Good day, ladies and gentlemen, and welcome to the Arch Capital Group second quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star and then zero on your touchtone 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 the periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Dinos Iordanou. Sir, you may begin.
Thanks, Abigail. Good morning, everyone, and thank you for joining us today for our second quarter earnings call. We had a good quarter on a relative basis, and I might say it was a very acceptable quarter also on an absolute basis. In today's market, we are emphasizing to our troops underwriting discipline, execution, and risk management in order to preserve capital and maintain balance sheet integrity. We continue to believe that our strategies of diversifying revenue streams and actively managing the allocation of capital will allow us to better navigate in this environment, which is challenging for all of us. As reinsurance returns have narrowed, and as you can see in our second quarter financial statements, we're fortunate to have our other business segments, the primary property casualty segment and the mortgage segment, contribute more meaningfully to our operating results.
Our reported combined ratio moved to a bit under 90% for the second quarter as catastrophe losses added 4.1 points to our combined ratio. Loss reserve development remained favorable in each of our segments, which in the aggregate reduced our combined ratio by nearly nine points. There were no noticeable changes in the property casualty operating environment from last quarter. There are some signs that reinsurance terms, especially ceding commissions, may have bottomed out. In our insurance segment, we saw a slight deterioration in rates across some sectors, particularly in the excess of capacity layers and short-tail areas. Rates were generally stable in most other lines, while the mortgage insurance environment remains very healthy. Marc Grandisson will give you more details on the segments in a few minutes.
On an operating basis, we produced an annualized return on equity of 9%, while on a net income basis, we earned an annualized return on equity of 13.2% for the quarter and a 7.9% on a trailing 12-month basis, which is a better measure to see our long-term profitability. Remember that net income movements can be more volatile on a quarterly basis, as these earnings are influenced by changes in foreign exchange rates and realized gains and losses in our investment portfolio. Net investment income per share for the quarter was $0.57 per share, flat sequentially from the first quarter of 2016. Despite volatility in the investment and foreign exchange markets in the second quarter of 2016, on a local currency basis, total return on our investment portfolio was a positive 163 basis points.
Once we include the effects of foreign exchange, total return was 127 basis points in the quarter in dollar terms. Our operating cash flow was $153 million in the second quarter as compared to $232 million in the second quarter of a year ago. Mark Lyons will discuss the cash flow and other financial details in a few minutes. Our book value per common share as of June 30, 2016, was $52.04 per share, a 4.4% increase from the first quarter of 2016. While some segments of our business have become more competitive, we believe that group-wide and on an expected basis, the present value ROE on the business written in the 2016 underwriting year should continue to produce ROEs in the range of 10%-12% on allocated capital.
Before I turn the call over to Marc Grandisson, I would like to discuss our PMLs we just essentially unchanged from April 1st. As usual, I would like to point out to you that our cat PML aggregates reflect business bound through July 1st, while the premium numbers included in our financial statements are through June 30th, and that the PMLs reflect a net of whole reinsurance and retrocessions. As of July 1st, 2016, our largest 250-year PML for a single event remains in the Northeast at $495 million, or about 8% of common shareholders' equity. Our Gulf of Mexico PML at $434 million, and our Florida Tri-County PML increased very slightly to $392 million. I kept my promise to be brief, I will now turn it over to Marc Grandisson to comment on market conditions before Mark Lyons discusses our financial results. Mark?
Thank you, Dinos. Good morning to all. The insurance industry returned to an average level of cat losses in the second quarter, with insured claims estimated in a $13 billion-$15 billion range worldwide. As you know, Arch underwrites globally, we will pay a portion of these losses. However, previous underwriting actions taken in both our reinsurance and insurance segments helped minimize Arch's exposure to these events. You may have heard us discuss cycle management in previous calls, but I feel it's worth repeating today that our appetite for assuming risk is directly related to our ability to earn an appropriate margin. In our view, it's not prudent to grow lines of business where the expected margins are not adequate relative to the risk assumed.
The insurance industry continues to face dual headwinds from low investment returns available in the market and underwriting margin compression as rates fail to keep up with loss trends in many lines of business. Our focus remains on deploying capital judiciously and carefully in the P&C space, but we are continuing to redeploy it aggressively in our mortgage or MI segment, where returns are very attractive and above our long-term goals. We remain bullish on the sector and believe that returns will remain above our hurdle rates for the next several years. Within the U.S. mortgage MI sector, we estimate that our market share of the primary new insurance written, or NIW, in the U.S. was in the 9%-10% range in the second quarter, up from 6.4% in Q1 as Arch MI n insurance/investment discussions, companies commonly refer to hurdle rates — the minimum required return or target return threshold used for capital allocation decisions.
The acceptance of RateStar, our risk-based pricing module, is a primary driver of this growth, and we believe that it will allow us to earn better risk-adjusted returns. In addition, we continued our market leadership in underwriting new U.S. GSE risk-sharing transactions and continue to see good volume from our Australian primary insurance relationship. Our U.S. MI operation increased its NIW to $6.4 billion during the second quarter of 2016, of which approximately 76% came through the bank channel. Over 80% of our bank channel borrower-paid MI commitments by the end of the second quarter were obtained through RateStar. Our current return expectation across our MI segment is in excess of our long-term ROE target of 15%. Let me turn now to our primary P&C insurance operations in the United States.
Overall, we saw rate changes of negative 180 basis points this quarter versus a positive 20 basis points last quarter. We believe that we have mitigated some of that rate erosion after consideration of our ceded reinsurance coverage. Most of our controlled or low volatility segments had rate change in a zero to positive territory, while our cycle managed segments experienced single to double-digit rate decreases. As we note, frequently, our cycle managed segments are more heavily reinsured. Our U.K. operation is still pressured from a rate level perspective, with an overall rate decrease across all our product lines of 4.6% this quarter. Our cycle management culture is a key factor in our strategy, and we are reacting accordingly to market conditions. We continued to realign the portfolio towards the more attractive opportunities in the U.K.
Globally, our insurance group continues to adjust its mix of business on a growth basis and also on a net basis as we are able to buy reinsurance on favorable terms. Ceded premiums increased 5% in our insurance group this quarter over the same period last year. Areas of opportunity for growth in the insurance sector in the second quarter were in our construction, national accounts, travel, and alternative markets lines. The vast majority of our growth came as a result of our ability to take advantage of the current dislocation in areas where major players are challenged. In contrast, our executive assurance, excess property, and program businesses are areas where rate levels lead us to a more defensive strategy. Turning to our reinsurance group, which continues its strong performance. Our teams are increasingly more selective given conditions in their markets.
