Good day, ladies and gentlemen. Welcome to Arch Capital Group Fourth Quarter 2022 Earnings Call. At this time, all participants are in listen only mode. Later, we will conduct a question-and-answer session, instructions will follow at that time. As a reminder, this conference call is being recorded. Before the company gets started with this 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 in the companies with the SEC from time to time. Certain statements contained in the call that are not based on historic 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 this 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. Sir, you may begin.
Thank you, Towanda. Good morning and welcome to the fourth quarter earnings call for Arch Capital Group. Happy Valentine's Day to all. I'm pleased to share that for the fourth quarter of 2022, each of our three underwriting segments produced exceptional results. Our quarter's results were buoyed by a lower-than-average cat loss experience, a significant favorable development in mortgage reserves, and a higher level of profitable earned premiums from our recent growth.
This quarter demonstrates the power of our strategy, namely our management of the underwriting cycle across a diversified specialty portfolio with a prudent reserving and underwriting stance. Our P&C insurance underwriting teams continued to lean into hard market conditions, and our mortgage team delivered record underwriting income, which is again a direct result of our years as the established market leader there.
For the full year of 2022, Arch generated over $1.8 billion of operating income with an operating return on equity of 14.8%. 2022 was our third consecutive year of sustained premium and revenue growth, supporting stronger and more stable earnings power for the near term. The net premium written growth from our P&C units was exceptional. Reinsurance segments NPW grew 51% for 2022 as the team seized on market dislocations while our insurance segment grew a robust 21% on the year.
We continue to see a broad array of opportunities to allocate capital where rates and terms and conditions allow for growth and attractive returns. Taking stock of where we are in the current market cycle, it's important to note that we've recorded premium growth significantly above the long-term industry average.
Over the last four years, we've grown property and casualty net premium written threefold to nearly $10 billion from less than $3.6 billion in 2018, while overall rates increased cumulatively by over 40%. As we have stated previously, our cycle management strategy dictates that we maximize premium volume when rates are rising, which is precisely what we've done.
While we expect to continue to allocate more capital to the P&C segments for the next several years, I wish to remind our shareholders that we've capitalized on the attractive return opportunities in our MI segment to the tune of $5.4 billion of underwriting income since 2017. These profits allowed us to redeploy capital into more accretive uses, including $2 billion worth of share repurchases since 2018, and the substantial growth in profitable P&C premium.
MI has been vital to our ability to propel our P&C underwriting growth. Underwriting cycle management is core to our culture. I want to take a brief detour into how we think about the underwriting cycle here at Arch. Here is a simplification of Paul Ingrey's insurance clock split into four stages. Stage one, at the onset of the hard market, we see rates increase dramatically and capacity withdraw. Results from the previous soft market results only begin to show up in claims activity.
Stage two. This is the beginning of the restoration phase, which is indicated by second and sometimes third round of rate increases, along with some improvements for the insurers in the terms and conditions as the industry adjusts its appetite and underwriting policies. Much of the focus during this stage is also geared to filling gaps in and replenishing reserve shortfalls from the soft years while showing tepid improvements.
Stage three, that next period is where rates gradually decrease, often as a result of overreactions in stage two. Underwriting profits from the hard market years gradually show up in the results. This period can be lengthy. It usually allows for still profitable growth, especially for the disciplined underwriters.
Finally, stage four. Famous stage four is where the industry forsakes underwriting discipline and overly focuses on top line growth even as rate decreases accelerate. This is where Arch's culture of underwriting discipline is most apparent as we cut exposure and prepare for the return of stage one. Right now, we are at stage two in most lines. Some, for instance, property, are back to stage one since the fourth quarter.
Understanding where you are at each point of the cycle for every product line and the nuances within each stage is critical to the timely allocation of capital to the areas of greatest opportunity. One of Arch's key sustainable advantages is the breadth of its capabilities across many specialty insurance lines, enhancing greatly our cycle management capabilities.
Strategic tenet at Arch is that underwriting acumen and discipline through the cycle drives superior risk-adjusted returns. I'd like to share some highlights from our underwriting units. We'll kick it off with reinsurance.
For the fourth quarter, Net Premiums Written in the reinsurance segment was $1.5 billion. That's more than double the same quarter one year ago. François will cover the details, much of this growth is because we were well-positioned to capitalize on broad market opportunities as well as several one-off opportunities resulting from market dislocations emerging in the fourth quarter. It is worth noting that the fourth quarter growth does not include the January one property and property Cat renewals, which will be reflected in our next quarter's results.
As you've heard, pricing for the January one renewals was strong. Cat pricing and terms both improved, leading to effective rate changes in the plus 30% to plus 50% range. We anticipate these trends will continue at the mid-year property Cat renewal and should translate to strong property Cat premium growth in 2023 for Arch.
