It's our pleasure today to have with us Arch Capital. We have Maamoun Rajeh, the Chairman, sorry, and CEO of Arch's reinsurance business. And we also have Don Watson, EVP Financial Services, and also Head of Investor Relations. I'm pretty sure most of you are familiar with them, but just to kind of get the high-level introductions out of the way, this is being structured as a webinar, so you'll be able to see us visibly throughout the hour. You will, however, have the opportunity to ask your own question through a few different methods. First of all, you can use the raise the hand function at the bottom of your screen. You can also send in Q&A via the webinar function, or you can email me directly at elyse.greenspan@wellsfargo.com. Just want to make sure that everyone gets a chance to have their questions answered.
I will kick things off with the first question. Probably most topical right now, Maamoun, is just the upcoming January 1 reinsurance season. So could you just level set things for us? What are you thinking right now from a pricing perspective? And if we can get the view on both the reinsurance as well as the retro side of the business and how you think things might shake out from a pricing perspective?
Sure. Thanks, Elyse, and thanks for having me. It's great to speak as always. Good afternoon, everyone. In terms of 01/01, Elyse, this is for us, as underwriters, going to be the most interesting renewal season we've had in many, many years, and we think about kind of the components that are driving this that get to the price changes. We have a level of uncertainty that's heightened. We have supply that's in flux, and frankly, we have demand that's increasing. The interesting thing about our business, as you know, is when rates go up, even when units of exposure stay constant, rating agencies require more capital, and for reinsurers, that's a great combination when our capital is needed at the height or in an inflecting rate environment. It's an interesting time to be solving problems and having an underwriter hat on.
But specifically to your question, if we think about property and retro, I mean, first of all, it's important to keep in mind that property rates have been moving. I think coming into mid-year 2019, our expectations as to rate movements around mainly the Florida renewal was maybe plus 10. And the market ended up, or at least our portfolio ended up, closer to plus 20. And so that momentum, I think, is going to carry through to 01/001, not in the same level, but I do believe 01/01/2020 will continue the rate rises that we've experienced beginning at 01/01/2020. Now, let's keep in mind, in the first of January, the portfolio and the deals that we get to renew are global, right? And so you get a smearing. You don't get just peak zone capacity, and you don't get just loss-impacted accounts.
You get really a mix of a global, U.S. and international book of business, but I do expect cap rates will continue to rise, probably in the U.S., low double digits, high single digits, depending on the zone and the dynamics of the deal, and retro will be orders of magnitude higher than that. I mean, I think seeing what is already being discussed and some of the transactions that are on the desk, our handicapping of it is kind of where we expect it to be. I mean, we think about retro at Arch. We're not a large retro player. It's not the biggest thing that we do, but it is piquing our attention and has been for the last couple of years as the market's inflected, but we do expect to see something closer to twice the traditional reinsurance pricing, something in the order of 25.
In our book, getting up to 30 or north of 30 would be the area that would make retro a bit more interesting for us at Arch.
That's helpful, and then also at January 1, right? There's a good portion of European business that renews, and so I know in past years, kind of when we get the holistic number, renewals kind of seem more muted, right, because Europe hasn't moved. Do you think that European rates can move coming off of not just the frequency of caps, right, but also the COVID losses? Is there an environment where you think we can get some price in Europe so the overall blend is something in a good level, positive direction?
I mean, you touched on a good point there, Elyse, in terms of COVID. COVID's manifesting a lot more in the CAT world outside of the U.S. than in the U.S. That's a variable that's coming into play in Europe particularly. And they always seem to get the memo a little late over there. The market share dynamics are a little different with the top five reinsurers really commanding a whole lot of market share and not wanting to yield much. But I do expect, I mean, I think as our portfolio, if I think about 01/01/2020, our international portfolio without any of these dynamics at play, we're up maybe, let's call it flat to 3%. I do expect that it will increase. It probably won't increase to the same extent as the U.S.
Demand plays a factor here, and the demand has been pretty static in Europe for a while. But we do expect that Europe will start to move. For what it's worth, Elyse, at Arch, we've been underweight Europe for the better part of the last decade. And frankly, we've been wrong. I mean, the events just haven't been there. But in the long term, I think we'll be long-term right. It's just not an area that the margins that you deploy capacity in Europe is just not where it should be.
And then thinking about alternative capital, right, we've heard about a good amount of trapped capital, primarily some from hurricane losses and then some also from COVID. How are you thinking about the trapped capital? And is that factored in when you talk about retro rates being up 25% to 30%? Is that the catalyst that you see there?
Yeah, I think it's one of. I mean, if you think about retro and the retro that's coming out of ILS capacity, I mean, it's been in flux now for a while, right? Coming into 2020, it started to the first year, I think that we saw some stabilization of the growth. And coming into 2021, I mean, anyone who has collateral at play will, by and large, trap that collateral. That would be the wise and responsible thing to do. And frankly, there's nothing sacrosanct about it. I mean, that's just the way the product works. That's what makes that product relevant compared to a rated entity piece of paper.