Underwriting year returns in many of the traditional reinsurance lines are in the low single digits, and some are even negative on an expected basis. Adjusting for one large loss for transfer and the impact of the GulfRe acquisition last year, our reinsurance net premium written declined by 2% for the second quarter of 2016 versus 2015. With that, I'll hand it over to Mark Lyons to cover the detailed financial results.
Thank you, Mark Lyons, and good morning all. Getting into the financial information, I guess I'll be the most verbose out of the three of us. As was true on my previous calls, the comments that follow are on a pure Arch basis, which excludes the other segment, that being Watford Re, unless otherwise noted. I will continue to use the term core to denote results without Watford Re and the term consolidated when discussing results, including Watford Re. However, due to an all-industries clarification issued recently by the SEC regarding non-GAAP measures, our earnings release now emphasizes GAAP measures and some previous tables and commentary that used to be in the earnings release have been shifted into the financial supplement. Please read them together.
Various examples are on page seven of the earnings release, we now show the reconciliation from net income to after-tax operating income, where previously it was reversed. The point being is that you start with the GAAP measure, not the non-GAAP measure. We also, on page one of the earnings release, now present consolidated underwriting results that includes Watford Re rather than the core underwriting results that previously had excluded it. Lastly, the schedule showing prior period development and cat losses by segment, along with the schedule displaying the components of net investment income and investment total return, are now on pages 21 and 23 of the financial supplement respectively. Hopefully that provides a little bit of a roadmap. Okay.
With that said, the core combined ratio for this quarter was 89.9% with 4.1 points of current year cat-related events, which are net of reinsurance and reinstatement premiums, compared to the 2015 second quarter combined ratio of 87.9%, which reflected only 1.9 points of cat-related events. Losses recorded in the second quarter from 2016 catastrophic events, net of reinsurance recoverables and reinstatement premiums, totaled $36.3 million versus $15.9 million in the corresponding quarter last year, primarily emanating from U.S. Texas hailstorms and floods, Fort McMurray, Canada wildfires, and earthquake events in Japan and Ecuador. This was a quarter that experienced a high frequency of cat events, yet the largest of these have less than an $8 million net impact to Arch.
This result evidences our continued emphasis on proper line setting and the overall focus towards reducing our cat PML exposure, given that, in our view, current pricing does not adequately compensate for the exposure assumed in many cases. The 2016 second quarter core combined ratio reflected 8.9 points of prior year net favorable development, net of reinsurance and related acquisition expenses, compared to the nearly identical 9.2 points of prior period development on the same basis in the second quarter of last year. This results in a core accident quarter combined ratio, excluding cats for the second quarter of 94.7% compared to 95.2% in the corresponding quarter last year. This quarter, the reinsurance segment had two unique transactions that impacted the financial statement in different ways, both related to loss portfolio transfers.
The first reflects a commutation of a pre-existing contract that resulted in recognizing $19.1 million of other underwriting income. However, this contract had been accreting approximately $1.5 million of gain a quarter. The incremental impact is approximately $17.5 million for the quarter. This contract had been receiving deposit accounting treatment since inception since it did not pass risk transfer under GAAP. This gain shows up in other underwriting income, it is outside of the combined ratio. The second transaction involves a newly bound loss portfolio transfer with a long-term client where we have familiarity with the underlying exposures. This contract has sufficient risk transfer under GAAP and therefore receives insurance accounting treatment. As a result, we booked this contract at approximately 100% combined ratio and its impact is felt directly in the combined ratio.
Furthermore, it covers the cedent's net after all enduring reinsurances, thereby making this a frequency contract. That said, the reported calendar quarter of reinsurance segment combined ratio of 82.1% would actually be 79.4% without the impact of this new loss portfolio transfer. In addition, it results in a 7.7 point increase in the calendar quarter loss ratio with a five-point benefit to the expense ratio, therefore totaling a 2.7 point worsening of the calendar quarter combined ratio over what it would have otherwise been. Getting back to our results for the quarter, the reinsurance segment 2016 accident quarter combined ratio excluding cats was 98.4% compared to 94 even in the 2015 second quarter.
This quarter's combined ratio reflected the impact of the loss portfolio transfer we just discussed that contributed approximately $40 million of net written and net earned premiums, as well as the impact of a large marine attritional loss that had no equivalent in the second quarter of last year. Without the impact of these items, the accident quarter loss ratio was nearly flat over last year's quarter. In the insurance segment, the 2016 accident quarter combined ratio excluding cats was 96.3% compared to an accident quarter combined ratio of 97.6% a year ago. This 130 basis point decrease was driven by 100 basis points in the loss ratio and 30 basis points in the expense ratio, with the loss ratio decrease reflecting a lack of the large attritional losses that we experienced during the second quarter of 2015.
When one adjusts for this, the non-cat, non-large attritional loss ratio was essentially flat quarter-over-quarter. The mortgage segment 2016 accident quarter combined ratio was 66.1%, compared to 77.4% in the second quarter of last year. This decrease is predominantly driven by the continued expense ratio improvement in our U.S. primary MI book, due mostly to growth, along with beneficial mix changes towards GSE transactions receiving insurance accounting treatment in lieu of derivative accounting treatment. Regarding prior period reserve development, the insurance segment accounted for roughly 6% of the total net favorable development in the quarter. This was primarily driven by shorter tail lines from the 2012 through 2014 accident years, with some contributions from longer tail lines spread primarily across accident years 2003 to 2012. Partially offset by a large energy casualty claim from the 2015 accident year out of our Bermuda insurance operation.
The reinsurance segment accounted for approximately 81% of the total net favorable development in the quarter, with approximately 70% of that due to net favorable development on short-tailed lines concentrated in the more recent underwriting years. The balance due to net favorable development on longer-tailed lines, primarily from the 2002 through 2013 underwriting years. The mortgage segment contributed to the balance, or 13% of the total net favorable development in the quarter, which translated to a near 17-point beneficial impact to the mortgage segment loss ratio, primarily resulting from continued lower than expected claim rates from our U.S. primary mortgage insurance operation and from the quota share treaty covering the 2009 to 2011 book years as part of the original PMI and CMG purchase transaction.
As discussed in previous quarters, almost all of this favorable development benefit is offset by the contingent consideration earn-out mechanism negotiated within the purchase agreement. This contingent consideration impact, however, is reflected in realized gains and losses and not within underwriting income. This quarter, the nominal payout cap within the contingent consideration mechanism was reached, which is 150% of the transaction closing book value. Effects will still be felt in future quarters, though, as we continue to accrete to the contractual payment dates and the discount rate employed to account for increased certainty decreases over time. The overall core expense ratio improved by 180 basis points. This was affected by the loss portfolio transfer referenced earlier.
