Well, thanks for coming. We're pleased to have Arch Capital presenting. Timing couldn't be better with Aspen having an investor day down the block at the same moment, but it'll be for an intimate conversation. We have here CFO John Hele, who's probably been there about a year and a half, two years now.
Yes.
He came from ING as CFO there to Arch and brought his expertise, both really in a lot of things, in technology as well as accounting and operations, really the whole package. We're really pleased to have John. John's going to make some prepared remarks. I have some questions, I can ask questions all day long, if I get tedious, I'll open up to the audience, we have lots of them here though. Anyway, with no further ado, John Hele.
Thank you, Josh. I have just eight slides this morning. I'll give you a very brief overview of some of the thoughts on Arch, we'll turn over the questions with Josh as well as the audience. Here's, of course, our informational statements. The summary of Arch is our key strategy, Arch was started and recapitalized in 2001 to focus on underwriting skills. The businesses that Arch is in are talent-intensive businesses, not really people-intensive, not personal lines. When you think of what we may expand into, it's always going to be businesses that reward the underwriter and the talent-intensive part of that. Equal with that, in terms of focusing on underwriting skills, I think Arch has done a great job in aligning executive compensation with long-term performance. Our underwriters are paid over a 10-year period on ROE, on the actual ROE that comes out.
For some shorter tail businesses like property cat, it's five years, these are averaged out over time. As well, the senior executives, both myself and Dinos Iordanou, the CEO, we're paid on both operating ROE in a year and the increase in book value per share. We're really aligned totally throughout the firm to the shareholder. The third key part of Arch's strategy is to explicitly manage the property and casualty pricing cycle. Arch spends a great deal of time and effort thinking about playing this cycle. What this really means is that when the times are good, we're in the hard market, Arch will grow disproportionately more than the competition at this time. We will really grow as much as we can when times are good. When times start to turn poor and the pricing is softer, we will pull back.
We will actually shrink from lines of business and reallocate. It's this movement, this management of the Property and Casualty cycle that Arch spends a great deal of time and effort working on. At the same time, Arch always maintains a conservative balance sheet. We want to limit our investment risk. We're cautious in our reserve philosophy and have low financial leverage and high liquidity. Especially in the soft markets, we want to have low financial leverage so that we are always ready to gear up when the hard market comes. If there's a large cat event or something, we want to make sure we have the capacity to first have debt to really put to work when the market turns hard. We think these key things allow Arch to develop a superior risk-adjusted return.
We have specialty lines in both insurance and reinsurance, so we can always have broad platforms in which to play. We can seek where the cycles turn. Not all lines turn at the same times. Not all lines turn in insurance and reinsurance at the same time. It's important to have this very broad base and expertise in the broad base so you can effectively play the P&C cycle. We also diversify geographically and by various lines of business. We spend a lot of time on capital management. What return are we getting on the capital for the shareholder? If we don't get the right return, we will buy back our shares. In terms of the financial highlights for the first quarter, and most of this information has been out there for some time, but we turned a profit in the first quarter.
We had a slight return on operating equity. We think that was unique among many of our peers. Our book value per common share went up in the quarter. These are restated for the three-for-one share split in May. This is even after share repurchases of $237 million in the quarter. Total capital of $4.7 billion. Common equity is about $4 billion. Our mix of business, and we get this question a lot. Do we have a target between insurance and reinsurance? Right now, we're 66% insurance, 34% reinsurance. Do we have a target? We don't, really. Reinsurance is more elastic in terms of growth and shrinking. It's easier to grow fast and shrink faster to the cycle. Insurance is slower to build, slower to shift, but we don't have a set target.
We're always looking every single quarter is how do we allocate capital, where are the best returns. You can see by client location on the left, we have most of the business in the U.S., some in Europe. Again, this is because we think overall, this is where we can get the best returns. You can see the broad range of business. This is the trailing 12 months. Always a hard thing to say. The total premium here net is about $2.5 billion on the right-hand side. Speaking about the cycle, of course, the property cat business is getting a lot of excitement, a lot of interest right now, and that's 7% of our premium. So that's $175 million of our $2.5 billion. Years in property cat.