And so I think the fact that a good chunk of the worldwide retro markets, particularly the aggregate products provided by these ILS shops, the fact that there's going to be trapped capacity, and frankly, reloading with conditionality, I think capital providers and ILS managers together, they've gotten wiser. Claims have a way of teaching everyone a few things, right? And frankly, for the system, for the entire system, it's better. It's healthier to have a wiser group of capital coming in through the ILS side of things. So the demand for property cap, particularly in light of questions about views of risks and uncertainty around weather, all of that's coming together to just suggest that the ILS community at least won't be as prominent as they have been coming into 01/01.
And the point that I always think about with ILS capital is that a lot of it's visible and a lot of it competes with us, and it's the thing that everybody kind of keeps tabs on. But where it really is effective when it's in flux is where it sits behind traditional players. And we all know over the years, there's been a lot of traditional players who have relied heavily on ILS capacity. And that's going to change their behavior in the market as well with that retro capacity pulling back.
That's helpful. And then as we think about the market on an overall basis, I think last year we were hearing about this U-shaped market, right? Primary going up as well as retro and kind of reinsurance the bottom of the U. So as you kind of put these comments together, do you think 2021 is, and I know you're speaking more from the reinsurance side, but is 2021 still going to be a U-shaped market where the U is higher, or do you envision kind of that reinsurance working its way up so the market doesn't really feel like a U-shaped when we think about next year?
Yeah. Again, I start from the premise that primary rates coming into the system is a healthy start. Our healthy clients, more demand for reinsurers, it kind of just cascades that way in our favor. Now, I speak from an Arch Capital perspective. The fact that our primary operation is getting the rate rises that we're seeing there will deploy capital however it comes or wherever it's optimal. From the reinsurance perspective, I do agree. Right now, the 01/01 pulse that I sense in the reinsurance community is, generally speaking, for anything that's pro rata, the community is going to be content to take on the primary rate changes and not yield shares off programs. The rest of the, and so I think that'll be somewhat orderly coming through. Net reinsurers are in a better place coming into 2021 than before.
Ceding commissions have had a trend of giving in favor of reinsurers a little bit, not wholesale. I mean, if we think about it, ceding commissions are that great variable between prior hard markets and this hard market. It's probably in the order of magnitude about five percentage points that are not in our camp that traditionally have been, high 20s versus low 30s. But the rest of the market should, at least I'd say the word should on the reinsurance side, improve and take effect. But we can't control that, right? We'll see how that comes through. I think by and large, particularly if you think about CAT and what's coming through CAT, the community is probably graduating from low double-digit return on equity type numbers to maybe mid double-digit ROE numbers, which I believe are healthy.
And then on the retro side, if you're retro-dependent and you look at a lot of the Lloyd's capacity, if capital is a constraint, which is becoming increasingly so, that is a bit of a squeeze of having to buy the retro. But shops such as ours who can pick and choose, and frankly, in the past, we've been net buyers of retro. Today, we're probably going to be net sellers of retro. And so there is an opportunity for us to actually partake in the various segments here of the spectrum where prices are inflecting.
And then what about maybe the last part of kind of the January 1 dynamics? What about demand? Do you sense that insurers are potentially going to change their programs from raising their deductibles or perhaps lowering their deductibles? Do you think there's going to be changes to programs that could potentially lead to either more or less business coming to the reinsurance market?
Yeah. I think broadly speaking, Elyse, the sense I get from major clients is less change at 01/01. We don't want to change too much in our program. We don't want to change too much in our panel, which is exceptionally relevant to any newco starts. And I'm sure someone will have some question on that as well. But it's consistency of panel, consistency of program seems to be the emerging theme. Having said that, I think tolerance for volatility with our clients has gone down. So that bodes well for demand. And here, it's sort of holistic solution products around whole accounts and structured solutions. We were having some conversations generally, and I'm sure others are around this one. Now, it's early. It's funny. This will be a late renewal season. There are a lot of discussions.
We're having a lot more discussions at this time last year and the last handful of years. But in terms of locking in deals and anyone sort of double-lining pricing, we're still a ways off. And I think it's just going to be a late, late renewal season.
Okay. And then if we think beyond January 1, right, to kind of set the stage for thinking that we could see healthy rates in the U.S. and even perhaps some increases in Europe on the reinsurance side, as we think about the progression during the year, next year, so 04/01, the Japanese renewals and 6th and 07/01 in Florida, do you envision this as a market where we'll continue to see hardening during the year and then even take us just as things sit today, take us to 01/01/2022? Do you envision this being a market that has legs where we could think about more than one year worth of firming?
Yeah. Sure. I mean, Japan, first of all, in April is an easy one because that's going to be an interesting one because frankly, there's a lot of views of risk in Japan are changing, and that'll be an interesting renewal and a good one, I think, for reinsurers, but I think if you step back and think about it, right, this market has been on the move for a number of quarters now. In fact, if we think about Q3, Q3 would mark sort of the third annual compounding of rate rises, and not just that, but it's at an increasing pace, and so just rough orders of magnitude, I think if we looked at the rate rises that we saw in Q3 2019 relative to 2018, they were sort of two times that increase.