Moving now to our insurance segment, where we continue to reap the benefits of the investments we've made in enhancing our specialty businesses in the UK and in the US. On the year, we wrote over $5 billion of NPW, net premium written, compared to $4.1 billion in 2021, with growth coming from a diverse mix of business. Underwriting performance continued to be excellent with an ex-CAT accident year combined ratio of 89.6%. Rate increases with a few exceptions remain above loss cost trends. We expect this strong momentum to continue for 2023.
The insurance market remains rational and disciplined. We expect also continued opportunities due to the ongoing global uncertainties and remain optimistic that this disciplined behavior that we saw in the P&C industry for the last three years will persist as we move through stage two of the cycles.
Next, our mortgage team again had an exceptional quarter, capping off an excellent year as we benefited from earnings from our embedded book as well as from favorable reserve development as cures on delinquencies exceeded our expectations. The mortgage segment delivered $374 million of underwriting income in the quarter and $1.3 billion for the year, an excellent contribution in a year where higher mortgage interest rates slowed new originations.
Our insurance in force, the earnings foundation of the mortgage segment, grew to $513 billion at year-end 2022 as persistency increased due to higher mortgage rates. As expected, higher mortgage rates led to reduced NIW as mortgage rates touched 7%, the highest rates in 20 years. Looking broadly at the MI industry's health, we have borrower credit quality which is outstanding and excess housing demand above supply.
The U.S. unemployment rate is near historic lows and the borrower's equity in their homes remain at very healthy levels. One thing worthy of mention is that the MI industry is acting in a disciplined and responsible manner. In the face of these economic uncertainties, premium rates are increasing while underwriting quality remains strong. Finally, the interest rate increases we've seen in the last 12 months plus should help fuel our net investment income through 2023. We are poised to benefit from a higher reinvestment rate coupled with the growth in invested assets.
I've had auto racing on my mind lately, and when I look at our industry, I can't help but think that Arch is one of the best cars on the track. We know that winning the race comes down to more than having a great driver or the fastest car.
There is much preparation, analysis, and looking at the conditions on the track, as well as monitoring the other drivers. By recognizing the soft market conditions in 2017 and 2018, we avoided the mistakes others made early in the race when they might have burned tires or overheated their engines. Pricing began to improve in 2019, we were able to take advantage of some of our competition's bad pit stops and engine problems, and we took the opportunity to take more of a lead on the track by increasing substantially our writings.
Then once we saw some clear track ahead of us, we were able to accelerate even faster. Today, we're firing on all cylinders, and I know we've got the right crew to bring it home. Let's hand the wheel over to François before coming back to answer your questions. François?
Thank you, Marc, and good morning to all. Thanks for joining us today. I'm very pleased to share that once again, Arch had an excellent quarter on virtually every front. The year concluded with fourth quarter after-tax operating income of $2.14 per share for an annualized operating return on average common equity of 28%. Book value per share was up 9.9% in the quarter to $32.62, and down only 2.8% on the year. A great result considering the impact rising interest rates had on our fixed income portfolio, the difficult year in equity markets, and the elevated catastrophe activity we experienced this year.
Turning to the operating segments. Net premium written by our reinsurance segment grew by an exceptional 118% over the same quarter last year. Although this quarter, we had a few large one-off transactions that impacted our results and contributed $407 million to our net written premium. Adjusting for these transactions, our net premium written growth was still elevated at 61% for the quarter.
These transactions are yet another example of the dislocated state of the reinsurance market, where our strong balance sheet provided significant advantage as we looked to deploy meaningful capital to support ceding companies at firms that meet our target return expectations. More importantly, the underlying performance of this segment this quarter was very good with an ex-CAT accident year combined ratio of 82.9%, and a de minimis impact from current accident year catastrophe losses.
Reflecting ongoing hard market conditions, the insurance segment also closed the year on a very good note with fourth quarter net premium written growth of 17.4% over the same quarter one year ago, and an accident quarter combined ratio excluding CAT of 89.6%. Most of our lines of business still benefit from excellent market conditions, both in the US and internationally, and our expectations for the coming year remain very positive. Our mortgage segment continued its run of quarters with results better than long-term averages as claim activity for the business remained low.
While production volumes were down due to the lower level of originations in the market, we remain positive on the return prospects for this business. Net premiums earned were up slightly on a sequential basis as the persistency of our insurance in force at 79.5% at the end of the quarter continued to increase. The combined ratio excluding prior year development was 45% for the quarter and reflects our prudent approach to loss reserving, one of our key operating principles.