Controlling for this transaction, the core expense ratio improved by 20 basis points, driven by the continued improvement in the mortgage segment expense ratio and continued marginal improvement in the insurance segment expense ratio. On a written basis, ceding commissions achieved within the insurance segment quota share cessions improved 210 basis points over the second quarter of 2015. As stated last quarter, the growth in alternative markets business reduces this benefit somewhat due to the associated captive cessions. Core cash flow from operations was $153 million, as Dinos has mentioned, in the quarter versus $231 million in the second quarter of 2015. This reduction was caused primarily by higher losses paid net of recoveries and the timing of outflows associated with ceding more premium this quarter versus a year ago.
Core interest expense for the quarter was $12.4 million compared to $12.6 million in the first quarter and $4 million in the prior year's quarter. The prior year quarter amount included a favorable adjustment for a deposit accounting transaction, which resulted in an $8.4 million reduction in interest expense in that quarter. As mentioned earlier, this deposit contract was commuted during the quarter. Our effective tax rate on pre-tax operating income available to our shareholders for the second quarter of 2016 was an expense of 5.9% compared to an expense of 3.9% in the second quarter of last year. This quarter's 5.9 effective tax rate includes approximately 20 basis points or $250,000 related to a true-up of the prior year's tax provision to the estimated annual effective rate as of June 30th.
As always, fluctuations in the effective tax rate can result from variability in the relative mix of income or loss reported by jurisdiction. Our total capital was $7.6 billion at the end of this quarter, up 4% relative to March 31st. Our debt-to-capital ratio this quarter remains low at 11.7%, and debt plus hybrids represent only 16% of our total capital, which continues to give us ongoing financial flexibility. We continue to estimate having capital in excess of our targeted position. We did not purchase any shares this quarter under our authorized share buyback program, and the remaining authorization is approximately $446 million as of June 30th. With these introductory comments, we're now pleased to take your questions.
Thank you.
Abigail, we're ready for questions.
Thank you, ladies and gentlemen. If you have a question at this time, please press star and then 1 on your telephone keypad. If your question has been answered or you'd like to remove yourself from the queue, please press the pound key. Our first question comes from Kai Pan with Morgan Stanley. Your line is open.
Good morning, thank you.
Hi, guys.
Hi. These two large portfolio transfer transactions, could you give me more details about it? For the one you commuted, what's the reason for that? For the one you just booked, what attractive to you for doing so and do you see other similar opportunities?
Well, the first one we commuted, we always try to keep very good relationships with our clients. It was a client request. They wanted, and we felt the terms of commutation, they were attractive to us, so we accepted it. The second is in the normal course of business, we always look for transactions, and this was a transaction presented to us. We liked the economics, so we did it. Mark, you want to add to it?
The only thing I would add on the second one, it was really as a result of being intimately very familiar with the book of business. It's a client that we have known for many years, and the years under which that LPT is, the years it's covering, we actually had underwriting risk alongside with that party as well. That came as a result of, again, a request by the client to seek and improve their capital ratios. That's really why it's driven. That's what it's driven by.
Yeah. It's a capital relief situation here.
Do you see more similar opportunities?
Yeah. We see activity in that sector as a matter of fact. The thing is, we don't make predictions as to are we going to do any or not, because I have the faintest idea if they're going to happen. The instruction to our guys is, you look at them. If you like the economics, we do them. We got the capital. If you don't like the economics, we pass.
Yeah. Kai, it's always tough. There's a long runway on those. Hit ratios are low, we continue to see them and entertain them. Yeah.
Okay. That's good. On the MI side, the Australian reinsurance transaction, is that considered like a one-off or is it continued relationship if that could recur?
This is an actual ongoing relationship. It's a quarter share of a primary insurance book of business.
It will continue until it gets canceled.
Until we both cancel, the two parties agree to.
Right.
Right.
Okay. Are there additional sort of growth opportunity with that client?
At this point, we don't perceive it. We have a very significant portion of their portfolio, and we're sort of happy, very comfortable with that position.
Okay. Lastly is on your rate commentary in the insurance sector. It seems like it's down, like decelerates in terms of pricing decline. Could you give a little bit more color on the pricing dynamics there and in this environment, how do you sort of manage your portfolio? Looks like your core combined ratio actually improved in the insurance segment, you said mostly due to mix change. Will that be enough to keep the margin?
Well, it's a complicated question. Let me give you the strata. We don't give you the granular performance on each one of the sectors for obvious reasons, is you listen, but so are competitors, et cetera, so we're not going to tell them everything that we do. It's true in our comments that the aggregate rate reduction across the entire renewal group was about 1.8%. That's 180 basis points. Then you factor in some loss claims trend. That means that's not a good market to operate. Now, having said that, we have sectors that were very defensive because that's where we're seeing the significant rate reductions. I mentioned in my remarks, property lines, and excess both in D&O professional and liability lines, which the capacity players, and at the end, it's pure supply and demand. There is no differentiation in the product, et cetera, and it's under pricing pressure.
We try to manage those down, and we try to put more emphasis on a small to medium size business that we have more control on the rating and also the quality of the risk, et cetera. Now, I'm going to turn it over to Marc Grandisson because he runs the insurance group now. He runs all of our operations, and he's more granularly involved with these decisions as he does the reviews with the profit centers, et cetera, to give you a little more flavor.
Yeah. The flavor was actually given in the remarks. I did mention specifically the controlled and low volatility business, which is a small to medium size where we have more intimate and more influence over what's happening in the form and pricing. We are getting flat to single-digit rate increases in many instances. The ones that are more cycle managed, more open market, a lot more competitive, a lot more commoditized, this one had the double the single digit 5%-7% rate decrease. As I mentioned also in my comments, the cycle managed one is the one where we are a little bit more willing and working harder to buy reinsurance to actually mitigate those rate decreases.
I would just add on top, because Mark nailed it, is the additional layer that we've talked about the ceding commissions. On the commoditized product line, you manage your mix through increased reinsurance, and in this environment, you're getting continuing those thick overrides that drop to the bottom line and really help protect net income.
This is great. Okay, thank you so much, guys.
Thank you.
Thank you.
Thank you. Our next question comes from Jay Gelb with Barclays. Your line is open.
We've heard some other reinsurers, and perhaps even some of the brokers say that they view the reinsurance market as bottoming. Would you agree with that?