And if we looked at the Q3 2020 versus 2019, it was almost two times the increases. And that varies very widely depending on E&S and standard markets. But so the momentum coming in is really accelerating. That's one. And I do think this notion that everybody is sort of sentiment matters and everybody is sort of converged on this notion that, first of all, it's broad-based rate rises. And the idea that they will continue for some time is baked in, I think. Now, a lot of things can change in a year looking at 01/01/2022. But I am optimistic that this market does have legs primarily on the insurance side, on the policyholder level, which always invariably will be good for reinsurers. And don't forget, a lot of what we do is pro rata business, right?
We sit side by side with an insurer providing our capacity next to them on a select insurance. And as we build that business, and as you've seen us on the reinsurance side at Arch over the last couple of years, I mean, we have grown. And I'm pleased when I see that. We're never a top-line shop, as you know, and we don't even have forecasts on telling our people what to do and what to expect. But as I see that business piling in, that's good quality business. And that has some time to earn through. And it's doing it at the right time, in my opinion.
If you had to compare this market, and I know every market is different, it does bear some similarities to post-2001 and also 2005. Would you pick one over the other, or is it just there's just so many different variables today?
Yeah. I think you characterize it. I think it's got elements of both, right? If you think about COVID, COVID has that 09/11 sense to it in terms of the number of products that have been impacted. The difference is COVID geographically has been global and isn't just limited to the U.S. Now, ultimately, we'll find out how it all shakes out. And frankly, I feel a little bit better about COVID in terms of an industry loss today than I did six months ago. But nonetheless, that has a 9/11 feel to it. But the CAT events and the frequency of CAT events and the expansion of just outside of the U.S. really has the 2005 feel to it. The key difference for me from 2001 is you haven't really had that exploding capacity. You haven't had destruction of capital per se.
We've had a lot of M&A activity that's been sort of the great sweeper of some of these failed projects, but haven't had that spectacular busts that we saw in 2001. And the existing community is healthier. It's there. The existing companies are probably best positioned to trade through this cycle this time around. So long way of saying it's got a little bit of both, but it is unique in its own sense as well.
Right. And then a question that came in from an investor. I think we touched part on this earlier, but they just wanted to know if there were any major changes to terms and conditions for 01/01 or just 2021 in general. I know we kind of touched on the demand side of things. And then they also wanted to know how is Arch treating COVID claims in 2020 on XLL treaties with respect to ALIS ?
Yeah. Yeah. I'll hit the second first. Look, our portfolio and the excess of loss, particularly a property portfolio, is constructed deliberately in a way to reduce or minimize uncertainty. We will never be perfect. But we spend a lot of time deploying capital in programs that model better than the average program. This means we stay away from tech lines in terms of Property Cats, means we stay away from large commercial. And so that bodes well both for the predictability, if I can say, the credibility of the modeling, but it also bodes well for anything like COVID. And so in the U.S., a large proportion of what we do on the CAT is personal lines.
And so we're not taking a blanket view of saying to our team, "Go out and exclude communicable diseases on everything that you write." That's just not what we do, and that's not constructive to clients. But we do think about it. And certainly, our attention to it has been heightened. So we will underwrite the deals, as we always have, and we will make the changes that are appropriate to those.
Okay. That's helpful. And then in the past, you guys have spoken about return on allocated capital, right, to your P&C business. And you, I think a few minutes ago, made the point that you thought reinsurance, correct me if I'm wrong, was going from a low double-digit ROE to a mid double-digit ROE. I'm not sure. I think that might have been just industry comment versus an Arch-specific comment. But do you have a sense of, correct me if I'm wrong on that, and then do you have a sense of the return profile for the reinsurance business that you would expect today if the pricing dynamics play out the way that you're expecting?
Yeah. I mean, do I have a sense? I have a very precise knowledge of it, for sure. I mean, I think as a general statement, first of all, you know us well enough, I think, to know we deploy capital across segments, even within the reinsurance group. And even when we talk about specialty lines within those specialty lines, and within each line, we go down to the subsegment. I mean, I was thinking we were just having a discussion around our Agribook, for example, as one of our specialty lines. Our Agricultural Book is unrecognizable today versus where it sat just three years ago in the deployment of it. So there's a lot that goes into it.
I don't want to dramatize it more than it is, but we do spend a lot of time down to a segment level of where we kind of lean into and where we put exposures out there. So, yeah, I mean, I think so. Having said that, I think generally speaking, if this momentum that we see kind of continues, for those that were in the low double-digit ROE area should end up in the mid double digits. In this interest rate environment, that's a phenomenal place to be, I think. Frankly, we haven't talked much about it, right? The interest rates are a big driver of what's going on here and the sustainability of it and the need for it to continue because it's exceptionally hard to make up for, I don't know, 150 basis points reduction in discount rate on long-term lines.
You take a deal that's four-year duration. You need five, six points net of trend just to make up for that. And so that's another point that I think the market will slowly carve that back and ensure that underwriting margins kind of at least make up for that reduction that we're all experiencing in interest rates.