Our underwriting income reflected $270 million of favorable prior year development on a pre-tax basis across all segments this quarter, which represents approximately $0.66 per share after tax. While most of this favorable prior development, $211 million, came from the mortgage segment, mostly on claim reserves set up for COVID-related delinquencies in the 2020 and 2021 accident years at USMI. It is worth pointing out that our P&C reserves also contributed to the overall result.
Of note, both our insurance and reinsurance segments had another quarter of favorable reserve development, and the 2022 calendar year paid to incurred ratio for our P&C operations was 58.7%, its lowest level in more than five years. Both these metrics provide some insight into the adequacy of our loss reserves, which constitute an important element in the quality of our balance sheet. Quarterly income from operating affiliates stood at $36 million and was generated from good results at Coface SA and Somers.
Pre-tax net investment income was $0.48 per share, up 41% from the third quarter of 2022. Cash flow from operations over $3.8 billion for the year was strong and when combined with the proceeds from maturities and sales of securities in a rapidly rising yield environment enhanced the underlying contribution from our investment portfolio.
Going forward, with new money rates in our fixed income portfolio in the 4.5% to 5% range and a growing base of invested assets, we are well-positioned to deliver an increasing level of investment income to help fuel our bottom line. Total return for our investment portfolio was 2.6% on the US dollar basis for the quarter, with all of our strategies delivering positive returns.
The contribution to the overall result was primarily led by our fixed income portfolio, which benefited from relatively stable interest rates and tightening credit spreads. The overall position of our investment portfolio remains relatively unchanged as we remain cautious relative to duration, credit, and equity risk.
Turning to risk management, our natural cat PML on a net basis stood at $970 million as of 1 January 2022, or 8% of tangible shareholders' equity. Again, well below our internal limits at the single event one in 250-year return level. Our peak zone PML remains a Florida Tri-County region. As Mark mentioned, the PMLs we report represent a point in time estimate of the exposure from our in-force portfolio and the premium associated with the 1 January 2022 renewals will get reported in our financials starting next quarter.
On the capital front, we did not repurchase any shares this quarter as our assessment of the market opportunity in 2023 remains very positive, one where we should be able to deploy meaningful capital into our business at attractive returns for the benefit of our shareholders.
Finally, as Marc mentioned in his remarks, the results we enjoyed this year across our operations were achieved through a thoughtful and deliberate execution of our cycle management strategy and a strong culture of allocating capital to the most profitable markets and opportunities. These results, which were an important contributor to us joining the S&P 500, were only made possible by the ongoing hard work and dedication of our over 5,000 employees across the globe.
They deserve a tremendous amount of credit for making us who we are today, an industry leader with a stellar 20-plus year track record that is ready for the opportunities and challenges ahead of us. 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 star one, one on your touchtone telephone and wait for your name to be announced. That's star one, one to ask the question. If your question has been answered or you wish to remove yourself from the queue, please press star one, one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tracy Benguigui with Barclays. Your line is open.
Thank you. Good morning. your one in 250 PML to tangible equity at 8% as of 1 January 2022 wasn't too dissimilar to your 7.7% as of 30 September 2021. I'm wondering what made you pause to incrementally take more exposure that have anything to do with less retro capacity or your view of ROEs based on pricing for that incremental cat exposure?
I think this number, interesting, this number is one region, one area, one peak zone. What is not seen in the numbers, and we'll have more thorough discussion after the first quarter call, is that we've increased cat exposure across a wider range of subzones, and that doesn't really come across, you know, through that Tri-County. I remind you, Tracy, that the Tri-County renewal is going to be more important and more apparent at the June 1 renewal. It's also one first step into it.
If we had grown a European exposure because the re force was pretty good there, significantly, it would not show up into that one single number, right? It belies sort of the true increase in allocated capital to catastrophe. If you look at the aggregate number, which is a better reflection, there is indeed an increase that will be commensurate. You'll see the premium increase and the cap allocation increase are, it will make sense to you.
Okay, that's very helpful. As you look through the year, even though 25% is your maximum threshold, where do you think you could realistically land based on your risk appetite?
This is a great question, Tracy. Our typical answer is you tell me what the rate levels are like and we'll tell you what we think we can do. We have a plan, based on certain, you know, various levels of rate changes and terms and condition changes by zone, by region. Our team, as you can appreciate, is willing and able to operate on that basis. If you take a step back, I think the overall capital position of the company is we have plenty of opportunities to deploy. It's hard for us right now to see going all the way to 25%. Certainly we have room to grow, and we have the capital and the relationships to do so.
Okay. Also really quickly on the reinsurance side, in recent times, you focus more on quota share over XOL. With hard pricing, where do you see the best opportunities? I'm thinking about lower ceding commissions on quota shares and the higher rate on line on the XOL side.
I think it's across the board. You just mentioned that we have improved economics both on the quota share and excess of loss. I think that the numbers you see in fourth quarter, a lot of it has to do with, you know, our recent growth in the quota share that we've written.