In general, I do. Mark, do you agree?
Yeah. My comment on this, I will be careful because we don't know, again, the future. There are certainly signs that reinsurance markets are pushing back on markets like property cat, for instance. There is some layer that had to be repriced in the second quarter because there was too much aggressiveness in trying to get the price down. There's some pushback. It's still going down, but not to the same level. In addition, we also have pushbacks on the market on getting increasing commission. We are successful in getting a couple of points, which Mark and Dinos mentioned before. This is landing around 1%-2% increase, but there's a lot of push to get more than that. There's still a lot of pushback from markets at this point in time.
What I tell our troops is, again, we're going to react to whatever we see in the marketplace. It could be a bottom, it could be a plateau before more damage being done. It's really too early to tell.
Yeah, you see shortfalls. That's an indication that there is a pushback if you can't fill the placement and you got to go back with filling a shortfall. There are signs that we're hitting the bottom. Listen, where interest rates are, where investment income is, you better make it on the underwriting. If you're not making it on the underwriting, you better pack it in and go and open a Greek diner. You make more money doing that.
Okay. The next topic I wanted to touch on is the mortgage insurance business. Based on our model, looks like the underwriting profits from that could double this year compared to 2015, driven by the strong top-line growth and improving margins. How big of a business can you envision this being over time?
Well, first, you got two questions there. One is you're projecting earnings. I don't think your comment is actually totally correct. You got to understand that in our MI book, we have U.S. MI, we have the Australian MI, which is more steady. We got GSEs, which is more steady. Then we have some early transactions. We had a couple of reinsurance transactions that they're declining because they're maturing. They were vintage 2012, and the duration is six, seven years. We're towards the end of those. I would say yes, the contribution of earnings is going to grow, but it's not going to be exponential the way you put it. Having said that, the second part of your question is, do we like the sector?
Yes, we do, and we're willing to contribute more of our capital, but we don't want it to be totally the dominant exposure that we have. In the way we think about it, we want to have a balance over time between reinsurance, insurance, and mortgage. Having said that, in different parts of cycles, depending which segment is the most attractive, the earnings might be coming heavier in one area and lighter in another area. That's the beauty of allowing us to navigate and allocate capital into our three businesses. At the end of the day, we will not be 100% mortgage company, we won't be 100% reinsurance company, and we won't be 100% a P&C company. The market will determine which sector is a little bigger or a little smaller for us because at the end, we're only chasing market.
If you're chasing earnings, you got to go where the earnings are.
Of course. On the mortgage insurance front, do you envision it being organic growth that drives this going forward, or is Arch interested in acquisitions in that space?
We're interested in everything. If we like a sector but our history has been, let's make sure that we have the right strategies that we can always grow organically and depend on that because acquisitions, sometimes they happen, sometimes they don't, and at the end of the day, we don't have a strategy that is focusing on acquisitions for growth. Our strategy is focusing on let's see if we can build it organically. We're not excluding anything that it might be thrown our way and is attractive to us. Mark, you agree?
Agree with you. Yes.
Thank you.
Welcome.
Thank you. Our next question comes from Michael Nannizzi with Goldman Sachs. Your line is open.
Thanks so much. One question, Marc, just on the reinsurance business or the LPT specifically is, it seemed like all of that was earned in the second quarter. Should we assume that there really isn't a durable impact for the remainder of the year, either in terms of top line or losses? Secondly, should we assume that it renews again in the second quarter next year, and we should see that lift in premiums again when that happens? Thanks.
Okay. Good question. To both of those, you should view that as a unique special event.
Not recurrent and really not earnings. It was virtually fully earned right away. Consider it a quarterly outlier.
Okay, not expected to recur again.
There is no underwriting gain or loss. There is no underwriting gain or loss. We booked it at 100 combined.
Yeah.
At the end of the Yeah. That small increment on the flow that is going to earn, it's going to be there. There is, for all intents and purposes and for your model, ignore both of them.
Yeah.
I mean, Michael, is it possible?
Yeah
A year from today we reevaluate the ultimate as favorable or what have you? Sure. Don't think of it as a quarter by quarter impact.
Got it. Okay, great. Thanks. It looks like Watford premiums were down year-over-year. I was just curious because it looked like sessions in the segments were up. Does that just mean that you're ceding business to more non-Watford entities? How should we think about that?
Well, I think you've got, as Mark already talked about, if you're looking at overall sessions, you have the insurance group continuing to cede a little bit more.
Yeah.
I think in totality, it was roughly the same net to gross at an ACGL level. You still got reinsurance guys doing some retro cessions, but I think it's mostly leveraging reinsurance from the insurance sector side.
There's not much change.
Got it.
in the buying as well, on the reinsurance side as well. It is very consistent.
Got it. Okay. Just the net, like the $ amount of sessions in the businesses was higher, whereas the net premiums in your other segment, which I assume is all Watford, were down. I was just curious if your strategy in terms of how much business you were placing with Watford was changing, or if there is some other distortion in there.
Let me take you back, and then I will turn it over to Mark. At the end of the day, independent if we shipping premium out to third party reinsurance or to Watford, it has got to make economic sense. We are not going to, if I can get it cheaper in the open market, I am not going to give it to Watford just to maintain volume. I am going to go and buy it from where is the most attractive place for me. Having said that, I do not think we have changed anything strategically as to what we do with Watford. Our responsibility with Watford is to be the underwriting managers and underwrite business that at the end of the day, it is going to give them flow as close to zero cost as possible. When we find those opportunities, we do it, and we give it to them.
If the business produces returns that are acceptable to Arch, we will not cede it out. We will keep it at Arch. Our philosophy and our strategy has not changed.
Okay. Got it. Thank you. Just lastly, just back to mortgage for just a second. Written premiums, both gross and net have increased nicely. I'm guessing a lot of that is the GSE business, I mean, all the business, but GSE seems to be growing more. Earned premium has lagged that growth. I guess I'm just trying to figure out how-
Well-
Yep.
I can answer some of that.
But-
Go ahead. Go ahead, Mark. The premium written, a lot of it, half of the growth actually comes from Australia, and it's a result of being the product is a single premium upfront. You get all the premium upfront, and the earnings pattern is extremely dragged, drags along.
Okay.
Also on the written premium for the rest of the units, there will be a lag in earnings because we have to write the business, and it takes a long time to write. We have some singles as well on the Arch SMIs. We did write some singles there, not as much as the other guys in the world, but we did some. There is definitely going to be a lag between the written by virtue of being single upfront, mostly from the Australian business.
Got it.