We're happy that market's turning hard and is getting a little better, but it certainly does not mean all the business, both for us and the entire industry, is heading into a hard market yet. In a very short summary, this is what it's all about. It's the financial performance. Again, this is all restated for the three-for-one share split, but almost a 20% annualized growth rate since the recapitalization of Arch at the end of 2001. You can see the dramatic growth and steady growth throughout the years. This has been done, again, with a conservative investment portfolio. This has been done with a cautious reserve philosophy. Slow and steady, we think, wins the race. I will answer one of the questions in advance, Josh, that you had already.
Uh-oh.
About share buybacks, we'll have to think of another one to fill in. This is a slide that we presented. This is how we think about doing share buybacks. The key one I'd like you to focus on is the upper left-hand corner. We always want to make sure that when we're buying back shares, we have a return period, a return on investment of three years or less. If you're in the lower left-hand corner, those are kind of no-brainers. It's under a year, or instantly accretive, which it has been for some time. When we get into the white area, that's the areas that we have to think about, the upper right-hand corner is when we don't really want to do that. Right now, we're trading just above book. We're 1.1 to 1.5, depending upon the day, of trailing book.
We think, as we said on our first quarter conference call, that we think we're putting shareholder capital to work today at a 9% return on equity. For a whole block of business, we think we're earning about 9% on that. You would look across the top column, if we bought back shares at 1.1x book, we would have a 1.84 years before it returns the money on that investment. We can buy up to about 1.17 till we get to about the three-year mark when we're earning about a 9% ROE in. This is the grid we look through. If we get well above that amount, we would think about doing a special dividend or something else over time if we have a lot of excess capital. Right now, it's June.
We're starting to enter the beginning of the hurricane season, believe it or not. We just finished a lot of tornadoes here in the U.S., we're starting the hurricane season here in June, it runs through to the fall. We tend to slow down our share buybacks in the third quarter until we get through all this. We tend to buy the most historically in the first quarter and fourth quarter of the years. We still have about $990 million at the end of the first quarter left on our share buyback authorization, which is good to the end of 2012. It's interesting. We've had a lot of investors visiting us in Bermuda, they're meeting all the companies.
I put up that strategy slide, and they say, "That's all very interesting, John, but I see that same strategy from a lot of people." Maybe there's slight differences, maybe different focus on lines, but everybody says they're doing these things. What has given Arch the ability to have the performance that we've had? I've worked in several companies and several industries, and these are some of the key points that have really struck me that Arch has been communicating for years in terms of what makes Arch different. I come back to effectively managing the P&C pricing cycle and having a very realistic outlook each and every quarter as to what's going on. Arch has rate indices that go back to 2002. We know the returns on those. We have a lot of industry rate indices.
We calculate out the effective rate change each and every quarter. We try to know, Arch tries to know where it stands all the time and to make informed decisions. It's easy in this business to get optimistic. Sometimes it's going to turn soon. We tend to work on the facts and really think carefully about where we put our money. The underwriters being paid on long-term performance based on ROE, and that's on the actual ROE on a treasury return. The investment income above the treasury rate goes to the shareholder. This creates a great focus for the underwriters and a great teamwork as well with actuaries and with the senior management. We always seek an appropriate return for each risk taken, and this is different perhaps from some other people. Arch does not believe in diversification for diversification's sake.
We don't diversify into another zone because it lowers the total aggregate risks. If we want to look at putting capital to work in Florida for wind risk, we look at the return we're getting for that. If we want to look at putting capital to work in Southern California for earthquake risk, we would look at what we're being paid for that risk. Same thing for Japan, for Chile. We believe the diversification impact of all that should go to shareholder, and we shouldn't just give that to the client. That's why Arch was actually underrepresented, underweight Japan, Chile, and some of these other areas. Arch is very disciplined in returning excess capital to shareholders, and you can see from our experience in that. Again, the last key point is trying to be conservative in both liabilities and assets.
We don't take really large bets on any one area. We take a lot of typically smaller bets on the liability side, and on the asset side, we maintain a very conservative portfolio. Today, it's very challenging sometimes when you think about what is conservative. The five and 10-year treasuries used to be conservative, and you have to think pretty hard sometimes, is that the right thing to do? We are diversifying a bit into equities. We have about 4% of our portfolio into that. We've come back into that. That served us well so far this year. Overall, we'll always have a conservative overall portfolio. With that, I guess I'll sit down and then we'll start our fireside chat. Look at my water here.