That's helpful. Before I go to the next question, just an FYI, I do see some other questions coming in. But if anyone on the line would like to ask their own question, just use the raise your hand function, and we will go around and make sure everyone gets a chance to ask their questions. But before we go to the Q&A, so you kind of hit the nail on one of my next topics, right? We spend so much time talking about what's going on with catastrophe rates that we haven't really hit on what's going on with the long-tail line. So on the casualty side, you make a valid point, right? With interest rates being so low, you're going to need to obviously push for more price on the longer-tail lines as well.
So can you just give us a sense of what you're seeing in casualty lines? And when you give us the pricing sense, can you give us a sense of which lines you view as much more attractive to Arch today from a growth perspective?
Yeah. I mean, once again, I think the story begins and ends on interest rates. On anything long-tail, we do, I mean, the market on the primary side is moving dramatically in the larger segment, the large E&S sort of commercial space. And that's needed and that's required. And the fact, as I mentioned, the fact that we have those interest rates at the worst, the lowest they've been in, I don't know, forever, 60 years, is a big impact on that segment of the market. And I think that's going to play out. I mean, the bottom line for me is underwriters will have to make a decision. Do you lean into that market now with substandard returns and hope that you can ride it out, or do you say to yourself, "Nope, I'm going to hold out and wait another year until the tide carries it above mark"?
And everyone's grappling with that. All shops are going to have to make a decision around that element because it's fantastic on the insurance side. And it is becoming more interesting, at least in the last half dozen years, this is a chance to really make up for some of our absence of long-tail lines. And I should highlight that, Elyse. I mean, and the nice thing for us is we've been patient over the last five years. We haven't deployed, overextended ourselves, whether it's in Property CAT or in the reinsurance side on long-tail. And the long-tail segments that we did play in are very different than third-party GL or professional lines. And so it gives us a chance to kind of step into that a little bit going forward. And I don't think we'll go crazy, but we will do more.
As you'd expect us to, as the market improves, we'll do more.
Okay. Great. I think there's a few questions that came in, but before I ask those, we do have a question from Heather Takahashi with Thrivent. So, Ryan, if you want to just unmute her line.
Hi, guys. Can you hear me?
Hi, Heather.
Hi. Thanks for doing the call. So I have a question on Property CAT and model changes. So could you talk about how your models have changed for Property CAT since 2017, and what do you think the industry has done? For example, if you were to have given the return period on Irma back in 2017, and then you were asked the same question again in 2020, would that number have changed? And what's your view of what the industry has done, if anything, with respect to models and expectations?
Yeah. No, fair enough. And thanks for that, Heather. And you know as well as I do, right, solving for one or two event sets, when you think about just the loss adjustment expenses differences in Florida between one event and another could be 15 points on its own, right? But the whole event set, I mean, look, the nice thing about this business is you have a baseline model, and you do what you get to overlay your view of risk onto that modeling. And every shop's going to do it differently, and everyone's going to have a view by territory, by peril, maybe just across the board. And we certainly have our view. And our view certainly for us is that you can't ignore the frequency of the events that we've seen recently.
Having said that, I recall 2004, 2005. It's one of the things that we talked about earlier in the question, is that 2005, a lot of shops waved the white flag and said, "Florida's uninsurable." And for 10 years, you could have made a lot of money in Florida. And so you got to avoid being very, very specific about it. But we do, Heather. The one thing you wouldn't be surprised to hear is it's taken a lot more of our time talking about these topics and embedding it into our modeling. And for the first time, I'd say we actually have a meteorologist on staff. We haven't done that in the past. I think those insights are informative and helpful. We're never going to be that shop that builds an army of them. We're not going to be that reliant on modeling.
But ultimately, you take a view, and then the biggest lever that we have in terms of that is in times of uncertainty, your ultimate lever is how much you deploy. And in times of uncertainty, you deploy less. And if you look at our capacity, I mean, we've been sitting at the low single-digit percentage of our equity base in terms of globally at Arch in terms of P&L.
Maybe one thing to add to that, Heather, just you get to it is a point that with this uncertainty that we have out there, you need more margin to cover the variability that you're having. And so, yeah, we've seen a lot of increased frequency this year. The last three, four years, if you think about it, we have. There's increased uncertainty in terms of whether the models are moving and adapting quickly enough. And so you have to get more margin. And that's really a factor in what's driving these rates.
The other thing too I wonder about is the whole assignment of benefits issue.
So I was talking to one of the Europeans last week, and they were saying, "Oh, how excited they were about the price increases in Florida." And I asked, "Well, what about that big slew, that huge amount of Hurricane Irma AOB claims that came in over the summer? What do you think about that?" And the guys, it was a video conference call, so I could see the guy raise his eyebrows. He had never heard this before. It was a strategy guy. It was the head of strategy. So you might be able to forgive him, but still, come on. So I'm wondering, are people factoring that stuff in in the industry? Because I was surprised that he was surprised.
Sounds like someone's going to be paying some tuition bills. What do you think?
Yeah, I think so.
