on a U.S. dollar basis, the return was a positive 41 basis points for the year led by the equity and investment grade fixed income sectors. The embedded pre-tax book yield before expenses was 2.16% as of year-end, and duration remains fairly consistent at 3.43 years. Fixed income duration, as we've said in the past, can fluctuate due to tactical decisions as opposed to long-term strategic shifts, and the current duration continues to reflect our conservative position on interest rates in the current yield environment. Reported net investment income in the quarter was $67 million, or $0.53 per share, versus $67.3 million in the 2015 third quarter, or $0.54 per share, and $72 million or $0.56 per share in the fourth quarter a year ago.
As always, we evaluate investment performance on a total return basis and not merely by the geography of net investment income. Core cash flow from operations, as Dinos mentioned, was approximately $100 million in the quarter versus $227 million in the fourth quarter of last year. This reduction primarily reflects higher ceded reinsurance payments in total across all reinsurers and retrocessionaires, as well as some timing differences associated with the Watford Re ceded payments. It also reflects lower gross premium collections, reflecting the drop in volume, particularly from the loss of a large MGA acquired by a competitor within our insurance group, as has been discussed in previous calls, at a lower level of paid reinsurance recoveries received due merely to timing differences. The full calendar year 2015 core cash flow from operations was $705 million versus $998 million in this full I think I misspoke then.
The full calendar year 2015 core cash flow from operations was $705 million versus $998 million in the full 2014 calendar year. Core interest expense for the quarter was $12.8 million, which is consistent with our longer-term run rate. Consolidated, therefore inclusive of Watford, interest expense was $15.8 million. Since, because we consolidate Watford, approximately $3 million of interest expense is associated with the use of leverage within Watford's investment portfolio. As you recall, roughly 11% of Watford's results impact Arch's financial statements. Our effective tax rate on pre-tax operating income available to our shareholders for the fourth quarter was an expense of 6.9% compared to an expense of 1.7% in the fourth quarter of last year. The full-year effective tax rate on pre-tax operating income was 5.1% versus 2.4% for 2014 calendar year.
This reflects $2.9 million or 26% of this quarter's total tax being a true-up of the first three quarters of the year to this 5.1% annual tax rate. Fluctuations in the effective tax rate can result from variability in the relative mix of income or loss reported by jurisdiction, as was the case in this quarter. Our total capital was $7.1 billion at the end of this quarter, up 0.6% relative to September 30th and up 1.1% relative to 2014. Our debt-to-capital ratio remains low at 12.6%, and debt plus hybrids represents only 17.1% of our total capital, which continues to give us significant financial flexibility. We also continue to estimate having capital in excess of our targeted position. During the full 2015 calendar year, we repurchased shares at an aggregate cost of $365 million versus the 2014 share repurchase aggregate cost of $454 million.
These represent 71% of net income during 2015 and 56% of net income during 2014. Book value per share was $47.95 at year-end, up six tenths of a point and up 5.2% relative to a year ago. This change in book value per share this quarter primarily reflects the company's continued strong underwriting performance, virtually offset by the challenging quarter in the financial markets. With these introductory comments, we are now pleased to take your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and then one on your telephone keypad. If your question has been answered or you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Sarah DeWitt with JPMorgan. Your line is open.
Hi, good morning.
Good morning.
Quickly on the mortgage insurance business, I just want to get your latest thoughts on the growth opportunities there. You've probably seen some of the mortgage stocks are down 40% in the past six months on concerns about growth, pricing, and competition. I'd be interested in your latest thoughts on that sector.
Well, as I said in my prepared remarks, we like the environment in the sector. The underwriting quality of these mortgages is very high. The macroeconomic conditions are positive. You will get fluctuations on a quarter-to-quarter basis on demand. There's nothing we can do about the demand. However, let me point out to you that the GSEs are, through the bulk transactions, they're transferring a much more significant portion of the risk to the private markets. There is ample opportunity on these risk-sharing transactions to expand the demand for transferring risk to the private markets, which we participate. That is the environment. As far as pricing, yes, there's been spots of competition, especially on the lender single premium sector.