Well, let's begin with a question I've talked about in the past. I found your answer to be very much in-depth and about really, I think, the most important change going on right now, which is the RMS 11. The changes, whether it be wind field degradation or storm surge leakage, what has RMS gotten right? What's wrong with the model, or not wrong, but just difference of opinion, and how do you see it playing out for the market over the next, I guess, eight months or maybe three years, as many say?
Sure. Well, RMS has introduced a new model, RMS 11. Most people have been on RMS 9 or 10, depending upon how they think about it. There have been three major changes, enhancements to RMS in its model. One is a new wind calibration, where they've taken and tracked back all the storms from the past few years and come up with a better, they believe, a more refined view of what wind damage is. There's also another factor in called storm surge, which would be flood damage, which would have come due to the wind, but is often not covered under many policies. RMS has done extensive studies, and they found there's "leakage," from companies actually having to pay when there has been the flood that's been associated with these storms. This has not typically been modeled that much in the past.
The third area is they have a shorter-term, a medium-term, and a long-term assumption, and they have a higher frequency in some of the medium and shorter-term assumptions. Depending upon where you and how you manage risk, it has quite a big impact for some players. It's higher in, say, the one-in-100 range than the one-in-250 if you're measuring your P&Ls that way. It also depends quite a bit where you have your properties that are being insured. In fact, RMS 11, for some properties closer to the coast, has actually gone down. It's the inland because these storms that they backtracked, of course, went way inland, some even up to Ohio. There's been a recalibration of the inland damage and the potential damage there.
We gave out our end of our first quarter call, some of our initial runs of the impact in what we do, and we saw the Northeast for how we measure it going up about 30%, Florida Tri-County going up about 20%, but that included some of the storm surge. We are actually still in discussions with RMS, trying to understand exactly how much in their data behind the storm surge. I think the wind piece we're getting pretty comfortable with. We had already applied some factors on the models already to reflect the higher wind assumptions because we also backtrack after every storm the damage that happens. We had already calibrated a bit of the models up for the wind.
This is a fairly big change for us, obviously. It could be, for some players, much more if you play a little lower down or depending upon where your properties are. From what I've heard so far, RMS just sent a press release recently. I don't know if you saw that, Josh, but where they mentioned that people are still examining it and looking at it, but they believe there's wide acceptance. RMS is the largest model that is being used in the industry today. We calibrate to all of them, but we have to wait and see because we're still actually in discussions on this storm surge piece, I think is one of the biggest areas that we still have to understand better how much we want to accept.
You can actually put in a user-defined factor in for the storm surge now as you look at your properties and think about your contracts and how well you might be in court to win the cases for the storm surge piece. It certainly is everyone's thinking. This renewal, I think, was a factor but wasn't fully adopted by most people. This is coming. It will come. It will have to have an impact over time.
You mentioned in the prepared remarks that you don't take risk for diversification sake alone. As much as you'd say that it's unique, I think that your peers say that. Most everyone said, "Look, Japan, we're not getting paid." Most people don't take risk for diversification sake. A big earthquake happens in Japan, you don't have a lot of losses, and a lot of your competitors who don't take risk for diversification sake have a lot of losses. This is sort of one thing that plays out. That doesn't mean you don't take risks, however. Can you talk about Japan versus the Eastern Seaboard? Arch has a quite a large PML, where you can get paid.
Can you give us a scale of just how much better you get paid for the type of risk that you're willing to actually put out Arch's equity to take risk at, so people can understand the degree of what happened in Japan and why some people wrote it, and how you get paid in this industry?
Sure. For earthquake risk, it's an easy reference point to talk about Southern California. We had Northridge three years ago. You can think about the damage that's happened from that. You do have the U.S. tort system, so you have to calibrate a bit for that when you think about it. Prior to all these events, let's say a year ago, the rate on line in Southern California for earthquake was 5% or 6% rate on line. How much you got paid for the amount of risk you're taking. Let's go down to Chile, for example. You would think Chile, where the reinsurance attachment is much lower down, and I don't know if the building codes are the same as in the U.S., but you wouldn't think, if you didn't know this industry, you'd think it'd be the same price or maybe a little higher.