Yeah. I mean, Florida, look, Florida has always been laced with issues that one has to think about, right? The next big event when companies can't pay their reinstatement premium or have to take their claims out to a third, and I'm being provocative here intentionally, right? You have to outsource your claims payments and everyone's going to look back and say, "Well, why don't you think about that?" We do. And you limit it by how much capacity you're willing to tolerate in anyone's own and the clients that you everyone's got a view, right? Every deal clears in Florida. Everyone's got their best favorite clients. But we try to have our own, and we backtest them, and we audit them, etc., etc. And that's what you can do and then make the best bets that you can take.
Got it. Thank you.
Now I'll go back. If anyone else would like to ask their own question, raise your hand, or you can also use the Q&A function or send it in to me. I got a good amount of questions sent in, so I'll just kind of go in the order that they were received. So one investor wants to know your views on the startups. Will they ruin the parade and put a dent in the hardening market?
Broadly speaking, I mean, I think it can, right? It can. But broadly speaking, I think the one interesting thing I should first take it a step back, right? Let's look at the capital that's been raised. We think about the capital that's coming through. By my count, and Elyse and others will have a better one here, but we're north of $12 billion. And the vast majority of that capital has been raised for and by existing platforms. Yeah, some of that is new co, and some of it is still sort of aspirational capital. And we saw the news on one of them, I think, yesterday and so on. So it suggests that maybe not everyone's going to clear through. But I think so that's one. I mean, and two, I think the timing matters.
In setting up a de novo in this time and building a team and getting ready with licenses and platforms, I can make a lot of jokes around this, but I won't, but it takes time, and so you question the relevance or the impact that those new co's are going to have at 01/01, and then broadly speaking, I remember back, I was one of the early Archies here, I remember when we were five of us in the office at a time when we all knew each other and we all worked together, and still, it was very challenging to get a company off the ground in a raging hard market, to assemble a team, a disparate team in a COVID environment, putting your message out remotely and bringing a value proposition that doesn't exist with the likes of Arch and our peers.
I think it's more challenging this time around. I don't suggest that those companies that have a quality team won't be successful, but I'm saying what about the impact in the short term, and if I take the Arch Capital hat off and I just put the reinsurer hat on, and they present opportunities for us, and these new cos set up, and by and large, they'd like to buy quota share capacity, and they'd like to protect the unlucky events in the early days, and so it works. It brings in business to the, it brings in premium to the system, but over time, yeah, it could have an impact. I also note that a lot of these companies that have started up have PE backing, and we all know what PE's required returns are.
And again, hopefully, that is a regulator as to how these companies deploy and how disciplined they're going to be. I think that's an important point to keep in mind. But net net, from what we're seeing in the market, what we're hearing from brokers, the dialogue we have with our clients, and I'll say it, we're already in dialogue with our clients, right? It takes some time for others to do that. By and large, clients want consistency. And if the panel is there to trade, and a lot of the panel will be there to trade, it's going to be hard to break in from a reinsurer perspective.
Okay. Great. We'll take a break from some of the sent-in questions to go back to someone on the line. Steven Gavios at Jennison. Ryan, if you could unmute his line, please.
Thanks, Elyse, and thanks to Maamoun and Don for doing this for us. So two somewhat related questions. The easy one first. Maamoun, you had said earlier that you didn't think reinsurance programs and panels were going to change much. Do you think shares are going to change much within those panels?
Yeah. Well, do you know what? I like to think so because I think by and large, whether it's a client, a broker, or an ILS capital provider, there's a flight to quality. And I think there's going to be a reasonable chance that A-plus rated quality organizations are going to have a chance to flex out on the programs at the expense of others.
Okay. And now my bigger question. So your boss seems to think that he's Phil Jackson, and he's debating whether to pass the ball off to Jordan, Pippen, or Kerr. So as you guys sit around the table, and of course, you all know each other very well for a long time, how do you think about putting capital to work in the reinsurance business versus putting capital to work in the primary business, let alone the MI business?
Yep. Well, yeah, Michael Jordan, I always want the ball, right? I always want to take the ball, take the shot. And no, look, do you know what? As you can see, I'm in the office, Mark's next door, and Nicholas is over there. And we spend a lot of time in this organization collaborating and thinking about it. And we're just wired to put the capital where it makes sense to put it to work. And there's a lot of insights and info flow, which, again, when you think about it as an established organization with two global entities, insurance and reinsurance, just the advantage you get in decision-making from those cross insights. And so we're constantly going to deploy capital in the places that make most sense. And we're also fortunate in our organization, our size, and our prospects that it's not an or discussion either.
A lot of these discussions are end discussions that we can do here and here and have some in reserve for if this story plays out, etc.
So I guess my question is to follow up. As you think about your 2021 game, obviously, there's a lot of uncertainties in that. Do you feel like you'd have enough capital from Daddy to write the business you want to write, or is Nicholas going to take it all from you?
No. I have plenty of capital. Plenty of capital to write what we want to write. And.
Maamoun has sharp elbows, by the way, so just.
I was standing next to him. I know.