We've seen that easing in the first quarter on the basis that with the PMIERs and the capital requirements from PMIERs coming into effect, there is a higher capital charge on discounted LPMI business. In essence, we've seen not only us doing a lot less in that sector, but some of our competitors doing less. We're very bullish on that.
I'm going to turn it over to Marc Grandisson to give a little bit of the color because he's embedded in that business, and he has been since the beginning. He probably knows more detail than I do.
Yeah. At a high level, I think the USMI, if I break it down in two pieces or two areas, is the credit union channel that we have. We had already a very significant market share. We're maintaining and actually growing it somewhat. The growth there is going to follow the overall market growth in MI origination and MI purchases. The bank channel is going through a tremendous growth over the last year, and most of the growth is on the MI. In fact, pretty much 90% of the growth comes from the bank channel. We're still in the early stages of establishing our presence, establishing our relationships, and contacting our clients and growing that and establishing the pipes, if you will, to deal with this.
At the same time, we have, as you know, established RateStar, and RateStar's initial, as Dinos and I know, so we see the numbers, it's been a very initial, very good response from the market. That, I think, will lead to hopefully, giving us more penetration in the bank channel for the next 12 months. That's not even counting the U.S. risk-sharing that Dinos mentioned. The new mandate, the new scorecard, the new evaluation that the FHFA will do for the GSEs. From our expectations right now, the GSEs will have to, in the risk-sharing transactions, probably buy 50%, possibly more, over 2016 versus 2015. That's actually a very bullish statement that the private market is going to get a bigger place at the table.
Okay. Let me add also one more point. It's more subtle point, but I think it's important based on where the financial markets are today. At the end of the day, we're one of two or three of the highest-rated MI companies. I believe that a lot of the originators, I don't care if it's commercial banks or mortgage originators, et cetera, they're going to start paying more attention to where they're placing their business. Even though they're not the counterparty, Fannie and Freddie are the counterparty, I think it's prudent to be placing your business with more highly rated financial companies. We're bullish about that because I think it's starting to be recognized, especially by the smaller banks, that, hey, we'd rather do business with people that they have a better, a stronger financial rating than others who don't.
Okay, great. Thank you. Then on the excess capital, I know it's a high-class problem, but given the stock's back above a level where you'd repurchase stock, how would you think about deploying that, and how long would you sit on the excess capital if the valuation stays at these levels?
Well, we don't try to sit on excess capital. I mean, at the end of the day, we look at opportunities to deploy as much of our excess capital. Our first choice is to deploy it in the business. As we can see now, most of our opportunities, they're coming on the mortgage side. When we get dips in the market, as we have seen in the first quarter, and literally our stock got punished unfairly as far as we're concerned. At the end, it gave us the opportunity for us to buy some of our shares back. If people don't like them at a certain price, we like it, and that's the opportunity, we take advantage of it.
It was in the closed window, by the way, I did put a 10b5-1 plan that it worked for us, it gave us the opportunity to purchase 1 million shares at reasonable pricing as far as we're concerned. We're going to continue with that philosophy. I believe we're going to get opportunities as the market is starting now with some of our competitors to be putting pressure on their financials that we can deploy more capital in the business because at some point in time, it's going to improve. Now, if you're looking at it quarter-to-quarter, you might be too anxious. We have a more longer-term view. We look at it year-over-year.
I don't mind carrying a certain amount of excess capital for the next year or so in order for me to have my powder dry in case I get opportunities to deploy.
Okay, great. Thank you for the answer.
You're welcome.
Thank you. Our next question comes from a line of the name is [Kai Pan with Sterne Agee]. Your line is open.
Hi. Good morning. The first question is on RateStar. I believe you mentioned 783 players have signed up for RateStar, if I'm correct. How many of them are the large players? Are you getting any of the large banks signing up for this program?
