Good day, ladies and gentlemen, and welcome to the Q3 2019 Arch Capital Group conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied.
For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your hosts for today's conference, Mr. Marc Grandisson and Mr. François Morin.
Sirs, you may begin.
Thank you, Crystal, and good morning to you. Our diversified business model of specialty insurance, reinsurance, and mortgage lines of business produced good growth and acceptable risk-adjusted returns for our shareholders in the third quarter. Operating earnings generated an annualized return on common equity of 10% for the third quarter as our book value per share grew 3.9% and more than 21% on a trading 12-month basis. Before I discuss market conditions in the broader P&C sector, I would like to address a topic that is currently getting a lot of attention, namely, the increased claims inflation or loss trend. In this part of the cycle, we are not surprised to hear about adverse claims development that some in the P&C industry are experiencing.
We have discussed our view of loss trends on these calls over the past several years. I'd like to remind our shareholders that at Arch, we approach pricing our products and establishing our reserves with a bias towards conservative loss trend estimates. As I have mentioned before, history teaches us that on average, the P&C industry experiences claim inflation rates about 200 basis points above the CPI, although this can fluctuate over time. It seems to us that the premium rate declines seen by the industry over the past several years should have led to higher current loss picks. It is important to bear in mind that in many lines of business, it takes three to five years before an accurate level of trend can be confirmed. We believe that this gap between the estimated and actual loss trend has contributed to the uncertainty in reserve development.
This uncertainty helps fuel both disruption and dislocation in several areas of insurance, which we have been and are capitalizing on. Dislocation is evident in a rise in our submission activity this year. It is also reflected by the fact that we are achieving higher rate levels on new business than on renewal business in several segments. To give you some sense of the data, our submission activity in the third quarter was up more than 20% in E&S property and 15% each of E&S casualty and professional lines, specifically D&O. To date, we believe that these disruptions are more indicative of a transitional market than a traditional hard market, as we have not yet seen rate increases and hardening across the board. Risk selection is still paramount.
Across all lines in our insurance group, renewal rate changes average a positive 3.5% for the quarter as net premium grew 22% in the third quarter above the same period in 2018. About 30% of that growth came out of an acquisition we completed earlier this year in the U.K. small commercial line space. Rate increases contributed a quarter of the overall segment's growth while new business opportunities generated the balance. It is worth reminding you that we expect to close on our acquisition of the Barbican Group in the fourth quarter. We believe that the enhanced presence and scalability of our Lloyd's operation will provide us with further opportunities. Turning to the reinsurance market, reinsurance pricing tends to follow that of the primary insurance industry with a few twists.
Catastrophe and large attritional losses can disproportionately affect reinsurance results, creating localized opportunities in areas of the reinsurance business. Property fac and marine are examples of improving markets. Over the past several years, we have significantly reduced our net exposure to property cat risk in response to the declining level of risk-adjusted rates. The occurrence of Japanese typhoons in both the third and fourth quarter of this year has impacted global reinsurance industry results and should support the ongoing need for additional rate improvement. Turning to our mortgage insurance segment, Arch MI continues to perform well. Market conditions continue to be characterized by strong credit quality and a healthy housing environment. In terms of new production, our third quarter new insurance written, or NIW, grew 18% over the same period a year ago.
That production was driven by growth in the mortgage insurance market due to a broad increase in mortgage originations, combined with an increase in the level of mortgage insurance purchased from private mortgage insurers. Overall, insurance in force grew about 2% sequentially in the quarter at Arch US MI as higher prepayment activity was more than offset by new MI originations. We continue to be pleased with the credit quality of our insurance in force as key risk metrics in our US MI portfolio remain at historically favorable levels. Notwithstanding the good market conditions in the MI sectors, we continue to mitigate our downside risk from an economic cat event through the purchase of insurance-linked notes.
With respect to our investment operations, we have maintained our focus on total return and continuously repositioned the portfolio to adjust to financial markets conditions, which contributed significantly to our growth in book value per share this quarter. With that, I'll hand the call over to François.
Thank you, Marc, and good morning to all. Before I give you some comments and observations on our results for the third quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis which corresponds to Arch's financial results excluding the other segment, i.e., the operations of Watford Holdings Ltd. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $261 million, which translates to an annualized 10.3% operating return on average common equity and $0.63 per share. Book value per share grew to $25.61 at September 30th, a 3.9% increase from last quarter and a 21.1% increase from one year ago. This result reflects the effect of strong contributions from both our underwriting and investment operations. Starting with underwriting results.
Losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums, stood at $68 million or 5.2 combined ratio points. These losses impacted both our insurance and reinsurance segments and were primarily due to Hurricane Dorian and Typhoon Faxai. As for prior period net loss reserve development, we recognized approximately $51.7 million of favorable development in the third quarter, net of related adjustments or 3.9 combined ratio points compared to 6.7 combined ratio points in the third quarter of 2018. All three of our segments experienced favorable development at $3.9 million, $14.7 million, and $33 million for the insurance, reinsurance, and mortgage segments, respectively. We had solid net written premium growth in the insurance segment, 22% over the same quarter one year ago.
While approximately 30% of that growth comes from the U.K. regional book of business we acquired earlier this year, we also had a strong quarter of new business and an improving renewal rate environment in most of our lines of business. The insurance segment's accident quarter combined ratio, excluding cats, was 100.3%, essentially unchanged from the same period one year ago. Some of the pricing and underwriting actions we have taken over the last several years have begun to filter through the loss ratio, while our expense ratio remains slightly elevated, primarily as a result of investments we are making in the business. In particular, as discussed on prior calls, the integration of our U.K. regional book and other smaller acquisitions is ongoing and increased the overall insurance segment expense ratio this quarter by approximately 130 basis points.
Investments in our underwriting claims and IT operations explain most of the remainder of the increase in the expense ratio. We continue to expect that the expense ratio for this segment will remain higher than the long-term run rate until the growth in net written premium we achieved over the last few quarters, both organically and from acquired businesses, is fully earned. Moving on to our reinsurance operations, where we also had solid growth this quarter, with net written premium up 40% over the same quarter one year ago. Over 60% of the growth came from the casualty segment, where we were able to write select new opportunities in distressed sectors of the market, including a multiyear treaty that represented approximately 65% of the growth for this line of business. As we have said in the past, some of these opportunities can be lumpy and distort quarter-over-quarter comparisons.
Property, excluding property cat and property cat, make up most of the rest of the increase in net written premium. The reinsurance segment's accident quarter combined ratio, excluding cats, stood at 92.8% compared to 92.5% on the same basis one year ago. Part of the large attritional loss activity we experienced this quarter includes some exposure to the Thomas Cook collapse. Our expense ratio remains satisfactory at 26%, down 140 basis points since the same quarter one year ago. The mortgage segment's accident quarter combined ratio improved by 290 basis points from the third quarter of last year as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations.
The calendar quarter loss ratio of 3.8% is higher by 60 basis points than the result observed in the same quarter one year ago, although last year's loss ratio benefited from favorable prior development that was approximately 320 basis points higher than what was observed this quarter. The expense ratio was 20.8%, lower by 60 basis points than in the same period one year ago. Total investment return for the quarter was a positive 100 basis points on a U.S. dollar basis as our high-quality portfolio continued to perform well. Our investment portfolio duration is overweight relative to our target allocation, up slightly to 3.64 years at quarter end as we continue to expect a continued slowdown in economic growth and a lower for longer global interest rate environment.
The corporate effective tax rate in the quarter on pre-tax operating income was 11.7% and reflects the geographic mix of our pre-tax income and a 40 basis point benefit from discrete tax items in the quarter. Excluding this benefit, the effective tax rate on pre-tax operating income was 12.1% this quarter. At this time, we believe it is still reasonable to expect that the effective tax rate on operating income will be in the range of 11%-14% for the full year. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction.
Turning briefly to risk management, despite the recent increases in catastrophe pricing, our national cat exposures on a net basis remain at historically low levels at October one, with the Northeast still representing our peak zone at slightly more than 4% of tangible common equity at the one in 250 year return level. We remain committed to deploying more capacity in these segments if rates and expected returns on catastrophe exposed accounts continue to improve over time. In our mortgage segment, we recently completed our 10th Bellemeade transaction earlier this month with coverage of $577 million. Currently, the enforced Bellemeade structures provide aggregate reinsurance coverage of over $3.7 billion. With respect to capital management, we did not repurchase any shares this quarter. Our remaining authorization, which expires in December 2019, stood at $161 million on September 30th, 2019.