The price in Chile was between 1%-2% rate on line. You go over to Japan, the rate on line was two or three. Japan has a lot of earthquakes. Maybe they have better building codes, maybe they have not the U.S. tort system, but the Japanese legal system takes a long time, like a decade, to hear claims anyway. I don't know if that's any better or worse than the U.S. system. You would think there would be at least what you get for Southern California. It hasn't been. This is what I come back to about Arch's decisions, about always looking at the risk. What are we being paid to take that risk? We were just not being paid enough to be in Japan.
The history has been, Japan said, "We'll make it up to you." At a rate of two on line, that's 50 years. Even if it goes up 100%, it's still 25 years to get paid back. That's a very long time to be patient for these things. The coverages that we tended to be on, the Japan exposures that we did have, were global covers, where we were writing perils ex-U.S. all over the world. It's sort of a piece of a large global cover, and that's why we picked up $60 million of damages there. Certainly we were never focusing on it. We always looked, we analyzed it all the time. We want to be paid well for when we're taking risks. Something could happen sometimes. You want to make sure that you're being paid well enough for it. We like Florida wind.
We think you're paid pretty well for that. Northeast wind, we think you're also being paid, having a good return on. You'll see our PML switch usually each year by the beginning of the year. Our largest zone has been the Northeast, and then it switches down to Florida. Some covers come off the Northeast. They roll off early in the year sometimes, and then Florida comes on, of course, this June and July, the renewal season. It switches around that. We've been at below our limit of 25% of common equity under the measurement systems for, once it dived down the last two years, we've been 20%, 18%, 17%. That's also because that even as attractive as we find these rates, we want to make sure that if we're going to go up against a limit we want a better return.
For us to be at 20 and go to 23, that next 3% of capital that we put against that PML, we want even a higher return on it. It has to be really good for us to be right up to the 25, right up to our limits. Our limit is a one in 250 PML limit. Some of the players have lower limits or different limits. A one in 250 event is an extremely large event in Florida. We think that we would not want to take more than that type of limit in a major way because it would just risk the firm. We don't want to do anything ever in any risk that would seriously hurt the firm in a major crisis.
Maybe I'm being a little reductive, but in my mind, that leaves California quake, North Atlantic wind, and maybe Northern Europe as attractive zones to write geographically focused cat reinsurance. Going forward, do we see other zones? Can Japan reach the point where you would find it more attractive? New Zealand, Australia, Chile?
New Zealand has had large increases, double, triple. It depends upon the layer you're at. Some of that's going to next year. That's still not a big of a market, New Zealand in itself. Japan, I'm hearing, they moved most of their renewals to July. They were coming up April, and they got them extended to July. We're hearing talk of maybe 80% increases from the two. Still not that exciting overall. Northeast Europe wind has not been at a greater rate historically. You'll see us quite underexposed there. We understand there may be some changes to RMS for Europe coming sometime this year. Maybe that might make it more exciting. We tend to just look at our overall spots. Again, we have to remember that as exciting as this is, global property cat and property type risks are 10%, 15% of global P&C premiums.
It's still, it is good. It's improving, but certainly not enough for a total broad market turn.
I guess 3 years ago, Arch sort of also, if you want to be a little ahead of the curve, Arch made an investment in a privately managed retro writer, fully collateralized and having its own capital. Looking at the marketplace, at least 3 of your direct competitors have now formed sidecars, although different ones in that there's contingent capital in them, which may mean that they get capitalized, may mean they don't, depending on what the opportunity is. For your investment in that, is there a market for you to go deeper into retro perhaps through investment? What are the benefits of having this privately managed investment, and how do you think it'll compare and how do you view the retro market at this point in time right now?
We quoted on some retro ourselves this past renewal cycle, it didn't pick up totally. There has been some going on. I think we'll have to wait and see. Clearly, if there's another big storm, it could really pick up. Right now it seems to be supply sort of met demand with the overall market with maybe an overall rate increase of about 10%, is what we think it is. It's not like it's gone up 50%. There's some restriction in some players where people will want to have some more retro, we haven't seen a massive rush to it. In retro, we want to be paid well when you take that type of risk. Our normal hurdle is 15%. We'd like to see clearly in excess of that. We would like to see maybe returns of like 20% when you play in retro.