I think by virtue of the Cat XL, as we just talked about in two months ago, increasing, I think that we would be in a position to increase our excess of loss contributions at the bottom line. When a hard market is around, which we still see on the reinsurance side and the insurance and the P&C side, you know, we have a tendency to migrate towards a quota share. There's a few reasons for that.
Number one of the big reason that we like to talk about is you inherit some diversification within that portfolio that you otherwise would not necessarily get from an excess of loss perspective. We really like this. We like to be closer to the rate change, right? When you're on a quota share basis. You're side by side with a client as opposed to an excess of loss, you need to be relying on your sole pricing to make it work. Over time, when the market gets harder, I think you will expect us, and as part of the cycle management, to underwrite more quota share versus excess of loss... [crosstalk]
Thank you.
This year, they're both. This year, they both are pretty good.
Thanks.
Uh-huh. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Michael Zaremski with BMO. Your line is open.
Hey, good morning. Thanks. I'll stick with the primary insurance segment, given I feel like most of the questions will probably be on reinsurance. You know, the growth has been decelerating there a bit. You know, Mark, we heard your prepared remarks sound like you know, you're still excited, but maybe you can kind of talk about our, you know, what's driving the deceleration? What are you guys seeing? I don't know if it's worth bifurcating between kind of E&S excess surplus lines versus non-E&S. I'm just curious if you, if the discipline there is dissipating a bit more versus, you know, reinsurance. Thanks.
I think we're just experiencing on the fourth quarter. That will probably change in 2023. I think opportunities are gonna resurface more broadly than we even had in the fourth quarter, right? I think it took a little while for the market to digest in and see what it means for the overall market. I think now the market is clearly in the camp of, you know, making, doing what it needs to do, to improve the return on the pricing on the property, which I think also you heard on other calls, but I think will impact, you know, broader set of line of business beyond the property exposure.
Before I go back, if you look at the 17% growth, I mean, 17% growth over a premium that's about 3 x the size three, four years ago, you know, we did have a lot of growth in the beginning of our market. As you get into the late stages, I think a 17% could be equivalent to another 50% increase in 2021 or 2020 when we started to lean into the market. I think this is a natural phenomenon that after a while you've, not that you've mined everything, but you really have pushed as hard as you could, and we're still pushing hard. Even 17% to me is about 3x the average growth in the premium in the industry.
That tells me that we're still seeing a lot of opportunities. It's again, like I said, we're later in the stage of the, of the hard cycle. I think that we'll see a rejuvenation, if you will, of that growth, possibly because the insurance companies are gonna have to increase, as we all know, their pricing. One is the property cap and the higher retention, right? They have more risk retained. We're participating like the other guys on the insurance market. We expect market to, you know, sort of getting a second bite of the apple, if you will, of a hardening market.
As a follow-up, sticking to the with the primary insurance segment, it sounds like the opportunities might fall within the property space, if I'm interpreting your comments correctly. When we're thinking about the segment's combined ratio, I feel like looking at my older notes, it was kind of mid-90% was the goal. Is that still what you're thinking? Is, you know, if time's been so good in terms of the market cycle that, you know, we should be thinking lower 90% as the more near-term goal?
I think we said a few things about the combined ratio. The 95% was meant as a target back in 2016, 2017 when interest rates were, you know, quite a bit lower. They went down further. As you know, that meant that we needed to have lower combined ratio targets, which we targeted over the last two, three years. That's why you see the impact of. I think from our perspective, low 90s is still what or high 80% is sort of what we're still pushing for because within the interest rates, you know, they may revert back and come down after a while in a year, a year and a half from now.
You don't wanna be too rushing to recognize all the various interest rates. Although we are currently, you know, we are pricing into our business, but we tend to take a longer view like we do on the trend on our inflation, and we're thinking the rates might come back down. I think we would still target a lower 90%, high 80% to get the returns that we think we deserve.
Understood. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Jamminder Bhullar with JP Morgan. Your line is open.
Hi. First had a question on the reinsurance business. If you look at your premium growth, even excluding the sort of large transactions, one-time transactions you mentioned, the numbers extremely strong and obviously doesn't have the impact of 1 month renewals in it. What's really driving that? Do you expect some of those factors that drove the strong growth to continue into 2023 as well?
Yeah. I mean, the one thing that, you know, right from the get-go, I think you need to appreciate the, you know, the quota share business is something that we, you know, we might have written a deal in 1 January 2022 and, you know, the premium gets written over the four quarters. We're benefiting from that. That's showing up in each of the four quarters. If the underlying rate increases also from the ceding companies are higher than what we might have expected at the start, that gets adjusted throughout the year.