Yeah. Steven, let me just jump in on this a bit on it from the group perspective there. All of these guys are looking to get a return on that capital. And so as they look at building their business plans, right now, reinsurance group, what did you see through the nine months? These guys have really accelerated. They're absorbing capital right now. They're utilizing it, and that's because they get good returns. I think we do get to, excuse me, a situation where the opportunities are so good in primary as well as reinsurance as mortgage that we have to make a decision. Excuse me on that. But I think the question is, that would be a nice high-class problem for us to outrun our capital as well as our capital generation that's going on right now. And I don't see it. We see really good opportunities in 2021.
We don't see us outrunning our ability to fund that internally.
That's helpful. Thanks, Don. Elyse, back to you. Thank you.
Thanks. So going back to some of the questions that were emailed in, there were a couple on the return side. To go back to those comments, Maamoun, so one investor wanted to know, when you said going from high single digits to mid double digit returns, did you mean mid teens, or did you mean something like 20% to 30%?
No. So look, I mean, the question at the time was around cat versus retro. And I would differentiate the two. Again, in our world, when we think about retro and you think about how far removed you are from the original risk, you say to yourself, "Yeah, look, I've got another plus whatever it's going to end up being." And you start to monitor. It's classic fashion. I mean, we've been monitoring retro, I'd say, for about three years. I'm going to take a long way to your answer, but just the retro market, to put it in perspective, is about $18 billion odd limits. And three years ago, we'd have seen probably a quarter of that. And in 2020, we saw two-thirds of that limit in terms we reviewed and analyzed it. And it remains a small part of what we do.
But our view of it is, if you're going to do retro, you're going to want to do retro at north of 20 RE. Don't hold me to this, but it's just kind of incomparable. If you're going to deploy capital between traditional treaty, where you have a real good sense for what's going on, and retro, the order of magnitude difference needs to be about a third more. And so that's kind of how I think about it. And so the answer differs for the different segments that we might be in. But by and large, I mean, I think if you were writing property in the low teens, if I said single digits, I apologize, the low teens, you should be writing it with this momentum going, you should be getting a chance to do it at mid teens.
Retro, normally speaking, should be taking a, again, my rule of thumb, maybe a third more than that to make a meaningful difference between, or maybe we reallocate interest and exposures from one to the other.
Okay. And then another question. I'm not sure how much detail you guys are going to want to get into this. And Don, if you want to add, because one investor was just wanting to know, based off of your expectations for the 01/01 renewals, how would you generalize the ROEs between your three business segments? And if you could just comment on your normalized ROEs that you expect between insurance, reinsurance, and mortgage. So I'm not sure. You kind of gave us kind of the reinsurance. If there's anything you guys kind of want to add on the other two businesses.
I would say, yeah, one of the things that's making it a different story today is what Maamoun references, the investment yields. Your longer tail lines of business are suffering. We've talked about just like on the insurance group, getting to better than a 95% on an excl. CAT or on a normalized cat, I'll call it, basis. We're operating at that. Guess what? The bars are being moved because of the investment yields. Maamoun just went through some of the numbers. It's pretty material on even medium-tail business. We have to keep on improving. What I think a lot of what, although Maamoun's group does a fair amount of casualty and longer tail lines, these also do a fair amount of the shorter tail where the investment yields have less of an impact.
So we see better returns right now coming in in the reinsurance. And that's why you see us supporting a lot of growth there. We like the long-term stability of growth within the insurance group. But we're still probably talking or somewhere around that 10% to 12% expected returns on the business because of the drop in investment yields. Even as we see some improvement in the underlying loss ratios with improving rates. Mortgage, which I don't want to pass up here, is something that we still see as mid-teens ROEs. This is something that we still see as very good business. So all three of the businesses we think are double-digit ROE next year.
Okay. Great. Before I go back to some of the questions that I have that came in, Chad Stogel from Spectrum, I see you have your hand up and have a question. Ryan, if we could unmute Chad's line, please. Chad, you're live.
Hey. Thanks, Elyse. Hey, guys. We're doing a lot of talking about the renewals and the pricing, but also on that uncertainty point that you brought up earlier, the losses, COVID being one of them. Today, we had a sort of surprise ruling out of Australia. I don't know if you have any comments on that. The primaries there were kind of banking on disease exclusions, and then somehow or another, the lawyers, as they normally do, they figure out a way to get around that, and Australia ruled in favor of the plaintiff. So just curious, any thoughts you have there and how big that market is? Because I can't imagine it comes close to the U.K. or definitely doesn't come close to the U.S. market, but they did something similar to the U.K. with the test case.
So any comments there on either your exposures or just more broadly?
I mean, I haven't seen that ruling. But as a general statement, I see Australia is sort of the equivalent of California in being litigious, but the equivalent of Taiwan in their pricing. And so we're not a player in casualty in Australia. It is not an insignificant market for some. It's a fairly mature casualty market and professional market. But we don't, by and large, have exposure to it. And I haven't seen that ruling. But do you know what? It's classic, right? It's why COVID is doing what it's doing in this market. It's not because of COVID. It's just yet another bit of uncertainty that the industry has just realized we don't have that buffer of safety to pick up these things. You look at Ogden Rate changes in the U.K.
You look at COVID and you say to yourself, this business on the long tail needs a buffer of uncertainty to price in a long-term shock such as these.