In general, the smaller banks and smaller in size originators, they embrace RateStar more than the larger banks. As you know, we give the opportunity to all of our customers to choose either RateStar and/or the RateCard. We haven't abandoned the RateCard. What the RateStar does, it tries to evaluate our ROE expectations for the entire book of business. We're pricing the business. As a matter of fact, we believe RateStar will give us even better ROEs than the old RateCard. That has been the environment. The incredible thing about RateStar is that we have the ability, live, to see every single originator who is using the system. Independent if that mortgage insurance we're going to place with us or not, we see every single originator, every mortgage officer who is live on our system instantaneously.
We monitor the volumes, we see who is using it, and which territories they're using, et cetera, which for us is an incredible thing, especially also from a marketing point of view. To tell you the truth, we find some banks that maybe three, four, or five of their loan officers use RateStar significantly, and the other three, four, and we know all of them by name, don't use it at all. It gives us an opportunity to go and have a proper conversation as to why not. Marc, you want to add anything on the RateStar?
No. The only thing I will concur and further confirm that the highest level of application that we receive are coming through the regional and commercial credit union channel. The banks are bigger, a bit longer to go over and make the change and adopt the RateStar application. It's going to take time, but we're going to get there.
Yeah. We have approvals on RateStar, I believe, in 46 states.
Correct. Yes.
Right. Have you seen a pickup in business from RateStar? I believe one of your large competitors are not doing it. Have you seen some more competitors trying to do something similar to what you're doing?
Well, early signs is a little bit of pickup. Where we see more of a pickup in utilization. Like I said, we only released this about two months ago. It was early December. Now we're in February. Sometimes the process takes six to eight weeks for a mortgage to be placed. Clearly, there is an uptick, a noticeable uptick in the utilization of the system and the applications that they go through the RateStar, and they get a quotation for that mortgage insurance. If that loan is going to be made and if they're going to place it with us, because I'm sure they're comparing what our price is versus a Rate Card from some competitor, it's too early to tell. I'm optimistic.
Sure. Are you seeing other competitors also do something similar to your RateStar?
Marc, you're closer to it.
You heard the call on Radian and MGIC. I mean, you can go through that and hear what they have to say, and there's definitely a trend in the industry to go in that direction to actually try and address the inefficiencies, frankly, that reside within the Rate Card pricing to better address and better assess the risk within a portfolio. I need to remind you, as Dinos and Mark did on last call, that that endeavor of ours to create RateStar took over a year to put together. This is no small feat. It included having an amazing dedication and a big group of our people to really put it together. I would not be surprised. I can't speak to them, but I wouldn't be surprised that our competitors feel compelled to have to react to this as well.
It's predictive analytics, independent if it's in the auto insurance business or in the mortgage insurance business, et cetera. It's the norm now. If you're not willing to assess risk appropriately and price it appropriately, at the end of the day, you might be subject to adverse selection over time, and we don't want to be in that category. We do challenge our people to create that innovation independent of the work effort that's involved. Believe me, it's a 5-quarter effort. I was involved in it. Marc Grandisson was involved in it. All of our senior guys, from Andrew Rippert to David Gansberg and his team in Walnut Creek, we put a big effort to do this. This is not something that, as one of our competitors says, it's just some black box that spits out.
There's a lot of effort, a lot of analytics, a lot of historical data that we have used, both from within the old PMI books that we're running off on behalf of the regulator, but also with external databases that deal with mortgage risk. We're proud of what we have achieved. Believe me, it's still a work in progress. We will continue to improve it and improve it and improve it because it's not something that is static. As we learn about the predictability of the model, then we will adjust. It's no different what we've done on the cat business, right? You've seen our performance on the cat business. I think we have fared well over the years taking catastrophic risk because at the end, Let's face it, I'm the only non-actuary in the senior management team.
I think they're ready to expel me from the group. Everyone we have is a quant here except me. I keep up with them. Everyone is an actuary.
Yeah, exactly. Totally.
Sure, that's helpful. Just one follow-up, just some numbers questions if I may, really quick. First is on the expense ratio. Just on the operating expenses, those were higher this year versus last year. Just wondering if you plan to keep them flat next year. The second piece is on the P&C Insurance on the acquisition expense ratio. Do you expect that to decline this year because of higher ceding commissions?