It's high up there, but it's risky as well. It's interesting. I think there's some capacity to come on, but certainly nothing like the sidecars that happened in the last major cycle. We'll have to wait and see what this windstorm happens through to the end of December.
I have a lot more questions, but I'd rather audience ask questions if they want since I'll open to them or I can just keep firing away. I'll leave it to you. Do we have a hand who wants to question or you want me to keep questioning? The offer will expire. I'm going to keep asking questions. In a very broad sense, the deadlock in Washington appears probably at a bigger impasse than it ever has before. The United States might be defaulting on its debt in 6 weeks. That would be interesting. If we went back in time 3 years ago during the presidential elections, there was a lot of chatter about trying to close tax loopholes, particularly related to Bermuda and obviously Arch set themselves up in a way to take advantage of what the tax laws were at the time.
Why do you think or what do you hear is going on in Capitol Hill? I don't hear any global tax arbitrage conversation going on in all these discussions. Obviously, you have alternative offices around the world and whatnot. Where do you see this conversation in Washington going and where is our position in the event that there are some legal changes?
Well, now the conversation in Washington is a fascinating topic because there are many conversations in Washington. They don't appear to be talking to one another, but there are still many conversations. There have been some talks of various proposals for reinsurance from the United States to foreign jurisdictions and limitations and taxes on that. It was included in the president's budget again this time, but that budget appears to be going nowhere, certainly with all the discussions going on. So although you can never predict these things, I think with the monumental challenges that they're facing now between the debt ceiling limit and spending cuts versus tax revenue increases. So far we're not a broad based topic among the Senate or the House.
Overall, if you step back from the whole thing, even under the most optimistic scenarios, it doesn't raise enough money for any major change to the deficit or any other major spending program. As things roll through Congress, things can be added sometimes. That's why we tend to speak a lot about the benefits that the global reinsurance community gives to the Florida companies and stressing the very positive parts of insurance because insurance is truly a global business. The capital will be where it gets the very best return and there are various jurisdictions that have that. We have it in Bermuda, but there's also many others and you see companies in various locations.
I think the overall U.S. tax policy hopefully will realize this over time and will, I think for all U.S. corporations, I hope come to some more rational tax policy, not just for the insurance industry but for.
If it becomes more of a different level of rationality.
Yes.
If we become a more, I guess, nativist or tax unfriendly place in trying to capture as much tax as possible, how has Arch set itself up, particularly from the insurance perspective from a general desire to increase its taxes on companies like yourselves?
We have contingency plans if various jurisdictions are ever targeted, but if it's a broad-based reinsurance to any external group outside of the U.S. type restriction, we clearly have various tools at our overall disposal. We can invest more in muni bonds. There are still some good municipalities you can actually buy some bonds with. Limited, but still a few good ones. Right now, in fact, with writing our U.S. insurance business is writing typically at 102 or 100, it's not making that much of a profit in the short term. Of course, in the longer term, you would have underwriting profits. It would pay higher taxes. Overall there are some other ways to move business around. We do more reinsurance, I think, from Bermuda and externally than from onshore.
You would pay higher taxes over time in the U.S., we're growing our business worldwide. Our Lloyd's syndicate is growing as well. This is kind of balanced out over a long period of time. We don't view it as a terrible risk or crisis.
Cat-exposed property is a line of business that clearly seems to benefit here. There's no P&C insurance, reinsurance is not a monolithic industry. There are a lot of individuals who say that pricing is broadly on the rise at this point in time. Do you concur with that view? I think it's sort of a rhetorical question, because I think I know your answer already, but perhaps you can tell people what you think about the broad markets, particularly liability markets, and talk a session about why people have different opinions.
Sure. Well, as I've said, clearly, property cat has gone up. It's gone up in Florida at this renewal. It's going up in Japan. It's going up in various areas. That's good for that piece of that market. There are some tiny spots around the world where you see some significant pricing power. We call a hard market when we're seeing larger increases. You're seeing 20%, 30% or higher type of increases, then you really get into some solid returns, unless you're at a very high level of ROE already. We think overall, we're running at 9%, and we have a broad mix. That includes the reinsurance and everything else. We have a long way to go with some of these lines before it gets pretty exciting.