I think maybe just to add on to that, Chad, that the reality is COVID's going to be with us for a while. And losses can continue to emerge for a period of time, right? Some of which we haven't seen, and we don't know. The FCA in the U.K., Supreme Court's going through this week, right? There could be some other conclusions there. We're going to continue to see test cases in the BI language in the U.S. There is uncertainty, and that's where we've got to monitor for it. We've got to look at our wording, and we have to be very prudent about what we're doing. All of this just, I like Maamoun's comment there. There has to be margin for uncertainty out there.
That makes a lot of sense. That's helpful. And just one clarification, Maamoun, did you say for the decline in rates on long tail, you need 5 to 6 points? Was that the number that you kind of threw out there?
Pardon? Sorry.
On investment yield, with the drop in investment yields.
With the decline in investment yields, yeah.
Yeah. Look, it's just the back of the envelope, if you think about just the loss of, again, if you think we were discounting it 2% just a short while ago and we're discounting it 50 basis points today, just to stay even on a reasonable duration, you need probably, yeah, five, six points of rate just to make that equation. I mean, it's pure math, right? Just to make it work.
No, that makes sense. That's great. Thanks, guys. Appreciate your time today.
Thanks. So going back to questions that got sent in to me, one that just got sent in, if cedents want stability on their panels, are you guys able to grow on most sought-after panels? Either you're already on them or it's new business, or will more growth come from getting on new opportunities to the market? Can you kind of envision how you put together your portfolio next year?
Yeah. No, look, good question. I think where we sit on panels, the discussions, the conversations that we have with clients sound more like, "Hey, guys, how can we get more of Arch on our program? What's it going to take to get you guys to do more?" And so for us, the ability to increase shares, I would say, is easier to do than our average peer next to us who are already pretty much well entrenched and have big participations on programs. And this goes for CAT and some of the non-CAT on the syndicated business. We will always be. I mean, I shouldn't say it that way. I mean, we are considered a first call type market for anything that's complex, that's different, that needs speed of execution, that needs a little bit of creativity.
Those deals, we will lean in and we'll take the whole thing or majority of it. We will have opportunities to do that in terms of, I think of your words, of new business. I think that area has a chance to present more opportunities for us. On the syndicated side of the house, the transactional business will get to inflect and do more. Then, frankly, in the last five years, if you really think about the components to the platform that we've put together, we haven't been deploying as much as our peer group has, but we haven't been sitting still either. So we have various buckets, whether you think of our prop fac team that's doing volumes that are sort of order of magnitude two times what they were doing just a short while ago.
If you look at some of the various units that we've put together, if you think about the ILS capabilities that we've built over just the last few years, we have tools that were coming into this kind of inflecting market that we didn't have just a handful of years ago on the reinsurance front. And so I think that's going to bode well. These are going to be timely for us. And frankly, I mean, we have a lot of conversations with partners. We're constantly speaking to, fielding calls or reaching out to partners, capital providers that have been around Arch for many, many years, discussions around sidecars, discussions around other opportunities. Those are constant.
I would say in the last number of years, it's been really our call not to do them because we just don't believe much in the returns, and we won't slap the brand behind it. Going forward, frankly, we're going to be much more open-minded to that so long as it adds value to our clients and makes sense and is durable. So that might be another source of things that we do that we haven't done historically.
That's great, and then another client wants to know, given the rate momentum you're seeing and the growth you've seen this year in reinsurance, how much of an increase should we expect in net premiums in 2021?
Get the crystal ball out there, Maamoun.
Yeah. I guess they want you to compare it to the 20% to 30% year over year, or would you expect it to decelerate, so I'm not sure if you want to give a precise number, but maybe talk directionally.
Yeah. I mean, I think you should expect if the market improves, you would expect the shops such as ours to do more in that market, and if the market doesn't return or play out in the way we expect it, we might do less. I mean, we will constantly be looking to kind of maximize those returns and where we deploy it.
I think the point is the momentum is good today. We like the market opportunity, and we like our positioning. But it's really hard to say what kind of additional rate on rate do you get in 2021. And that's really going to depend on our appetite. We don't have a particular desire to write more premium unless the returns are commensurate. The investment yields continue to put pressure. If we see more on the longer tail casualty lines, we still need a lot more because of the rate issue. So if your prediction is rates stay the same, are we going to see enough? Well, this is the other thing. How fast does the economic growth pick up next year? Is the demand side going to pick up just from an economic activity? So a lot of unknowns out there.
Where we are going into year-end on property, I think it's a little clearer. But beyond that, it looks promising, but who knows, right?
Okay. And I wanted to take a break from some of the questions that got sent in to me. I think we do have a follow-up from Steven Gavios. Can you guys open Steven's line? Steven, are you there? He might have hopped off. Okay. We'll wait and see if he wants to. Steven, are you there?
Here we go. Can you hear me?
Yeah.
Yeah. Sorry.