Our debt to total capital ratio stood at 13.5% at quarter end, and debt plus preferred to total capital ratio was 19.5%, down 300 basis points from year-end 2018. In terms of fourth quarter activity, we expect to use resources on-hand to fund the Barbican acquisition at closing once we receive regulatory approvals. With these introductory comments, we are now prepared to take your questions.
Thank you. If you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. For optimal sound quality, we do ask that if you are using a speakerphone, that you please lift the handset before asking your question. Again, ladies and gentlemen, that is star one to ask a question. Our first question comes from Michael Zaremski from Credit Suisse. Your line is open.
Hey, good morning. In the prepared remarks I think you talked about some stress in the marketplace. It's my understanding that in the primary insurance space, I could be wrong, and it's reinsurance too, it feels like the greatest dislocations kind of in the mega-sized account space where capacity is very constrained. Just curious, is that an opportunity Arch can gravitate to or that's not your sandbox? Maybe you can kind of talk to where you see the greatest dislocations in the marketplace and which could benefit you.
I think your assessment is right on. I think that you will hear on the other calls and from the marketplace that the risks that are larger, that carry more limits, are going through more dislocation because competitors are reevaluating their risk appetite. This is where most of the capacity deployment was, shall I say, overextended in the last several years, and this is where most remediation is taking place. You will find that mostly in the E&S, in the large commercial risk, and this is where we have seen most of the increase in submission activity. We had been historically, being who we are, on the defensive for those risks, and we are very well positioned to take advantage of that.
I think we are on the receiving end of looking at more of those opportunities as we speak, and this is where we're able to flex more of our muscle.
Okay. Just want to confirm, you obviously have a great rating from the rating agencies, and you have a relatively large balance sheet, but the primary insurance balance sheet's smaller. In terms of the counterparties and the brokers, do they look at the total Arch entity balance sheet when kind of assessing whether you guys can take a big piece of the large account space?
Yes, they are. I think they're also looking at us from a perspective, some commercial anecdotes for you that we are one of the few that said we have heightened appetite for risks that are priced appropriately. I think the broker community and client community is very open to that and very willing to engage with us.
Okay. That's helpful.
Great.
Switching gears to mortgage insurance. There was a recent agreement with the FHA and Department of Justice earlier this week. There's been some talk about maybe it shifts mortgage insurance volumes, banks coming back kind of to the FHA and maybe out of the private marketplace. I don't know if you have any thoughts there or if I'm barking up something that could take place.
I always have thoughts about everything. My initial comment to you, Mike, is that it's very early, right? It was announced last week. It's not already this week. I think it's an attempt to, I guess, decriminalize being FHA as a result of the banking system sector sort of being reluctant to provide FHA product to its channel. We'll see how that goes and where it ends up. There are also uncertainties as to whether a different administration would have a different view. It's really an agreement with the DOJ, like you said, and HUD as to how it will be treated. It's too early, I will say, to tell you. In general, what we hear in Washington, though, is that the private sector is still a most favored area where the government wants the mortgage insurance risk to be deployed.
We have seen this for many years. We'll see where that takes us. We're watching it, and we'll have more sense for where it goes, and it's going to take a long time over the next several years.
Just one last on mortgage insurance volumes. I believe in past quarters you've kind of alluded to maybe giving back some market share as competitors all have their own proprietary systems. It feels like probably didn't give up market share this quarter, but it's too early to tell. Is your view still kind of you might over the next year or so move down a little bit in market share? Still strong, obviously, in absolute basis.
We don't manage the company on the market share basis. As you know, we just put out there our pricing and see what the market gives us after a quarter. You're quite right with the new black box environment, it's a lot harder to see where everything falls out, and I think we're not the only ones. I think most of our competitors will feel the same way. We're still in the early innings of how they deploy their pricing modules, how the client react to theirs versus ours. I would just see that we put our pricing up there with our return, and it so happens that we receive and we're able to write the amount of business that we wrote in this quarter. I would not ascribe any market share target from where we sit.
Thank you.
Thank you.
Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open.
Hi, good morning.
Hey.
Hey, Marc, how are you? My first question is on your pricing commentary. In insurance, you said 3.5% price in the quarter. I'm trying to get a sense, I know there's a lot going on within that book and some new business as well as your acquisition, but how do you guys view loss trend? I guess if you're getting three and a half points of price, I would assume trend in aggregate is probably in excess of that. Can you just kind of help us think through that a little bit better?