The couple of factors were basically, you know, we're just following effectively the fortunes of the ceding companies. Still, I think our teams deserve a lot of credit for going after these opportunities, you know, being responsive to the client needs, being, you know, providing good capacity with, you know, good ratings, et cetera. Does that continue on in 2023? We think so. We think the market is there, and as we saw, like, the growth was not only one line of business, it was pretty much in every line of business.
I know property and property scan have gotten a lot of attention in the last few weeks. Still, I mean, all lines of business, other specialty, casualty, marine, aviation, you name it, I think all lines are, I think in a position to really gonna keep growing at a good clip in 2023.
Just shifting on to MI. Your loss ratios are obviously very good, but I think the loss pick did pick up a little bit in the fourth quarter. Is that more sort of national driven or is it more regional to where you're starting to see some maybe softening in the market in certain regions or states?
The, you know, we've navigated through the regional differences in our pricing. I think we have constructed a portfolio that we're very happy with, stayed away from what we perceive to be the more dangerous areas and underpriced areas. I think that's kinda showing up in our performance over time. In terms of reserving, I'd say two things. One, the delinquency rates are still very low, so it's not like we're really seeing pressure at this point in terms of a higher level of delinquencies being reported.
The loss ratio pick is really more a function of kinda us being a bit more prudent. I think there's a little bit of uncertainty with is there, you know, home prices, are they about to come down? Does that create some potential pressure? We think we're very, you know, aware of that, whether there's a recession, et cetera. You know, we're still very positive on the segment. It's just a, you know, a realization that, hey, this is maybe a slightly riskier environment than we were in, like, a year or two years ago, and our reserves are gonna reflect that.
Okay, thank you.
You're welcome.
Thank you. Please stand by for our next question. Our next questioning comes from the line of Brian Meredith with UBS. Your line is open.
Yeah, thank you. A couple of them here for me. First, Mark François, you guys typically provide in your 10-quarters, the one in 250 for all the other regions as well, Northeast and Gulf of Mexico, UK. I'm wondering if you could have those statistics so we can get a better sense of, you know, what type of growth you're gonna see, you know, at 1 January 2022 renewals. Maybe focus also on Europe, because I know Europe was. You guys got a good operation there and a lot of opportunities there.
Yeah. I mean, the ones we report usually a couple more regions. I don't have those handy. I think, yeah, to Marc's point, I think a lot of the growth, you know, that we saw at least at one-one, you know, will come through in regions that were, I'd say we were probably a little bit underweight in the past. That's gonna show up in the first quarter premium and for the rest of the year. In terms of P&Ls, it really doesn't have an impact.
Gotcha. Okay. Second question. I'm just curious, Mark, if I take a look back, and I'm gonna date myself a little bit here. You know, if I look back at what your, you know, underlying kind of combined ratios looked like back in 2003, 2004, after the last hard market, you're getting pretty close there in the reinsurance business. Are we getting to the point where we're kind of seeing max margins in that business? Maybe you get a little bit more in 2023, but how much more do you think you really get here?
It's a really good question, Brian. I don't know the answer to that. I like the comparison to 2002 or 2003. I would actually like to compare probably more like a combination of 2002 or 2003, maybe 2004 in liability and maybe 2006 or 2007 on the property side. I don't know what that means. I haven't blended going the combined ratio that we had in those two years, but that probably would be close to what we can do. I mean, look, there's a lot of things are different this time around.
Interest rates are lower than they were before internationally. More specifically, we're an international diversified reinsurance company. Hard to tell, but it's certainly going in a way of getting above our long-term and ROE targets, that's for sure. That's really what, in the end, what really drives us, as you know.
Great. Thank you.
You're welcome.
Thank you. Please stand by for our next question. Our next questioning comes from the line of Yaron Kinar with Jefferies. Your line is open.
Thank you. Good morning, everybody. I guess my first question, just look at the ROE profile of the company. Clearly, there's upwards momentum here. Can you maybe talk about, A, what the target would be, and B, if you'd see it coming more from or the expansion from here on coming more from NII or more from underwriting?
I'd like to think we got room to grow, but you're right that I think the biggest probably opportunity is NII, just with the leverage, and the, you know, the correction or the increase in interest rates we saw last year. I think that's gonna take still a little bit of time to show up in the numbers. But as we look forward over the next, you know, 12 to 24 months, I'd like to think that that will that there's leverage there that we can that can show up in the numbers. In terms of the segments, you know, results, I think they can all.
You know, mortgages, you know, again, the reported results, I mean, significant reserve releases, which certainly helped the bottom line and the ROEs that are reported. We think the segments, the fundamentals underlying each of the three segments are still very good, that they can actually still deliver very healthy results.