So I believe the Watford Re saga is over, hopefully. So maybe, Maamoun, from your perspective, you can just give us your thoughts on how you're going to integrate that and manage that going forward. Obviously, you brought in some capital partners, but there's also more Arch skin in the game now going forward. And as I understand it, Watford was diversifying its own business a little bit, and now it'll be wholly part of yours. So just talk to us about how you roll forward with that business from here.
Yep. Thank you. I mean, using the word saga was probably pretty appropriate in this case. Not over yet, but clearly in the right place, in my opinion. Well, look, I mean, everything that we had in mind when we started Watford six years ago remains even more relevant today going into this hard market, hardening market, I should say, right? And so the idea of having a parallel balance sheet associated with Arch, the company is so intertwined with us in the first instance, makes a whole lot of sense. And from our client's perspective, having the capacity to do more with them on the one hand, for Arch to have a fee flow to continue is important. We've always talked about that element of what we look to do.
So going forward, I think you look at Watford, and you look at partners who know us very, very well, and Warburg and Kelso. As you know, Kelso is a partner of ours in Premia. And so we know them personally and institutionally pretty well. And so they understand where we think we want to take Watford. I think we'll probably talk a lot more about sort of Watford version 2.0 after the close and just really kind of get into those details. But by and large, holistically speaking, I think where we counted on investment returns to be the majority of the total return in the past, probably we'll lean more towards underwriting returns being a more important component of the total return. That's generally it. There's a lot more to talk through, but Steven, hopefully that gives you enough to get a flavor for it.
We don't mind. I mean, this is a time when owning a bigger piece of Watford in this market, we're very happy to do so.
So obviously, we'll talk more about this once you close the deal and can speak more freely. But just from kind of a general view, as you were talking, it sounded to me like the RenaissanceRe, DaVinci Re kind of relationship. Is that how we should think about it?
You know what? Perhaps more so in the future than the past. Look, Arch stands by the client's relationships that are in Watford. Those are there because of Arch. The transaction from an Arch shareholder perspective, we think is a compelling transaction, which is also an important component to this. In our minds, we did this for all the right reasons. I mean, a lot of stakeholders here, and we think all the stakeholders came out good here at the end of how it played out. Strategically, we think Watford's very important to Arch and to our clients, and particularly in this time of the market.
Got it. Thanks.
Then a question that came in from an investor. Is the expected 10% to 12% ROE with all three businesses in the double digits on allocated or reported equity?
You're getting penalized for some good intentions there, so here you go.
This is what happened. What we're talking about is allocated capital, guys. That's really what we're talking about. We're not trying to provide guidance on what our ROEs are going to be next year. We have capital allocated to all three operating units. We have capital allocated to our investments. And we have our shareholders' equity as well. So you have all of these things factoring in at the group level. The point really with the returns that I guess we're guiding you is that it looks better going forward. It's to the point that we're encouraged to write more business in each of our units. What you've seen in the reinsurance group, I mean, if Maamoun wanted to write the level of premium he wrote in 2020, he could have done that in 2017, 2018.
It's available out there if you're willing to take the price. The difference is that more business is meeting a return threshold that we're willing to take today, and that's promising. There's a lot of uncertainty out there, whether it's coronavirus losses, whether it's natural cats. These are all things that we're in the business of paying losses out there, hopefully not too many of them, and hopefully, we manage it well, but allocated capital, guys.
That's helpful. Well, I think this does bring us to the top of the hour. But before we end things, first of all, I wanted to thank Maamoun and Don from Arch for joining us today. If I was going to sum up the discussion, I would say if you guys are looking to a better market in 2021, January 1, double-digit rate increases you think you could see in the U.S., Europe will be up less, and you'll see greater rates in retro. And the momentum, you see it could continue on the reinsurance side during the remainder of the year, obviously with the caveat that there are some uncertainties. But you see this as a good environment, maybe a great environment to put capital to work in your reinsurance business. And all businesses should be generating double-digit returns on allocated capital in 2021.
I guess, is there anything you would add to those as kind of being key takeaways from this discussion? And then in answering that question, Maamoun, is there anything you just want to point out to the investors that are on the line with us that we might not have addressed today?
I think so. This is just our sense for where things stand today. Optimistic, but things have to play out. And the nice thing about our platform is it's scalable on the reinsurance side, for sure, very scalable and either way. And we've got a team that is excited going into this, working hard. And we have a chance for more wins this time than we did in the past. But there's a lot in flux, and we'll see ultimately how it plays out.
Don, would you like to add anything?
No, I think we've covered this well. I think that we are more optimistic. There's always uncertainty out of there. And so these are our expectations today. Things will change. And part of a good management team is being able to adapt to those conditions as they happen. It's something that we spend a lot of time looking at. And you see the fruits of that in terms of we cycle manage when the returns are less, and we're writing more because the expected returns are better. And we hope to demonstrate that.
That's great. I would think this is a good place to end, but I would like to thank Maamoun slash Michael Jordan. I guess that's the new nickname. And Don Watson from Arch for joining us today. If anyone has any follow-up questions, just feel free to reach out to me. Thank you guys very much.
Hey, Elyse. Thank you.
Thanks, i t's a pleasure.
Thank you.
Hope everyone has a good evening.
Thank you. You too.