If you're writing a line at 3% or 4% ROE, a 2% or 5% increase isn't going to make it a 15% ROE. There are some lines we pulled out of and pulled back on almost all those. We stay in them where we have to keep an option cost going for that are just really subpar returns. We have not seen any solid evidence that it has dramatically changed yet. We still see some rating decreases in some lines. Large case financial institutions D&O has still been going down. It increased right after the GFC, then it's been going down since then. We pulled back from that quite a bit. Casualty lines in general in the U.S. are still at a low overall ROE, will require large rate increases before you get any real excitement there.
We're in the lower ROE business. I think you see it in most companies and what they report when you look at their current accident year ROEs. That's the reality, you have to just get through this time. Hoping it's going to turn doesn't mean it turns.
Well, if I look at the P&L of some of your comparison groups head-to-head with you on a lot of businesses, some are broad-based writers, they're reporting double-digit top-line growth at this point in time right now, they're telling us that the rates are going up. Where's the disconnect? Look, I was born skeptical. At the same time, I think there's a number of companies coming ahead right now who, 10% top-line growth, rates are going up. Is it possible that people can be seeing different things?
It is possible. Clearly, if you play in certain market segments, because when we speak of hard and soft markets, it's never everything at once, unless you're in the rare time of 2002 or 2003. Everything went hard. Generally, you have all these mini cycles going on. You have the large case, people need premium volume. That pricing gets more competitive. Sometimes the smaller case, the mid-size employer type business, that's more long-term. You have the renewals. You have more pricing power. If you're paying a smaller size premium, you won't shop it every year. It just isn't worth it to save 10% on a $5,000 premium. It's just not worth shopping it all the time. If you are a very large company and you can get a 10% reduction, you will shop it with your broker. That's what they do.
Clearly, there could be some firms that have specially unique businesses that you can grow in. We've had a few spots we've mentioned where we've seen some growth. We're doing well in small, medium enterprise professional liability business in Europe. We've seen some growth in Canada among some lines. There are spots. That's how we've been able to really stay sort of level in many of our businesses. To do an overall type of business, if you're a broad-based writer, you have to be in the big businesses where the big premiums are, that's a lot of casualty business, we just don't see that yet.
In terms of the investment portfolio, are there opportunities out there in the low rate environment? We're seeing a number of sovereigns with very, very high yields right now. Fewer attractive marks on the liability side of the balance sheet. Are there any attractive opportunities on the asset side of the balance sheet here? Is this a period like on the liability side to dig in for the future?
Well, it's interesting because our philosophy is to be generally conservative, but when reportedly the head of PIMCO is shorting U.S. Treasuries, you have to start to think about what is conservative today. We've been generally a little short, shorter than our liabilities. We were 2.7 at the end of the last quarter, 2.73. Our average liability is about three and a half. We view that the risks of rates falling versus going up, it hurts us more if rates have a dramatic spike, so we'd rather be positioned a little short. Nevertheless, rates have actually gone down a little bit the last little while. We don't mind that. We were willing to give up that gain because the risk of a dramatic increase, the world is in a very interesting situation.
My daughter is currently an economics student, I'm telling you, this is a very unique period of time for you to be studying world economics. We have Europe and they seem to keep being able to push things down the road, it's a very precarious situation if you really step back and think about it. The United States spending is also headed down this path with no real agreement or leadership yet. Now, I'm very hopeful the U.S. somehow has a way to manage through all this and we get our act together. When you play on that type of risk, that you could have a dramatic increase in interest rates. It's really less inflation than if we threaten default, even though we would never really default because we have the money, we could just reallocate it to pay the coupon.
If people get fed up with buying Treasuries, you could see a big increase in just raw interest rates for the United States, and that would have a short-term impact on our portfolio, as well as all Property and Casualty insurers. If that does happen, and that reduces short-term capital needs, we want to be able to write business at that period of time. That could be raise of rates and a nice hurricane could really turn some of the broader markets. So we want to have that opportunity, that option always available for us. So we'll give up a little on the short term. We'll always have that flexibility to play into that hard market. We still are AA plus credit quality. We haven't gone up the credit curve that much. We have gotten back a bit into equities. In the past year, it's performed very well.