Well, Mark, you want to address it?
Yeah, let me do it in reverse.
This is Mark Lyons. Because I got two Marks. I got Mark Lyons now.
Hopefully not a third one called Question Mark. Let's take a reverse order. I think this is the third quarter I've commented on the quota share improvement on the treaty ceding commissions, and it's been about 260 basis points. It fluctuates a little but 260 basis points. I think the proportion getting that is increasing. You get more of a gearing factor. Firstly. Secondly, I'm quoting those on a written basis. You asked a semi-forward question, and we don't give guidance, but I think it's fairly straightforward that if you're getting those kinds of benefits on a written basis, they're going to eke their way in over the next three or four quarters. I think it's reasonable to expect improvement and then likely flattening at that point. However, there is continued improvement in the gross commission ratio. Mostly it's a function of basis points.
That was 110 basis points, and that's a big part of the reason for it as well. On the OpEx side, as I said, we like to look at these things in total. On the insurance group side, you had some specials in there that were related, I think, to our U.K. operation. We had some compliance things we dealt with. We had some Lloyd's costs. We had some overlap of some IT, which I view as non-recurrent, shifting from exchanging to an internal facility we have in the Philippines actually, which I view those as non-recurrent. The mortgage stuff side we know about. It has to come up to scale. I think on the reinsurance side, that was dominated by the reduction in the net of premium. There's a little accounting going on when we brought Gulf Re in.
Vinay, that with roughly an additional $2 million of costs that come in more explicitly because Gulf Re is now a profit center within the reinsurance group, whereas before it was more equity accounting.
Right.
A little of that sleight of hand. To make a long story short, I would expect continued improvements on the ceding commissions in the insurance group, and I would expect increasing management and flattening on the OpEx side.
Sure. Thank you.
Let me give you also a little bit of the strategic view that we have when it comes to expenses. I said many times in many calls, we're not willing to part with our underwriting capability. We're going to maintain underwriters, even if the market might cause us to reduce writings because we're going to maintain. The two religions we have is underwriting discipline and complete commitment to our good people, especially on the underwriting side. Having said that, we expect our managers to chew gum and walk at the same time. As a company, we have a very good turnover ratio, but still we have a turnover ratio, which is around 11% on an annualized basis. Within that parameter, you try on non what I would call on non-critical underwriting jobs, to make adjustments on your expenses through natural attrition.
That's been our philosophy from day one. A well-managed company plays with those parameters and make the right judgments, and our people are very good and very flexible, and they accept reassignments, and we move them from one operating unit to another where the opportunities are plentiful, especially if where they work we have to reduce volume. With all that in the mix, I think Mark and you got into the minutia, you got into the nitty-gritty on the financials. I want you to get the flavor of our philosophy and how we're going to operate the company.
Sure. That's helpful. Thank you.
Thank you. Our next question comes from the line of Amit Kumar with Macquarie Capital. Your line is open.
Thanks. Good morning to two Marks and one Dinos. Just very quickly going back to the realized losses line. Did you talk about what exactly was going on in the Watford segment, and why it had a realized loss?
No, I have not talked about that. I'll take that as a gas pedal. Well, I guess a couple things. First off, as you know, we kind of report Watford's results. We don't drive Watford's investment results. We're minority owners. In their line of realized gains or losses, it's actually the sum of realized and unrealized gains embedded in there. Hopefully you find that helpful.
Got it. For the X other segment, what did those realized losses stem from?
Well, I'll call it harvesting or reverse harvesting, but it's just your standard churn of fixed income and other investments that would've occurred throughout the course of the quarter.
Okay. I was just trying to figure out if there was anything more going on. That's helpful. The other question I had. Obviously, you spent a lot of time discussing RateStar, you are correct, other competitors are talking about it's similar to auto insurance where there's an early adopter advantage. How should we think about sort of the timeline here, where you still have that early adopters advantage for some time before others catch up? Is it fairly easy for them to sort of get up to speed as to what you're doing because it has been done before, it sort of puts you at parity at some point of time, or is there so much of a separation that it'll take a long period of time for the NMIH or Radian or others to really catch up with you?