Yeah, the three and a half for our portfolio, as you are pointing out rightfully, is that it is a very diverse book of business. Some lines of business are still, as I said, it is not an across the board hardening market. Some lines of business are flattish, and some are actually getting way in excess of a 10%, 12% rate increase. Some new business are getting quite a bit above even a five or six%, even if you are the middle of the road. I would just have you thinking about the starting point is also pretty important. The three and a half is one number that attempts to encapsulate everything, and it works well when you have a very monolithic marketplace or very monolithic book of business. As you pointed, our business is very diverse.
I think that where you see growth is either because we are seeing good opportunities in terms of good return, healthy returns regardless of the rate change. If we have a rate change and a growing opportunity because then the rate change is clearly beating the loss trend. We always look for margin of safety when we are looking at rate change and claims loss trend. It is not a game of decimal.
Okay. A lot of new business, right? I think you guys said three-quarters of the insurance growth was some new business this quarter. I guess as we think about you are getting good price on that, you said better than renewal, but I would assume you are probably setting the loss picks a little bit higher than where the legacy Arch business would be. How do we think about kind of the ongoing margin profile of the insurance book, right? Like bringing on this new business and the goal, I think, to get down towards that mid-nineties underlying margin.
Yeah, I think if you look at the way we react to the marketplace acquiring business that gives us good return and a good margin because, and it does not have to be because of rate change, it may just be because of wanting to find a new home because of risk appetite of other players are such that business finds its way to our balance sheet. That is just one aspect. Whether the rate is going up. I think that we have a very straightforward actuarial method to look at where we were assuming the loss trend and the rate change, and we book that appropriately, and I would argue conservatively so that we do not have no surprises, or we actually have enough room to maneuver going forward. Broadly speaking, margin is expanding as we speak on business that we write in this segment, in this point in time.
Okay, that's helpful. My last just numbers question, I think it's the last time you guys updated us, mortgage earnings were about, within the ballpark, I think like 75%. Is that still kind of about the right level or maybe it's gone a little bit higher this year?
Well, yes, it's definitely higher this year because mortgage has done phenomenally well, and we've got some cats on the P&C side. The P&C market, I think, is improving slightly over the last few quarters, and hopefully there's more room to grow. We'd like to think that the P&C earnings are going to start growing as a proportion of the total, and mortgage will be a bit less so. Mortgage, we still think has a lot of runway in it as well, just, I think we can see more earnings coming through the P&C segments, and that should help balance it out a little bit more.
Okay, thanks for the color.
Thanks, Elyse.
Thank you. Our next question comes from Joshua Shanker from Deutsche Bank. Your line is open.
Good morning, everybody.
Morning.
Morning.
Two questions, one P&C related and one mortgage related. On the P&C side, obviously the growth is very strong in the quarter. Can we foresee, and when can we foresee it, a reduction in the expense ratio based on amortizing a larger premium base across a similarly sized cost structure?
Yeah, Josh, I think we don't like to make forecasts, but I think it's realistic to see or think that sometime in 2020 as we earn some of the premium, again, the U.K. regional book that will filter in in second half of 2020, I like to think that maybe we should see some improvement. Everything else being equal, I think that's kind of what we're thinking about. You guys have heard it, we said it before, we still have a target to achieve a 95 combined ratio. That we're not committal to when, whether that's one year, two years, five years down the road. We're making the right improvements along the way. We certainly, at least in the interim and then over the next 12 to 15, 18 months, like to think that we're going to see some improvement coming through on the combined ratio.
Great, thank you. Specifically expense ratio, obviously the loss ratio is up to the underwriting, of course.
Correct. Yeah.
On the mortgage side obviously a lot of new insurance written in the quarter, but a very high proportion came from refis and contracts with LTV lower than 85%. Can you talk a little about that new business, whether it has persistency to it, whether the housing appreciation suddenly takes that business off your books? How should we think about the growth in the quarter specifically and how it differs from prior quarters?
Well, the overall market is getting better, you're quite right. The purchasing is actually growing despite the, if you look at the projection for the MBA for the next couple of years, the growth in mortgage and origination is still there in the purchase market. The refinancing was not a surprise, but it's a reaction to the drop in mortgage rate by about 110 bps over the last 12 months, that's to be expected. We have this, I wouldn't say flurry, but we have this heightened activity of refinancing that is occurring. The reason that the refinancing is still a big, I would say like a bit bigger proportion with MI attached to it is a lot of it was originated recently, and they still haven't crossed the LTV below 80%.