The way you got to think about this is that first, the mortgage business has a six to seven years earning pattern, right?
The Australian market, a lot of it is single upfront, but it will still earn over six, seven years. You have lag in the earnings and lag on the income that is going to come over time. In the U.S., you see our numbers. We do about 20% singles, 80% is the monthlies. The monthlies, they book and earn on a month by month. The singles, they're written upfront, but they earn over six, seven years. As long as you monitor those two, it will give you a good ability to put both the earnings stream as it's going to come in and also the net income stream that is delayed. That's why some people like to talk about embedded value in the mortgage sector, which some of you might have models predicting what's going to happen in the future.
Michael, just because I think you're probably going to go back, and you're thinking about how you're going to project this stuff on a go-forward basis. I just want to clarify, both Mark and Dinos talked about Australia being a singles market. I just want to make sure you realize that the contract itself is not a big bullet single. It's a contract over a whole set of singles that they accept one month and one day after the other after the other after. It's a book of business that has singles and accepting throughout the term.
Right.
Not a big bullet single upfront.
Right. We're getting it every month.
It's not a bulk transaction.
We're getting it every month, but we're not getting a little component month by month over seven years. We get it all upfront.
Right. I got it. It's not bulk.
All the mortgages are going to be one in one year. The premium is going to be booked in that particular year. It's going to be
Yeah
booked back month by month.
I understand. It's flow business, not bulk business. It just happens to be settled.
Like that. Yeah.
Okay. Got it. Great. Thanks so much.
You're welcome.
Thank you. Our next question comes from Quentin McMillan with KBW. Your line is open.
Hi, good morning, guys. Thanks very much. Mark, you had a lot of information in there, thanks for walking us through everything with a little bit of a more complicated quarter with a couple of those one-off things. One thing that I wanted to understand just a little better is, you mentioned the reserve development in the mortgage that had an offset in the contingent consideration, reaching the nominal payout cap. Can you explain that a little bit better for us, sort of how the reserving works there and why you had this relatively bigger $11 million reserve development? It sounds like it's an offset somewhere else in the balance sheet, so it's not really a gain. Is that the right way to think about it?
Well, think of it more as an offset than you could. You've got prior period development. In rough numbers, these were $10 or $11 million, I think, in totality.
It was $10 or $11 on a realized loss, is how it goes through. Then you've got the standard prior period development. It has to be coming from the same sources, kind of like a profit commission sometimes does. With a loss ratio increase, it might decrease the profit commission. Similarly here, you've got the subject years of what we purchased. It's continually lower delinquency rates and claim rates associated with those that dictates and indicates the reduction. Because on the CMG transaction, we bought it with a provision. It was a stock purchase. We initially paid 80% of book with an earn-out mechanism. Depending upon the-
Actual performance
the actual performance, which is exactly what this is indicative of.
we could pay out more, up to 150% of the closing book value. We hit that nominally, not present value, but nominally this quarter.
It's directly related. As it continues to have good performance as mostly shown through improved loss reserve development, you get an increase in the contingent consideration.
From now on, anything that is positive, it continues. It sticks to our ribs. They have ate all their meals. It's done.
Okay. That's great. Very clear and really helpful. Thanks very much. Secondly, on the MI side as well. You mentioned 80% of the 75% of the bank channel, 76% of the bank channel came through RateStar. Obviously, that's having great success for you guys. Can you just talk to us about what you're seeing the competitors now do in response to RateStar? Or maybe sort of what you expect the competitive environment to look like because of that?
Well, I don't know what they're going to do. As far as we're concerned, at the end of the day, RateStar is the proper way, in our view, to price mortgages. It's no different than in the auto sector when you introduce many different variables to price risk appropriately, and that's what we've been doing. We're pretty happy with not only the performance from a production point of view, but also when we go and back test what RateStar gives us versus RateCard, because we still have the RateCard. Our clients, some 20% of our business and 50% of our business in the credit union channel, it's coming through the RateCard. We test both, and what we like a lot about RateStar is that first and foremost, the ROE variability around the mean is very narrow, and we like that.
It gives you stability and more predictable earnings, where the RateCard has much bigger variability. Now, how competitors they're going to respond, I don't know. I think the best way for them to respond is just, and I don't want to give my competitors advice, is go to a risk-based pricing tool and make sure that they're pricing risk appropriately. That's the proper response. If they try to just cut rates on the RateCard and all that, it's like somebody in a quicksand, and they keep moving their feet.
The one thing I will add to this is the other one that's a big competitor of ours is the FHA, as you guys know. That one is a government agency that's also even harder for us to even figure what they're going to do with the pricing. I just want to make sure I put it out there.
Yeah.
The government's tricky to figure out. That's unusual.
Exactly.
If I can sneak this one more in, I'm sorry. On the valuation of the stock, obviously it's a very high-quality problem to have. It's been up there and above what your three-year return threshold would be for buybacks, and I'm kind of assuming that's why buybacks were limited in the quarter. Just assuming that we stay in this sort of heightened valuation for the stock, in the near term or over the long term, how do you guys sort of expect to deploy capital, or what might you do?
Well, I think you're reaching a conclusion that it might be right, it might not be. It wasn't as much the valuation of our stock, but it was more where we see opportunities in the marketplace. Let's face it, we've seen most of the opportunities on the MI space. Basically, we kept up powder dry for the reason that we can deploy more capital in the MI space, and that was the main reason behind it.
That thing that's alluded to though, it's a combination of things. We never have a bright line, as you know, on that. It's more of a guidance. For most of the quarter, we traded, I'd say, a little south of 1.4 to book value. It's got to be a little clearer than that given the combination of things.
Right.
Okay, perfect. Thanks very much, guys.
Thank you.
Thank you. Our next question comes from Joshua Shanker with Deutsche Bank. Your line is open.
Yeah. Thank you very much, everyone. Wanted to look at the favorable development in the mortgage insurance segment, and understand, I realize that this is very low loss content business, but if you only ran a short period of time, it almost took all losses out for the quarter. What's going on there? Is that one time in nature? Is the business so good that it's not showing any losses?
Josh, it's been a continual march downward on the delinquency rates and the associated claim rates as they come out of that.
remember, this is really 2011 and prior, so there's vintage of seasoning associated with this. it's not like the P&C, and you got to think of it as more of a report year view of the triangles.
Yeah, this is CMG mostly.