How should we think about that?
The way you think about it, if you remain standing still, they're going to catch up to you.
We keep walking. As a matter of fact, I hope our guys, they keep running, and improving it, et cetera. At the end of the day, it's how good is your thought process, what kind of algorithms that you build into it, how much of empirical data and whatever databases that they give you, predictive analytics you're incorporating. This is not nuclear physics. We're not putting the next man in the moon, but it requires a lot of effort. I don't know how quickly they can catch up. It depends on what kind of resources they throw at it. I can tell you, it was not a small effort on our part. We're behind it. We incurred the expense.
We had a lot of our very senior guys working on it because both me and Marc Grandisson, and Andrew, and David Gansberg, we were very committed that that's the way in for the future. We made it a very senior priority within the group to do this. This is five quarters ago. This is not today. Mark?
Yeah, I think from our perspective, it is a competitive advantage. I won't say we were first mover because you rightly pointed out that some others have done it.
Yeah
other competitors in the past. Clearly, this is creating, we think, some breathing air, some headroom for us, and at least because of the fact that we already have installed it's being used by our clients, and we're actually going to be dynamically, like Dino said, going through the portfolio, analyze it, and modify and adjust it as we go forward. We feel pretty good where we are.
Got it. Final question related to that, does the ratings downgrade of Genworth from S&P and Moody's, does that create a meaningful opportunity for the marketplace? How should we think about that?
It's too early to tell. So far, to my surprise, I'm hopefully a financial executive with average intelligence. I would have thought that on a credit business will have more of an effect as to who gets the business.
to my unpleasant surprise, it seems that a lot of the mortgage originators sometimes don't care as to where they place the business because at the end, they're not the counterparty, Fannie and Freddie is.
I don't think that's a wise choice for them to do. Over time, I believe that will have to have some effect because why would you continue doing business with somebody who is financially challenged? I leave that up to the market to determine.
Got it. Thanks for all the answers, and good luck for the future.
Thank you. Our next question comes from the line of Charles Sebaski with BMO Capital Markets. Your line is open.
Good afternoon.
Good afternoon.
Another question on mortgage. How much of your business in 2015 was refi versus purchase?
Mark will give you that number in a minute. I think he can dig it up.
I guess I just wonder, on the U.S. side, if there's a potential slowdown on refi at this level, if that's at all a headwind for you guys in that business.
I mean, refiles create more opportunities to write more insurance. If you're penetrating the market, refiles have an effect on us, because at the end of the day, we like more refiles along with new originations. I don't know. Mark, you have the number? Or we can always.
Yeah. No.
Don Watson will give you the percentages.
Okay.
I don't have all the books in front of me right now.
Well, as I'm looking at that, is the mortgage insurance part of the driver in the change of the effective tax rate this year? If kind of look at 2015, a bit over 5%. Is that a reasonable expectation for 2016 or going forward? Or does the growth in U.S. mortgage have a lifting effect on overall consolidated tax rate?
Well, Lyons will give you the answer to that.
Yeah. I love taxing questions.
Yeah.
Chuck, it's a good point to bring up. It's partially contributory. There's a lot of areas that in higher tax jurisdictions like that had very good results in the year, mortgage being one of them. Our Arch Re facultative group, our Morristown Arch Re cooperation, and the core insurance operation. A lot of that kind of skewed it. As mortgage becomes a higher proportion of total, and if we continue to have these margins, it will only creep up the effective tax rate, keeping everything else constant. We don't know what's going to happen in the P&C dynamics.
Okay. I guess, finally, on the P&C side, on the programs, I think you said you had a large non-renewal of a program this quarter, and wanted to kind of get your take on, is that a competitive reason? Was that just an absolute result? I guess I'm trying to get some insight on what's going on on the smaller account risk side of the insurance business.
Yeah.
A lot of competitors keep talking about that as a means to deal with the pricing in the large account space.