It allows us actually to go back again to the same client and re-up our mortgage insurance offering to them. That's it.
Is that refi business more profitable on a risk-adjusted basis because it's closer to getting to a point where there's a lower risk that it needs MI, or is it lower risk because it has a lower persistency because it's close to getting below 80%? How should we think about that business versus the rest of the book, I guess?
Risk-wise, it's about the same risk-wise. It goes through the same process of evaluating. I think there is pricing, it's a little bit less pricing, and a lot of it has to do with it's sort of rolling forward the same book of business. It's like a renewable book of business. I would say slightly less, but I think risk-adjusted, they're very similar after you factor everything in.
Are these customers likely the same customers you had before because of your procurement skills, or does the mix change that depends on who picks it up? It's a crapshoot if you get that refi from a previous customer.
I think you can make some action points to try and protect that book of business, but the latter is more likely if you don't do anything else. I think it's thrown back into the pool. It may be refinanced by a different mortgage originator to begin with. That will have different relationships going along with that.
Okay. Thank you for all the answers. Appreciate it.
Thanks, Josh.
Thank you. Our next question comes from Jeff Dunn from Dowling & Partners. Your line is open.
Thanks. Good morning.
Morning.
Morning.
First, could you provide the net ILN cost in the results this quarter?
The way we look at it varies, obviously by layer, some of the old Bellemeades have amortized. Big picture, Jeff, you should think about roughly 3% of the outstanding balance as the cost. We told you we've about $3.7 billion of outstanding Bellemeade limits in place at 3%, and I'll let you do the rest of the math.
Okay. Can you talk about the trend this year in terms of detachment points? It looks like the new business deals we've seen this year have moved beyond just being mezz cover, now we're really looking at mezz plus cat cover. Can you talk about the decision to do that, the market reception for continuing to do that going forward, and how you weighed the risk benefit versus cost?
Well, certainly initially, the attach and detach structures were very much focused on PMIERs coverage and capital requirements. I want to say in the last few, we've moved a little bit, like you said, beyond that, there's a bit more of a focus with rating agencies that have slightly different views on capital requirements. We're always interested in the trade-off and making sure that, yes, maybe we can get some additional protection at a rate or at a cost that is efficient for us, and that's part of our capital management decision. That's how we look at it.
I think part B of your question, there is tremendous appetite in the investment community for these types of products, as you know. The fact that we're expanding the programs a little bit and going up a bit more into the, like you said, past the mezzanine layers of risk. We've had tremendous success in placing those instruments, and we think they're hopefully there for us down the road.
Just a quick last follow-up. The other IIF was basically flat sequentially. Is that just lapse rate experience, or are you seeing any change in the attractiveness of the GSE CRT market?
It's just a normal roll-off, Jeff. As you know, we've been at it since 2014. You would have a sort of a seasoning and getting sort of a run rate in terms of appetite and having, frankly, our allocation being more stabilizing over the last two, three years.
Okay. Thanks.
Welcome.
Thank you.
Thank you. Our next question comes from Yaron Kinar from Goldman Sachs. Your line is open.
Good morning, everybody. I guess my main question is just around the premium growth in insurance and reinsurance. Seeing some growth in kind of longer tail lines, and I think you even explicitly talked about a multiyear program that you signed in, or multiyear treaty you signed in casualty reinsurance. Just given the loss trends that we're hearing about and just kind of increased concerns around deterioration thereof, can you maybe tell us or talk us through how you gain comfort in growing in those lines here?
Yeah, that transaction is very unusual. I would put in a camp of a bit more optimistic in nature. Not that we don't want to renew it for the foreseeable future, but this came to us with a lot of deep changes to the pricing, the attachment point and whatnot. It's not that you renew the same structure necessarily, Yaron . There's a lot of moving parts to that transaction. That one would be squarely in the camp of tremendous distress, which you said in your comments, François, and definitely at the heightened level of return that we believe more than covers any of the range of outcome or potential outcome on the loss trend going forward. It's about margin of safety here.
Okay. That specific transaction, then more broadly, the other growth in programs, construction, excess surplus, casualty.
Very similar. The construction and national accounts would have a bit more workers' compensation, so we have a bit more view on the loss trend in there, so that helps in picking our loss picks. On the E&S casualty, I think you would have a very similar phenomenon, not to the same sort of distress level that I just mentioned in the reinsurance transaction, but certainly you have similar overtones of distress being pushed into a different marketplace and having to be repriced. At price level that we believe far make up for any uncertainty we may have in terms of loss trend.