Right
which is the credit union business. We bought that company, and we bought the reserves, and we bought all the assets and the liabilities that come along with it. We had that pricing mechanism, the adjustment we talked about. At the end of the day, you got to reflect the performance, and the performance, it was better than we even expected ourselves. Otherwise, I am the dumbest guy on two legs because what I negotiated didn't work for me, it worked for them, because I'm paying a lot more for that company than if I would've taken 100% at book value at that time. In retrospect, if I know what I know today, I would've negotiated better.
You can't see us nodding here, Josh.
If I look at the mortgage loss reserve, what % of it in broad terms is legacy business versus Arch MI business?
100%.
I don't have that at my fingertips. I would say substantially.
Yeah. The vast majority is old stuff. Yeah.
Yeah.
Okay. It's the fact that you had enough favorable developments to negate your current accident year losses. Basically comparing apples and oranges, you have a huge back reserve and a small sort of new co reserve.
That's correct.
That's right. Remember, Josh, because you kind of alluded to it, I think, in the prepared remarks, that part of the original transaction was a quarter share on the 2009 to 2011, I'll call it, back book.
That is also experiencing some of the same aspects. That wasn't CMG though, that was PMI.
Right.
Do you have any reason to believe that business that you can detect RateStar underwritten business as a better loss ratio than Rate Card business?
We price RateStar and Rate Card to give us the same ROE. We have the same target. As we're back testing both, because every month I ask the guys and we back test based on the volume that comes in and we underwrite. The only difference between the two, it's not on expected return on equity. I think both of them on an expected basis, they're about the same. We did price both at about 15% ROE. The difference is that RateStar produced business is very narrower around. It's three to four ROE points up and down the mean, where Rate Card is much wider. Give you an example, just use credit score as one variable that you're going to test for.
If you're testing the 750s in the Rate Card versus RateStar, the Rate Card, even though the mean might be 15, it might be some business all the way up to 20, 22%, and some all the way to seven or eight. Where with RateStar it's more like 12 to 13, all the way up to 17, 18.
That makes sense. I appreciate the answers. If I'm right, maybe I'll be ceding the microphone to Ian right now. We'll see what happens.
Well, you were right on your write-up, except you couldn't predict our one-off transactions. When you're ready to predict our one-off transactions, I want you to call me, because you and I, we're going to go to Vegas together.
I'll make sure I do that. Take care.
Thanks. Take care.
Thank you. Our next question comes from Amit Kumar with Macquarie. Your line is open.
Oh, man, this sucks. No, Ian. I'll try to ask some intelligent questions now. This is a big thing for me. Very quickly, most of my questions have been answered, but sort of big picture question. One is sort of tying in the comments in response to other questions If returns are stable in reinsurance and insurance, and if your MI business is growing rapidly, should we expect a slow trend up in the A Y ROE? If that is the case, does your book value grow at a faster clip than the industry, all else being kept equal?
No, because your assumptions, I don't think you were totally listening to us correctly. We said that reinsurance is deteriorating. I mean, still very good results, don't get me wrong.
It's under pressure, so we're losing ground there. We're losing less than ground on the insurance side, but both those sectors, we're losing ground. In essence, from a profitability point of view, they're not going to have the same ROEs as before. The reason I didn't change the 10 to 12 on underwriting basis is because I'm offsetting what I'm losing on those two sectors by what I'm gaining through mix change on the MI sector. That's the way you got to think about it.
Got it.
Give me the platform.
Yes. That's a fair comment. I'm sure Ian is already disappointed in me. The next question I have is, again, on MI. With the Barron's story coming out on Sunday, there has been a lot of focus, a lot of sort of new investor feedback as well as from traditional investors. The one question which I was getting, and this is sort of interesting, is that the traditional P&C investors were asking, if things go south, wouldn't Arch be locked in? Unlike traditional P&C, where you can cut back on your writings, pull back on the capital, then wait for the cycle to turn. It seemed that there was some fear on that thought process, where if Arch becomes bigger and bigger in MI, maybe a different class of investors cycle in and the traditional investors cycle out.
What would you say to that, in terms of if the cycle does turn, how easily can you sort of pull back or pull out or change your strategy?
Well, it's a very complicated question, but it's a very, very good question.
It talks about what do you need to do from a risk management point of view, from capital allocation, and also, what the history has taught us in this particular sector. Let me start by pointing out to you that the performance on the bank channel versus the credit union channel was even. The worst year for the credit union channel through the financial crisis was 152 loss ratio. Nothing to write home about.
Not catastrophic, right? What I'm sharing with you is information we have through the PMI transaction, right?
On the bank channel, it got in excess of 300, 2x. When we examined that, and we've done a lot of analysis on it, most of it wasn't just economic conditions. Yes, economic conditions will have an influence, and that's the cat event that you have to plan for and make sure that from an aggregation point of view, you're comfortable with how much risk you're taking. It also tells you that if you don't violate your underwriting guidelines, your performance, even in down economic conditions, unemployment going to 15% and prices coming down by 25%, you can withstand all that
as long as you discipline on your underwriting side. Most of the delinquencies, they came from fraudulent loans that there was very little verification, the underwriting information, it was very suspect. On top of it, very, very loose underwriting. People writing risks that they shouldn't be taking that risk. Having said that, it's no different when you write long-tail liability lines on the P&C world. If you're pricing your workers' comp at 20% or 30% below, independent if you stop writing tomorrow, you're going to have that tail that is going to continue hitting you with adverse loss development year after year after year. The duration of those liabilities is probably even longer than the duration that you have on the MI space. The key to this business, in my view, and in all of our underwriters, is to maintain discipline in accepting risk.
The beauty of it is that even when you stop underwriting, let's say your pricing is at, with risk-based pricing, maybe the market will reject your pricing and they're going to find it cheaper from a set of competitors. You continue to have streams of revenue coming from what you underwrote properly in the prior year. The only thing you need to worry about is the broad economic downturn. Increase in unemployment and price reduction in the housing market, et cetera. We test for that, and we have cap loads, and also that determine as to what size we want MI to be as part of the overall Arch family. That's where we are.
Mark, one difference I will say with casualty, I totally agree with the analogy, is that we have a lot of tools at our disposal that we can use to really assess and evaluate the origination at any given time. If we know exactly what's been originated at any one point in time, we can assess what the risk is in that portfolio. I would argue that an MI book of business is a lot more homogeneous than a casualty book of business across all lines of business. More homogeneous, much more stable, a lot more predictive in terms of what you bring to the table by virtue of the various variable you use to price. It's always a factor. Things could change after you've underwritten it, but certainly-
when you underwrite it, you have a very good sense for the quality of what you've underwritten.