Right. Well, it's good to be in a position where we've had it for years and years rather than trying to gain it. There's more renewals to us than new business to others, and in a tough market environment, getting it on a new basis is a little tougher. Chuck, it was a program that was bought by a competitor. It was fairly large. It was on an annualized basis north of $80 million, hence $20 million in the quarter, giving us flat on it. We talked about action in other ones, but they, for calendar 2015, they were immaterial. It was just one program that really affected it.
Okay. I guess your competitors as well, which you guys fortunately haven't seen, is some adverse developments that in some of the lines. I was wondering if there's any comment on loss cost trend going on on some of the longer tail liability lines. Have you seen any changes coming up or things kind of just status quo as they've been the last few quarters?
Look, we have very stable loss cost trend across the board. We do an analysis every year, but we have not seen anything in the data that makes us change our expectation of loss cost trend. It's still pretty low, but it's very stable for the last couple of years.
Chuck, as we've talked about in the past, really, it's a different story by area. Marc's right. Across the board, weighted, we don't see anything material happening. You probably saw that on some securities class action suits, for example, that's kind of returned to a long-term normal where it had been below normal, things like that. Luckily, we don't seem to get hit by a lot of the SCAs, so we'll make that someone else's problem.
Yeah. Thank you.
Marc, you got the number?
Yeah, Charles, I have the answer. I want to make sure I got the numbers right before I quote it. It was a market where it was mostly a purchase market, 75% purchase, 25% refi. As you know, the mortgage rates went up, and it became more of a purchase market in the fourth quarter.
Excellent. Thank you very much for the answers, guys.
You're welcome.
Thanks, Chuck.
Thank you. Our next question comes from the line of Michael Nannizzi with Goldman Sachs. Your line is open.
Thanks. Just a couple of numbers ones, if I could. In the mortgage, or I'm sorry, in the reinsurance segment, Mark, could you quantify the impact of that tax item that you talked about in your script?
Yeah. Well, that wasn't really in the reinsurance segment. That was overall. That was $29 million, which I said was 26% of the total tax on pre-tax operating income. That's because the effective tax rate is 5.1 for the year. It was less than that as a third quarter. We have to true it up. We have to bring them up to the same level. I think-
Maybe we're getting our signals crossed. I thought you said in the script that there was some settlement of some tax matter.
Oh, sorry. Yeah, I'm sorry.
Okay.
That one, and we're not alone in this, so you probably heard it on some other calls.
Yeah.
It's the favorable tax ruling with regard to cascading FET, where we had paid it in the past, and then the favorable ruling came down, so there was a reimbursement associated with a prior cost expenditure.
Got it. That rolled up into the other operating or in the acquisition.
Well, some in insurance and some in reinsurance. It's mostly in acquisition.
Okay. Just trying to figure out what we should be thinking about on the forward. Any way we could get some quantification of that?
Well, it was about $3 million.
Okay.
One time.
Got it. Okay. Sticking to reinsurance for a sec, the other operating expense there, how should we be thinking about that on the forward? Dinos, I think you might've mentioned talking about redeploying folks from one place to another. If we continue to see the business there kind of recede, just given a lack of opportunities there to invest, is that an area where we would see that coming down, or do you expect to maintain your infrastructure there?
You got to break it into components. Right. You got to break it into components. How much is internal expense and how much is commission, ceding commissions, et cetera.
If you don't like the business, you don't have the ceding commission expense. Our intention is, I've said it many times, and I know Marc Grandisson and I, we see eye to eye to this. We have no intention of eliminating underwriting capabilities we have. I'm not going to give my underwriters to the competition. We're going to maintain that because our view of the market is more long term than short term. These are the same underwriters that generated significant profits for us when the market was good for reinsurance, and that market will come back again to supply and demand, and at some point in time, it will readjust. From that perspective, for you, when you're looking at your numbers, look at the operating expense, break it down into what's internal versus external, meaning ceding commissions and all that.
The internal, our run rate, we're going to maintain because I don't expect us to reduce our underwriting capability.