Great. Then my second question, just look at the insurance business. It sounds like you think that there may be some inflection to accelerating growth again in 2023. Can you maybe help us think about the impact of the reinsurance market, kind of available capacity, cost of reinsurance, how that plays into your the potential growth that you see for net premiums written in 2023 in insurance?
Great question, Yaron, because I think what we're gonna see through 2023 is a recognition, I mean, it's already there, but it's gonna be really coming home in the rules for us as a ceding company, right, on the insurance side and our clients and ceding companies that need more needs to be charged to the insured, so they can in turn pay the reinsurer they need to buy. Even if they went there, right? We heard that a lot of increase in retention, there's still more volatility that's absorbed by those insurance carriers, which should lead to, again, needing a higher rate, everything else being equal.
I think what we're seeing is, what we'll see is gradually, and again, on the reinsurance excess of loss, Yaron, you can just renew your business 1 January 2022, and everything change on a dime, right? On one strike of a pen. On the insurance side, it takes a 12-month period to transition and transform and then reprice the whole, the whole business. That's what I think we're going to be seeing. That's why I'm also, you know, fairly optimistic, is because we're going to have that repricing occurring throughout 2022, 2023 and beyond.
And alongside with those, between all of us here, terms and conditions are also going to be on the table, right, on the docket, for companies to present to find a way to not curtail, but find a way to have a better risk sharing with their insured, when it comes down to write the policy.
I guess for that, for that reason, that's what underlies is that sticker shock, not sticker shock, but a good increase in reinsurance at the beginning of the year that will have to filter through all the plans and budgeting for all the insurance companies, including ourselves, as we go forward in 2023. It's gonna be a slow motion, but it's still gonna happen. That's why I'm optimistic.
Got it. I apologize, I'm gonna try and sneak one more in here. Clarification. When you talked about kind of targeting low 90s, high 80s combined ratio, was that a reported combined ratio in the insurance segment?
That's policy year target. Expected, Yaron. It's expected, right? It's plus or minus, as you know, in our space, there's volatility around the expected numbers, but that's just long term expected.
Because you've been running at quite a, kind of mid-nineties. Where's that improvement coming from? Is it mostly just better rates and risk selection?
Well, we're running about 90% now. I think that we still continue to see improvement in pricing. That should help us get there somehow.
Okay. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Ryan Tunis with Autonomous. Your line is open.
Hey, thanks. Good afternoon. First question, I guess following up on Tracy. Could you give us some indication of, I guess, how you're viewing your overall CAT budget this year relative to 2021, based on what you saw for 1 January 2022 renewal? Should we expect kind of the expected CAT ratio to be higher?
The CAT ratio or CAT? I mean, in terms of...
CAT load.
CAT load. Dollars of CAT, yeah, we think will go up. No question. you know, we've been targeting, or targeting, I mean, our CAT load in 2022 was, call it, $80 million a quarter. now it's probably between $100 million and $120 million for the 1st quarter of 2023 based on what we wrote, right? We'll see how that develops for the rest of the year.
I mean, depending on how the 1 April 2022, 1 June 2022, 1 July 2022 renewals, how those kind of materialize, there's, you know, I'd say, you know, a good probability that it will keep going up throughout the year. Based on the in-force portfolio that we have, you know, in, you know, currently for the first quarter, I mean, that's kind of how we see the exposure to the CAT losses.
Perfect. That's helpful. Then I have one for Mark, I guess, more on the man-made CAT side, which isn't something we've talked about too much, but I would think that's one of the better markets right now on the reinsurance side. I guess just trying to size that, whether or not, you know, maybe some of the rate increases post Ukraine, if that can move the needle relevant to property CAT. Just looking at your marine and aviation premium, it's actually pretty chunky relative to property CAT.
If you could just give us some indication of, you know, can that move the needle? Is that something that we should be, you know, paying more attention to in terms of the markets we're seeing that are getting incremental firming that could help ARC?
It's a good question, Ryan. I think the one thing with an event such as Ukraine, which is a war event, there's actually a specific market for those kinds of risks. It's not like it's included part of the overall coverages for cat or whatever else out there. There were some, but there definitely as a result of that event, an attempt to exclude a lot of these war events and bring them back into the proper aviation war or marine war market, for instance. Yes, there is a lot of obviously a lot of activity there, a lot of rate increases there. We're participating in there. Those markets are, to begin with, pretty small.
That's why I think, you know, you'll see some improvement, but it may not be necessarily enough to move the needle for the industry, even though it's a very, very healthy proposition. The rates have gone through the roof, as you can appreciate, for the right reasons, in those types of business.
Yeah, makes sense. Just lastly, the acquisition expense ratio has been kind of hard to pin down at Arch over the past few years, but it's gone up. Obviously, it sounded like there were some changes in terms of ceding commission structures, things like that at 1 January 2022. Is there anything directional you can say about, you know, maybe how the acquisition expense ratios could move in 2023 versus 2022? Or do we just kind of expect something relatively similar?