Yeah. Amit, I'll just add one more thing. Your premise is that all P&C business can be decisions on an annual basis. If the market softens-
Yes
you get an increased proportion of multi-year contracts, and this is as an industry statement, and this is a differentiator between carriers. It's the difference between having multi-years with legitimate re-underwriting abilities versus one where you're locked in, and that's becoming increasingly common. As that grows in proportion, it's not quite as a stark difference as you think.
Got it. That is actually very helpful. Thanks for the answers, and good luck for the future.
Thank you.
Thanks, Mark.
Thank you. Our next question comes from Jay Cohen of Bank of America Merrill Lynch. Your line is open.
Great. Thanks for that last answer. That was actually helpful. Question on mortgage insurance. Shocking. When I look at the results for the quarter, I take out the favorable development, and I come to this kind of accident year loss ratio. First of all, is that a reasonable concept in mortgage insurance?
No.
It's not. Okay.
Sorry to interrupt you halfway through, Jay.
No, that's helpful.
You got to think of it as, it's report year. Closer to a claims made view of business than an occurrence view. Accident year and claims made business really is report year, and this is really the same thing.
You can reserve unless you have a delinquency.
That's right.
We don't like the accounting model. We talked about it in other calls, at the end of the day, I'm not setting up the rules. I just play by the rules.
The trend I've seen in this ratio, which has kind of steadily come down, that not necessarily is kind of the thing to look at going forward?
Which ratio?
You mean the
Delinquency rate or?
The loss ratio excluding, whatever you want to call it, the loss ratio you're reporting excluding the prior year development, which has gone from kind of 30 down to 17, makes it hard for us to forecast that number. Is the more recent year, recent quarters, is that a reasonable number to use?
There's more mixture going on here than you think. Marc and Dinos' talked before about the glide path difference on some of the old reinsurance contracts that are now running out.
The insurance accounting treatment on a lot of the GSEs have a different loss expectation than does some of the primary U.S. I hate to say it, but it does come down to a lot of mixture.
Yeah. If we were pure primary MI, it would be easier for you because you will see what the average claim cost is, which doesn't move very much. It's in the mid $40,000 range. You will look at the delinquency, and that is improving, bit by bit. Because we got the Australian business, we have the GSE business, and those, it depends what blocks we get, it gets a little more complicated.
Yeah.
Got it. Yeah. It's a bit of a modeling challenge for us, certainly.
It's all right. I mean, listen, you've got to have some challenges, you know.
Jay, at a high level to help you, I think the way we think about it on a run rate basis, the expenses is about 25%-30% on a run rate. I mean, we're not saying this is us for Arch, but globally in the industry, a mature book of business. Currently, the loss ratio is anywhere, you see them reported 20%-30%. That sort of gives you a range. I mean, it's kind of hard to point out. It could be, obviously, if nothing happens, could be significantly below this, but try to get you a long-term average.
That's the way we think at ultimate.
Right. Yeah. Look at a long-term average. Exactly, yeah.
Got it. That's helpful. The second question was on this contingent consideration. Mark, what was the cap that was up to? Was it $150 million you said?
No.
150% of the stated value at closing.
Yeah.
Oh, okay. Got it.
It was an earn-out provision. Basically, we will continue to be recalculating the book value based on the actual performance of the loan portfolio from the date of closing and prior.
Up until now, that basically has kind of helped your operating earnings, and it was offset in the net income to some extent.
Yeah, you have net income versus the realized.
Right.
It's operating versus net income.
Mm-hmm. Yeah, going forward, it sounds like that offset on the unrealized loss or realized loss won't be there to the same degree, anyway, therefore, it starts to flow through more right to net income.
You will, as I commented, because the financial statements reflect more the present value of it accretes over time like any interest unwinding.
Right.
Especially now that we've capped out nominally, will accrete towards the payment date. Plus, we're required through GAAP accounting to, as it becomes more certain, we have to drop the discount rate used in that present value calc. You get both forces causing additional effects in future calendar quarters. Yeah.
They're going to be small, so don't get too overexcited.
That makes sense. Lastly, just on the political environment. You're a fairly global company, and it seems both parties have some issues with free trade. Are you, one, concerned about this? Two, are you doing anything to prepare for maybe a change in the trade environment?
Not specifically, because at the end of the day Listen, free trade will affect the global GDP, and global GDP will affect the revenue for the insurance sector. Having said that, because we're a highly regulated business, a lot of what we do is global, but it's local from a regulation point of view. You operate, and you need local licenses, and you participate in that local market, et cetera. I don't see significant change in the way the insurance business is done if there is barriers that they put up. At the end of the day, though, if GDP growth is very low, it will affect our ability to get revenue. It's been always like that. You can track the growth on the P&C world of insurance and insurance with GDP, and there is a very good correlation there.
Great. As usual, helpful comments. Thank you.
Thank you.
Thank you. Our next question comes from Brian Meredith with UBS. Your line is open.
Thanks. I'll be quick here. Just back on the MI business. Just curious, does the Australian reinsurance business have better economics than the U.S. MI business? As that kind of comes in, is that contributing to maybe the improved loss ratios and stuff we're seeing? And as addendum to that, any other opportunities that you're seeing in the Australian market?
On the Australian market, right now, the Australian transaction that we have is really like an insurance, a flow business that we've done with that partner of ours, Down Under. That has not gotten a lot of earned premiums. I wouldn't describe a lot of pickup from that perspective, really. We've done, in the past, some reinsurance transactions. To go back to your point about the second question about opportunities, there were opportunities in the past. That's also what got us to really focus more intently on Australia. We had quota share reinsurance transactions with a couple of players down there. Since we have struck this significant, we believe, relationship with that bank, we don't feel that we have the need to do anything more in this segment.
Got you. You're capped out in Australia, you wouldn't do anything else?
For now, the answer is we're comfortable where we are right now.
Great. That's helpful. Then I'm just curious, on the LPT transaction, just trying to understand it. What kind of interest rate or return assumptions are you using when you're doing a transaction like that to get the returns that you need?
Right now, our units are doing pricing their transactions or portfolios using the Treasury free rate, by and large. That's what we're using. That's how they're compensated on when they calculate the ROEs.
If you're doing it at 100 combined ratio, that means that there's virtually zero capital assigned to it.
That's-
Okay.
No. Capital, no. There's no return. The capital is allocated based. No underwriting return.
Right.
The duration of liabilities are, let's say five years, they will take their five-year T-bill, and that's.
1%, 5% pickup on the float.