Okay. Just sort of thinking about the underlying loss ratio there in reinsurance. You saw year-over-year improvement, despite some mix shift away from what I would guess are higher profitability, property lines, at least relative to the rest of the book. How should we think about that? Was there anything sort of happened either in the quarter or the year, just top of your mind, maybe Marc, just that helped to support that result? Do you feel like 2015 was sort of what it was, and that's a good starting point to think about for the future?
Well, there's always seasonality in the business, firstly. You got to watch the serial comparisons. There is some of the mix differences. The facultative unit performed well as it generally does, and the degree by which it's well varies quarter by quarter. As Marc said, the property cat being de-emphasized, and if it continues where the margins are not, they're likely to continue in that way. The third-party businesses and the other opportunities that they've been getting, they're, I'll call out of the mainstream opportunities continue to be in the pipeline. It's a little hard because that is probably only half of the business, is probably what I'd call standard business at this point. I think fourth quarter is more of a reasonable go forward.
Yeah, I think that-
To further add to this, we're focusing on returns and always, we have very agile underwriting teams across the platform and reinsurance and able to maneuver in and out of markets as they see the returns get better or worse. A great example, as I mentioned in my notes, is the U.K. motor. It has a higher loss ratio component by virtue of being a quarter share. You're not going to get a 20% loss ratio in that business unless it's under extreme circumstances. We are expecting to have a higher loss ratio, but in the end, we don't worry so much about the components of the loss or expense. We worry about the margin that we can derive from the business.
As I will echo with what Dinos just said, we have a pretty decent agile team that's able to seek and source and seek and capitalize on opportunities, and we have more, always.
Great. Just maybe one last quick one if I could on the MI. Can you break down how much of the action in your underwriting profitability has come from U.S. MI versus whether it's reinsurance or the other business?
No, we generally don't talk about that. We do it, and we manage it in a total segment basis. The whole strategy that Marc and his team, Andrew and his team has is they balance the mixture of that, but they have a common macroeconomic view and everything else. We tend to look at it in totality and report it in totality.
Okay. Got it. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Josh Shanker with Deutsche Bank. Your line is open.
Yeah, good morning, afternoon. Thanks for taking my question and the long hour.
It's souvlaki time, Josh.
You got souvlaki. I don't want to keep you. Here.
No, go ahead. We got plenty of time. We got tape.
No, that's it. I'm done. No, I'm kidding. The Australian business, how should we think about revenue going forward for the Australian business?
It's hard for me to tell what's going to happen. It's an ongoing relationship that we've established, as we mentioned, over last year. It's been very fruitful, the quarter share agreements that we have with one of the major lenders down under. It's ongoing. There are things going on down under, as you know. Various options that we're looking at. It's very hard for me to tell you how it's going to go for the next year.
It won't be any less, but we don't know, hard to say what the new opportunities are because we're engaged in a lot of discussions that sometimes they bear fruit and sometimes they don't.
Is it going to be lumpy by necessity?
It will be steady, lumpy on the upside if we do other transactions.
Right.
If we interrupt a relationship, it can be lumpy on the downside, but we don't anticipate that.
I think I will, Josh, I will say it's going to be lumpy on the written base because the business in Australia is written all up front. The earnings is going to take years to go.
Right
A bit more stability on the earnings over time, the written.
Rightfully could be very lumpy.
Just to reemphasize and clarify that, Josh, because I think it's easy to get some confusion. That deal is not a single up-front premium, like in the totality of the exposure. Instead, it's a single premium market in Australia. You're going to have There is no monthly, really. It's going to be a series of singles that come out through month by month by month that come in, and we'll record accordingly.
Yeah.
It's not an upfront number.
Right. It's by mortgage, by mortgage, by mortgage, by mortgage. You're earning that over the duration of that, and it's a long duration, seven, eight, nine years.
Very good. On Watford, and I don't know enough about the investment strategy at Watford, it looked like the investments had a good quarter last quarter. Now we're in this bumpy market right now. How should market volatility affect investment results at Watford?