Yeah, I don't think it's gonna move a whole lot from where it's been. I think, you know, there's been a lot of, you know, shifts in the mix of business, over the years, right? As particularly as our insurance book in the UK has grown, that's a bit higher acquisition ratio, different kind of reinsurance purchasing decisions. There's, you know, there's a long list of reasons or, you know, explanations as to why it's, it is where it is now.
Obviously, you know, what we focus on is the bottom-line returns, whether, you know, if we're gonna pay a bit more acquisition, we certainly think we're gonna get a lower loss ratio, and that has been the case. For your modeling kinda, I think, exercise, I think assume something pretty similar to 2022 as a starting point, and we'll keep you updated as the year goes on.
Thanks a lot.
Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open.
Hi. Thanks. Good morning. My first question, I guess, is going back to the reinsurance margin discussion that came up earlier. If you guys have a flat PML and you guys are seeing 30% to 50% rate increases in cat, wouldn't that triangulate into margin improvement coming through in the reinsurance book in 2023?
Well, just for If I could just isolate, first, we wondered where you were, so good to see you there. Second, I think the if you look at the property Cat XL, Elyse, I think it's, you know, the returns have dramatically improved. As you know, for us, it's gonna be incrementally, of course, accretive to our bottom line, but we're not, you know, it's not the biggest line of business for us. That's what allows us, we believe the opportunity to, and room to grow, the way we think we could grow into 2023. It's hard to say how much more, but the property Cat XL market itself, has significant margin improvement.
Would you say, building on that, Marc, would you say that of all your business lines as you sit here today, the line with the best expected return in 2023 would be catastrophe reinsurance?
It's up there are others that we don't advertise too much that are really, really healthy and getting better as we speak, and they're as big, if not as big. Some of them might, are as big as the property cat writing. You know, we have quite a few who are giving us pretty high returns. This is up there. It's up there, though, Elyse. Let's be honest. I mean, you heard it on the calls. This is a good time to write property Cat XL. It's a really good time.
You said, right, on the PML discussion, you had mentioned, right, that we need to kind of see how things come together, you know, at June one, that that could also be a good opportunity. What could derail this? Is it just alternative capital and more capital coming into the reinsurance space as you think, you know, leading up to June one? Even when we think beyond that, what, you know, what are you guys concerned about that could derail the uplift that we've seen in the catastrophe reinsurance market?
I mean, it's hard to imagine, Elyse. I think the third-party capital you mentioned they're still more in a wait-and-see attitude. The US renewal, as we all know, is a small portion of the overall cat writing in the year, so more has to happen. As we all know, and in line with what our Tri-County, which is a Florida exposure, Florida is the biggest exposure. It's hard to tell what could derail it. I mean, I'm trying to think out loud, you know, are there, the third-party capital coming in? I don't see it being a case. No cat in the first half of the year.
Well, we better have no cat. It'd be great for our industry to at least take advantage of the less cat activity. No, it's hard to see anything, Elyse. Because I think that the psychology of the market is clearly of remediating, you know, what needs to be remediated in a property cat space at all levels, you know. From the C-suite all the way down to the underwriting assistant desk. I think it's clearly a recognition that we need more. I think the only thing I could say is, you know.
The one thing that I could say just to help you out here, I think that will make sense to you, that we may have, you know, a bit less than perhaps some people have budgeted or maybe a bit more than budgeted price increase when we have a delta around what we see. In terms of core capital needs, and supply and demand, I don't see a major shift. It was a long question because I was thinking out loud here. There you go.
No, that was great. Thanks, Marc. Appreciate the color.
Sure.
Thank you. Please stand by for our next question. Our next question comes from the line of Meyer Shields with KBW. Your line is open.
Great. Thanks so much for taking the time. I hope this wasn't covered. I missed about 1 minute of the call, but I was hoping we could dig into the non-recurring transactions in reinsurance. I'm assuming those are retroactive reinsurance. I was hoping you could talk about specifically the sort of risks or the lines of business that you're assuming, and maybe give us an update on what that market looks like now.
Yeah, I mean, to keep it, again, fairly high level, those are general. I mean, I consider them to be kind of capital relief, capital support transactions for a variety of reasons. Companies that have grown a lot, you know, under some rating agency pressure, they need capital relief. Companies trying to put some exposures behind them, et cetera. But just to clarify, those are not retroactive, so they're all insurance accounted transactions, all, you know, insurance or reinsurance accounting, so that flows through our premium, et cetera.