When you look at the contract, we assign capital to it, and you got to see what the upside, downside, and how much capital it goes, and you make those calculations. Don't forget, some of these transactions they have limited risk transfer. Some of them, they have more risk transfer, and that's when we got to go through a test if it's going to be deposit accounting or reinsurance accounting. This one has enough risk transfer, but we're happy with it because of our familiarity of the book of business and our participation on that book of business as the quota share participant in prior years. Having said that, don't misconstrue 100 combined that that might be the expected value of the contract over time. At the end of the day, you reserve conservatively, if you're wrong, nobody's taking the money out of your pocket.
The shareholder will get it eventually.
Got you. Last question. Do you have any update on your ability to take advantage of opportunities from AIG and some of the other companies that have been doing re-underwriting? I know we've talked about that in the past.
We don't target specifically any company. There is re-underwriting be done by many companies, including AIG and others. All I have to say is that, we've seen some increased opportunities in sectors that we believe we have good underwriting expertise, and we getting into the batter's box, so to speak. We haven't been hitting a lot of doubles, triples, or home runs, maybe a single here and there. Which tells you that the market hasn't come up to our liking yet. The opportunities that we see have increased noticeable.
Great. Thank you.
You're welcome.
Thanks. Thank you. Our next question comes from Ian Gutterman with Balyasny Asset Management . Your line is open.
It's not keftedes. It's souvlaki on the lunch menu today.
That's good. My first question was going to be about Greek diners, but given the call is going long, I thought I'd hold off and stick to business.
Are you ready to invest with me? Well, the two of us. As I'm getting closer to retirement, I got to think of things to do.
Exactly. I'd be open to entertaining an offer. Call my attorney. I won't ask about anything MI. I want to stick to the other two legs of the stool. Probably a lot of these are numbers questions since it's late. In insurance, you talked about, in the release, some of the adverse development from an energy casualty claim. Any color on that?
Yeah. Should I name it?
Yeah.
Sempra Energy. It's out of our Bermuda operation, where when you have a claim down there, given the towers and the attachments and where we play, they're Wall Street Journal front page events. This was a gas leak explosion. The estimate is $660 million.
Industry loss.
Industry loss all total.
Right.
We're on two layers, the lowest of which is excess of $265 million. Then we're on a piece of another layer above it. We fully reserved it on a net basis, so it can't move any more than where it is.
Got it.
It was a big loss for us. It's a manmade disaster cat, call it that.
Exactly.
That's why I think you saw cat losses in the insurance group.
That's what the Bermuda insurance market is.
Right.
That's exactly the kind of complex risk it attracts.
Right. Okay. That's what I was going to ask you is, I thought this was an adverse development. Was it cat as well?
No, it's not a cat.
Not a cat.
Okay. Got it.
Not in the accumulation of natural cat disasters was 16, but it was on the adverse development.
Right. It was from the 2015 year.
Okay, that's what I thought. Okay.
It just takes a while till those things are known, especially the attachment points like that.
Sure. My question on the CATs in the insurance segment is, I guess that was higher than I thought, I just looked back. It is, I think, the first time in a long time that CAT and insurance have been greater than reinsurance. I guess I just was curious if there was anything unusual that caused that.
Nothing unusual. Listen, on the insurance side, you get on two buildings and you got $5 million or $10 million in each, then all of a sudden you can have $15 million. We got an operation up in Canada, so I do not know exactly the specific accounts, but it was not a significant number of claims. It was a few claims. Do not forget, we do not write personal lines. For us to get hit, we got hit on apartment buildings or school or something of that sort, and it is very easy to get caught with $5 million on a couple of them, and all of a sudden. We are not reporting tens of millions of dollars. At the end of the day, yes, it was slightly higher than reinsurance, but it was nothing unusual for us.
Those losses, Ian, that we had in the second quarter were mostly insurance losses.
Okay.
It was heavily some of the reinsurance in Canada, but a lot of it outside was insurance more than reinsurance. I will echo what Dinos said. Having a small loss of cat load of about $10 million in our insurance group, having a variability of about $10 million is not a big deal for us.
Understood. I just was curious.
It's within the variability.
It can happen. If you're in the wrong hospital or in the wrong apartment building, and you put $10 million up, you're going to get hit.
Yeah.
Just sort of related to that, just overall for the combined insurance and reinsurance business, just looking at the cats for the quarter, was that basically in line with the cat load you've talked about, I think even a hair below. A lot of the calls people are talking about this being an active cat quarter, making it seem like this is much above average. Is that your view, that this is an above average quarter and you came in average? Is this just an average quarter and people are kind of talking it up and making it seem like a bigger initial number than what you are?
No. When you have a $13 billion-$15 billion worldwide, I would say slightly above average.
Okay.
If you were at 10 and you say $40 billion annual cat load
Worldwide is maybe that's the expected number. I haven't spent a lot of time, maybe Mark, you have. I know there's a lot of statistics, and we look at that, but I would characterize it as slightly above average, but this is not something that is not going to happen again.
Sure.
It's definitely slightly above average in the U.S. If you look at the PCS numbers, they're not totally outside. One thing I'll tell you, though, in Canada, it's really outside of the norm.
Right.
That's really what surprised most of our guys. It's not really reflected in the cat load of anything that people write in general around the world.
Yeah. Ian, I would offer that the perspective varies depending upon whether your results are two or three times your cat load versus inside your cat load.
That's kind of what I was getting at a little bit. Okay. My last one is just, Mark, if you could help me on the LPT math. I just want to make sure I'm doing this right. The 2.7% you talked about was on the overall combined, but on the accident year, because the accident year is higher than the calendar year. The accident year was getting maybe 30 basis points or so it was not that much of an impact. Is that right?
Well, let's see. We did it on a calendar year basis.
Mm-hmm. Your accident year was a 98-something, 100 versus a 98 doesn't really change it too much.
Yeah, that's correct.
Okay.
That's correct.
Okay. The question is, when I did it, the accident year, when I pull it out, was still pretty close to a 98, maybe high 97s. That was up about 3, 4 points from where you've been running. Kind of curious what happened there. I know you mentioned some large losses, but was it just that or any additional?
Sure. We had a marine loss, so with a vessel.
Really?
Yeah, a Gulf Re loss.
Okay.
If you take that large attritional, that was pushing 300 basis points, I believe.
Yes.
There's a couple other noise, that really accounts for it.
Makes sense. Perfect. All right, enjoy the captives. Talk to you next quarter.
Okay.
Thanks, Ian. Thank you.
Thank you.
I'm showing no further questions. I'd like to turn the conference back over to Mr. Dinos Iordanou for closing remarks.
Thank you all. Enjoy your lunch, and we'll talk to you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a good day.