Well, we don't make those decisions. Highbridge makes that. In essence, their approach hasn't changed. I know when the spreads have widened, they're going to take marks. They feel comfortable with the quality of the portfolio and the embedded yield, which is in the 7% and higher. Now it will be a question as to where the economy goes and would they have any defaults. Based on our reviews that we get on a quarterly basis as 11% owners, we don't see significant risks that they analyze every investment one by one, and they put probabilities of default and recoveries, and it depends where the economy goes. If we don't have a recession, I think they're in good shape.
Okay. Thank you very much. I'm sure there'll be another questions. Enjoy the souvlaki.
Thank you. Our next question comes from the line of Meyer Shields with KBW. Your line is open.
Great, thanks. Two quick mortgage questions, if I can. First, if you look over, I don't know, fourth quarter conference calls, a lot of Bermudians are talking about mortgage reinsurance. Are you seeing a more competitive market in general for that?
A little bit more. I don't think it's a competition. It's more participation, a lot of that we see in the bulk transactions that the GSEs they're purchasing now for the 20%-40% down payment. This is the 60-80 LTV business that the GSEs buy through the STACR and Connecticut Avenue Securities transactions in the market. You have a broader participation there by other reinsurance. Of course, some of the MIs that they needed to comply with the PMIERs capital requirements, they might have done some transactions in order for them to come up to the capital standards that they need to prove to the GSEs that they're compliant. I don't see a major change of that going forward. I think most of that participation is going to happen on the bulk transactions.
Marc, anything else you want to add to it or?
Agreed.
Yeah. Well said.
Okay. Second, I get that mortgage, at least written premium growth is going to be lumpy. As we see better market conditions there than in insurance and reinsurance, does that have an impact on the investment portfolio? Does that give you even more room for longer-term investing philosophy?
Yeah. I would say, Meyer, that it's a function of the duration of the aggregate portfolio at that point in time. I'd say as it becomes a higher proportion of total, it's going to inch up the durations on it, and therefore have it matching on the investment side.
Okay. Perfect.
Again, our investment philosophy is basically on the liability side of the business. We match durations with those liabilities. On the shareholder capital, we have a view that it can be very short, either zero duration all the way up to five-year duration, depending how our investment committee and the board believes the market conditions dictate. Right now, on the shareholder capital, we're about neutral. Our duration is what, 3.6, Mark? 3.6.
3.4.
3.4. Our duration of our liabilities is not that different from that. We're kind of neutral where we are today.
That's a great.
We can elongate that or go short on that depending what we do with the shareholders' equity capital.
Right.
Thank you. Our next question comes from the line of Matthew Carletti with JMP Securities. Your line is open.
Hey, thanks. Good morning. I just had a follow-up on Amit's question on the realized losses in the quarter. Mark, that was really helpful, the kind of color on the other segment and how Watford treats it. I guess my question's on the subtotal of the operating segments. It's still a pretty big number in the quarter relative to history, at least, particularly a quarter where equities are up. I'm just wondering, is there any OTTI to note there or performance of alternatives, or was it just kind of more very run-of-the-mill?
No, our OTTI was very small for the quarter. It was in the single millions of dollars. We have a total return philosophy, our portfolio trades quite a bit. Sometimes you're going to see realized losses coming through because they might be repositioning the portfolio from one security to another, and we take those marks. Where other companies, when they buy and hold, they might have more unrealized marks where we might have more realized.
There's also been a purposeful repositioning of the portfolio. You probably noticed that not just the movement into U.S. corporates and municipals, but a de-emphasis of mortgage-backed securities, commercial mortgage-backed securities, and so forth. When you compare it year over year. Dinos' point is right. As you make these decisions and turns, you're moving them into the bucket of just marks that would be unrealized in Q4. That's done with the thought of the future view of the portfolio returns.
Yeah, that makes sense. That makes perfect sense. Thanks for the color.
Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Dinos Iordanou for closing remarks.
Well, thank you all for listening to us. We're looking forward to talking with you in the next quarter. Have a wonderful afternoon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.