They are across. You saw it in our lines of business. They did hit, you know, multiple of our lines of business. Some were other specialties, some were casualty, some a little bit of property. It spread. It's a, call it a vibrant market. I mean, there's a lot of pain that some companies are experiencing right now and they're looking for solutions. Again, we're, you know, we think we have, you know, strong balance sheets and capital to support them.
I think, you know, we, you know, we don't know if they're gonna happen again. There's, I mean, those are lumpy, but if and when they are presented to us, we're happy to consider them. Once in a while they, we end up writing a few of them.
Okay. No, that's helpful. Thank you... [crosstalk]
Yeah.
Second question on mortgage insurance. I don't even know how to phrase this, but you put up very conservative reserves for mortgage insurance over the course of COVID, and I'm wondering how much of that unusual reserve is still there, because clearly, you know, speaking at least for myself, we haven't done a great job of forecasting reserve releases in that unit.
Well, that's a great question, which is becoming harder and harder to answer because in the early days, no question that we had adjusted our. You know, because so many loans, delinquencies that were in our inventory were in forbearance and trying to make the distinctions between kind of forbearance and non-forbearance, you know, delinquencies and how much is that worth was, you know, a new concept or new kind of reality we were facing.
Over time, I mean, you know, it's been three years now. I think the reality is like the inventory is somewhat kind of co-mingled. You know, we don't really think of loans and forbearance kind of that differently than we look at the other loans, even though we know there's still a few of them in the inventory.
I mean, long story to say that, you know, it's not something we kind of quantify directly every quarter anymore, but we still perceive that there's a bit of risk with, you know, COVID-related reserves, and that's why we've been, you know, holding on to the reserves up to the point where we think we just don't need them. Right now, this quarter was an example where, you know, I think the data kind of suggested that we were, you know, it was the right time to release a fair amount of the reserves that were set up in those years.
Meyer, quickly, I think what Franco is saying is true for all lines of business in the authority, but we'll try to take a prudent stand on reserve to make sure we have enough, and we'll let data speak for itself. This one is very unusual, Meyer, right? A pandemic or something unlike anything else. Next time we have another one, we'll have a better playbook to use. But we just didn't know, and we still don't know. It's still not over. You know, one-sixth of our NOD are forbearance different, so it's still coming back in. It's not totally gone yet.
That's what leads us to be, you know, that much more. From the outside, it looks like we're conservative, but we think we're being prudent, and the data speak for itself. We'll see if it happens that we don't need it, then we'll adjust it based on the data we see.
Okay. Nope, understood. Thank you very much.
Great. Thanks.
You're welcome.
Thank you. Please stand by for our next question. We have a follow-up question from the line of Tracy Benguigui with Barclays. Your line is open.
Thank you for taking me back in the queue. I'm wondering what your outlook is on professional lines within your insurance segment, particularly what stage you would classify that business in when you went through your stages?
Tracy, do you include D&O there, or you just want the non, the ex D&O? What and which line specific? Professional lines is a really broad market.
Yeah. Okay. My focus is more in D&O.
D&O. Okay. D&O, we expect similar trends that we saw in the last fourth quarter. It may change a little bit as a result of the overall thing that's happening in the marketplace. The trend in the large commercial, for instance, have been, you know, neutral to negative actually for the last three, four years. I would say that.
Even though we may hear you hear, I know rate decreases on a D&O for large commercial, there's rationality behind it. We expect rationality to still exist. There's a lot of data that points to that, you know, validates what kind of price points we're seeing on the D&O side. On the smaller D&O side, which we do a fair amount of, to remind you, we do a fair amount of D&O. We still see a very stable, very good marketplace. Again, the smaller D&Os are not the big-ticket items that you would expect, right? A lot of them are gonna be, you know, a not-for-profit small policy.
Minimum premium is really, you know, a lot of times what happens and, you know, and that 5% increase might be $50, right? These are the kinds of things that we do a fair amount of. We have grown dramatically over the last four or five years. It's becoming a big section what we do. The market is healthy from a claims perspective, right? To go back to what I said about the large commercial, the NCEs are down 25%, 30% over the last four years. It's a pretty good market to be there. The IPO market has stabilized.
It was pretty hot for a while. Pricing got crazy. We took advantage of a lot of opportunity. Not crazy, but it was very acute needing capacity. We expect this to renormalize again. I think I would say D&O is normalizing for large commercial, sort of a stage four. I meant stage three where, you know, recognizing some of the overreaction, and that's the smaller D&Os, probably, you know, early stage of stage three, which is still very profitable and, you know, a little bit of decrease here and there or a slight increase.
Thank you.
Sure.
Thank you. I'm not showing any further questions in the queue. I would now like to turn the conference back over to Mr. Marc Grandisson for closing remarks.
Well, spend a good day with your loved ones. We will see you the next quarter. Thanks for listening, guys.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.