Got it. Then maybe more broadly, as you're looking at deploying capital into insurance or reinsurance, when you think of quota share reinsurance here, getting the benefit of improving underlying conditions and then maybe additional improvement on the reinsurance side, does that start to become more attractive than the insurance book?
I think the reinsurance playbook is a little bit different. I think you can, by strike of a pen, embark on a significant partnership with a seeding company under reinsurance that really moved the needle quickly, as we saw in that transaction I just mentioned. On the insurance, it's a slower build. I think if you look back at our 2002, 2003 history, the reinsurance team is a lot quicker because it has the ability to be much quicker and get access to business that's going through a rate change and improvement rather much quicker than our insurance group will. The insurance group is not far behind, as you saw in the numbers this quarter. That's more of the same playbook, Yaron.
Okay. Thank you so much.
Thank you.
Thank you. Our next question comes from Brian Meredith from UBS. Your line is open.
Hey, thanks. A couple questions here. First, I'm just curious on the big transaction, reinsurance transaction, did it distort any of the ratios? Was there any unearned premium kind of portfolio that came with it, which would've maybe played to the earned premium?
No, it's early. There's no LPT, there's no incoming port in, so it's a straight up multi-year deal. Distort the ratio, is not really. There's normal level of its loss ratio, expense ratio. Not a whole lot's been earned as it is, so really in the big picture for this segment, there's no impact at this point.
Great, thanks. Just curious, in the insurance segment, some of the investments that you're making, that you highlighted, claims, et cetera. How long are those expected to continue here for? Maybe another way to think about it is if I look at your other underwriting expenses kind of growth that you're seeing, how much of that is due to the acquisition versus just investments you are making?
I'd say roughly speaking, there's probably a good more than half, maybe two-thirds is from the acquisition that we made. We brought on a fair amount of people with the acquisition, and as we said before, the earned premium has to earn, and we think that by early 2020 that that portfolio will have been fully with us for a full year. On top of that, there's still a few more adjustments or investments we made in terms of the staff. We brought in some other underwriters to help supplement some other lines of business where we're seeing opportunities, and other small areas, like I mentioned, claims and IT, where there's still investments we think we're making that are appropriate and at the right time for us to make them. I don't think those will keep growing as much.
Once the premium that we're putting on the books now earns out or earns over the next 12 months, it should stabilize and level out, and maybe even kind of go down a little bit.
Great. Another question. If I look at some of the growth that you guys are putting on, excluding this big multi-year kind of treaty that came on, a lot of it's heading more towards property, kind of property catastrophe, businesses that tend to be a little bit more volatile. Is that something we should expect perhaps, going forward, a little more volatility in the results, but maybe lower underlying combined ratios, kind of a shift, kind of mix of business?
The property that we're growing in leaps and bounds is actually not necessarily, some of it is cat exposed on the insurance side, but there's a cat cover and a lot of reinsurance protections against the volatility of the results. On the reinsurance side, I think most of the property growth is actually not necessarily cat exposed. It's a bit of a different growth. Some of the cat exposed, you've seen some cat and written growing, although we would say we are relatively on the way. Exactly, very small compared to what you would expect a Bermuda in our size. No, we don't expect much more volatility as a result of that.
Great. My last question, just curious, as we look at this kind of terrific growth you guys are putting on in the insurance and the reinsurance area, I'm just curious, how fungible is the capital between your mortgage insurance business and your insurance and reinsurance businesses? Is it easy to take money out of the MI operations to maybe fund growth in the insurance or reinsurance? How does that all work?
It's not 100% fungible, but maybe you noticed in our numbers this quarter, the PMIERs ratio went down in the third quarter as a result of a fairly substantial dividend that was upstream from the U.S. MI operations to the group. That is money that is available to fund growth in both the insurance and all our other lines of business or segments. How easy is it to do? It's a process. Certainly you can't do it on a whim or just overnight, but once we get the regulatory approvals and we sit down with them and show them scenarios and stress scenarios and forecasts, and certainly figuring out, also contingency reserves. There's a lot of statutory rules we have to abide with. Big picture, we have the ability to use some of that capital and move it around and use it in other areas.
Great. Really helpful. Thank you.
Thanks, Brian.