We also have some investments, small investments, $50 million here, $50 million there, in natural resource funds, to try to take advantage of commodity price increases over time. It's a tricky situation. Our chief investment officer gets a bit schizophrenic from day to day thinking about what might happen. We just plan along, try to be generally conservative in what we're doing, I think Arch has had a good track record of just slowly increasing book value per share on the total return of the investment portfolio. Our chief investment officer is rewarded on, and we manage on, a total return philosophy. We want to see that total return go up. Investment income is important, but the most important thing is to have that book value per share go up.
That's his task, take that investment portfolio each and every quarter and eke out a little bit each time, and that's what Arch has done, and that's what we plan to continue to do. Andy?
The 9% you talk about, can you break it down, roughly speaking, between property and casualty, assuming kind of normalized cats? The other question I have is, in Florida, for the hurricane, what's your rough exposure going into the season from a low average, above average, roughly speaking? What's your outlook for the casualty business?
We have three questions. The first one is when you think about a 9% current run rate ROE at Arch, given the current economic and P&C environment, what's the breakdown between property and casualty? Two is, are you over, under exposed, or what's the relative exposure going into this year's hurricane season? Three, outlook for the casualty market.
We don't give exact details by line for competitive reasons. In general, clearly the property cat business is meeting generally the type of returns that we like to see, call it around the 15%. If we're averaging 9%, that's on 7% of our portfolio. We have some business in the middle. We have some casualty lines that we don't write much in, but we're seeing low single digit ROEs in some of those. When you put in today's Treasury yield curve, this is a very important point is how we price and how we look at it. If you put in the current yield curve, even with assuming some return on your investments, but AA plus doesn't give you a lot of extra yield.
That's a big factor in some of these lower ROEs, particularly for the longer tail casualty business, which when rates were higher, had a much higher ROE. The second question was?
Going into the hurricane season, your relative exposure to prior years.
We're probably about average. Rates are up, and we've seen it a bit, but it's not up 50% or 70%, so we're seeing lines about where we have historically been.
Outlook for casualty.
Yeah, how do you see the casualty business heading into today? What is going to take for-
Casualty is a very long-term business. The 1999 year and the other liability line just developing favorably by three or four points in the 10th year of piece . Maybe some of that was AIG, but for the industry, you still see development in 1999 in this very long-tail business. The overall casualty market has to develop unfavorably for people to really have some pain. So far, at least the last three or four or five years, trend has been a bit benign. The question is that a trend that will continue? Will the trend pick up from here on in? Will it pick up and do retroactive increases where the trend should have been anyway? With the economy down, the less economic activity clearly has to have some impact on the overall frequency that's happening with casualty claims. Just less people out doing things.
That could be some of the explanations for the lower trends. We believe and we keep pricing with the same trend line. We think it will come back, and we keep gearing up our picks, especially on the larger case. Because we're shifting our business each year to smaller case business, it has higher expenses but lower loss picks. We're able to average it out year-on-year a bit in insurance lines. Overall, people will have to pay the piper someday. You can go from the time you write the business, it can be three or four years before you first start to even have to be serious about the claims. Then it picks up from there. Then typically, if you look at history, then it turns really bad. You have to own up to a lot.
If you look at the increases, the 1990s were all quite favorable in many lines of business. It got very poor underwriting by the end of the 1990s, 1998, 1999, 2000. That started to pay the piper in 2001, 2002, 2003. The market started to turn in 2000 a little bit in these lines, and you actually saw rates starting to go up in these lines in that year when people started to really realize they had a problem. Of course, we had some good examples. We had a few companies go under by the end of 1999 and into 2000. They had a bit of trouble signing off that year-end 1999 reserve book. When you start seeing that, then you start to see overall pricing changes in that market.
That's why Dinos has been saying, who's been through many cycles in his experience, we've probably got a couple more years to go before we start to see some changes there.
Well, there's 10 minutes until the next meeting begins. I think that we'll break here. Thank you, John. Be careful about praying for rain. Thank you all for joining.
Thank you, Josh.