Thank you. Our next question comes from Meyer Shields from KBW. Your line is open.
Great. Thanks. I only had one question. Marc, I was hoping you could help us understand how to think about the expenses associated with the submission flow uptick in P&C.
Yeah, it's more expensive. I think that one of the investment that we talk about is to get much more efficient in dealing with those submissions, and being more proactive using tools such as predictive analytics to really get to the ones that we have a higher chance of hitting. This is certainly part of. Yes, absolutely, Meyer, to the point that we're investing to be able to augment the throughput on the platform. That's one of them.
Okay. In general, do the distribution, I'm trying to think of the right way to ask this.
Okay.
As a percentage, are more of the submissions priced adequately now? Is there enough disruption in the marketplace that you're seeing, or that agents are pitching stuff that just doesn't make sense to Arch right now?
Right now we're seeing more submission coming to us. Our hit ratio is still in its early stages of finding its footing. It's also reactive to the marketplace price.
Clearly we are finding, in the new business, a similar and possibly in a growing mode more of our liking as to what's being proposed in the marketplace. By virtue of the fact that that business is not put out in the E&S market for pricing or for consideration tells you that it will be most likely repriced. The problem that we have with this, as you could appreciate it doesn't mean it's repriced, it's priced adequately.
Right? It could come out of a place where it needs probably a 30% increase, could get to this E&S and thrown into the marketplace and only command a 10%-15% or go for 10%-15%, that's not enough for us to do. It's still very important to be selective in what you do and maintain, as we have, our underwriting discipline.
Okay, fantastic. Thank you so much.
Thanks, Meyer.
Thank you. Our next question comes from Ron Bobman from Capital Returns. Your line is open.
Hi. Thanks a lot. I had a question about Watford. It's obviously trading at a huge discount to book, and it sort of indicates a disbelief, from my view, in either the underwriting quality or the investment portfolio or strategy. Not that I subscribe to it, but at least the market seemed to subscribe to sort of one of those two justifications. What are Arch's thoughts about where it sits stock price-wise and the plan and maybe the use of capital at Arch to remedy it if you're so motivated? Obviously, there's been some personal investment, sizable, the last few months by Arch executives. Beyond that, would you comment, please?
Yeah, I'll start and I'm sure Marc will chime in. I think at a high level, certainly there's only so much we can say, but we're still very committed to the Watford platform. It's been good for us. I think it gives us the ability to access business in a different way that we wouldn't be able to do so just with Arch. In terms of stock price, who knows what the market is thinking. I would argue that maybe there's overreaction based on some of the other hedge fund reinsurers and how they perform. I wouldn't speculate or think where it's going to go, but my personal belief is there's some overreaction going on. Marc, anything you want-
I think the one thing I would add, Ron, to this is I'm still in, and I still like the company's perspective, and I would even argue that it's even better at this point in time. I think that the marketplace is getting better, and Watford is uniquely positioned to be side by side with us, and as we underwrite and help them write good business to form the book. I'm actually more positive if anything today than I was six months ago, which I was already positive to begin with. There you go.
All right. Thanks, gentlemen.
Thank you.
You're welcome.
Thank you. Our next question comes from Ryan Tunis from Autonomous Research. Your line is open.
Hi. This is actually Crystal Lu in for Ryan Tunis. One question I had was just on the elevated large losses in reinsurance. I think you mentioned there is some impact from Thomas Cook collapsing. Could you maybe give a breakdown of how much of an impact the large losses had on the underlying results there?
Yeah. It is not major. I think I just made the point to have you guys think about it so that it can happen. These things happen. This quarter was Thomas Cook. It could have been something else. It has been other things in the past. We have had property catastrophe losses. It is not out of norm. Right now, I think it is around a 3% impact on the loss ratio this quarter. That is what we are in the business of doing. We are in the risk business. We are not making excuses. We are just letting you know. It is very consistent what we have seen in the past and highlighting it. That is all I think I want to say now.
Okay. That is helpful. One more question on just getting the insurance profitability down to your 95% target eventually. How has the changing pricing environment changed your view on your internal timeline and strategy in terms of business mix there?
I think it's not changing where we're going. I think that the market is most likely helping us getting there quicker or sooner. That's what I would tell you.
Okay. Thank you so much.
You're welcome.
You're welcome.
Thank you. I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Marc Grandisson for any closing remarks.
To everyone there, Happy Halloween. Thank you. See you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day