Arch Capital Group Ltd

NASDAQ:ACGL

Earnings Call Transcript 2022-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2022 Arch Capital Group 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. As a reminder, this conference call is being recorded.

Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby.

Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found on the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website.

I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin.

[Marc Grandisson, Chief Executive Officer]

Thanks Elizabeth. Good morning, and welcome to our earnings call. Arch delivered strong results this quarter headlined by an operating return on equity of 17%. Our results were driven by excellent underwriting performance across all three operating segments as we continued our focus on growth opportunities during this hard market, as demonstrated by the 27% increase in P&C net premium written over the same quarter one year ago. These results demonstrate how our company is positioned to capitalize on market opportunities across the many lines that we underwrite.

We've said it before, but it bears repeating. We are committed to agile cycle management predicated by a focus on risk adjusted returns. And it has enabled us to accelerate our growth through the deployment of meaningful capacity to our clients. Because we invested in capabilities and reserved capital during the soft market years, we are in the enviable position of being able to maximize to these opportunity. Increasingly Arch is seen as a provider of choice by our distribution partners and clients, which allows us to take on leadership positions, some in the industry retrench. P&C rate hardening continues in many lines. It's important to keep in mind that for the vast majority of the P&C lines, we've been able to achieve compounded rate increases meaningfully above last cost trends for the last two or three annual renewals and as such healthy margins of safety have been created. We believe this attractive level of expected returns should remain in place for the next few years.

I will now offer a few highlights on our business units. In the quarter, our insurance and reinsurance segments both had excellent operating results, largely because of how we leaned hard into the improving market early on. We also have invested in improving our data analytics while broadening our market presence.

In our North American insurance operations, premium growth was broad based with net premium written up 29% from the same period in 2021. Some of the most significant growth came from our E&S lines, both property and casualty, professional lines, including cyber and a resurgent travel and accident sector. All our lines of business where we believe risk adjusted returns are most attractive. Our specialty international insurance business, which includes our Lloyds and UK regional businesses, also delivered strong growth in the quarter with net premium written up 23% from the same period last year driven primarily by specialty, casualty and property. Our investment in building the UK regional small business is gaining traction as well.

When looking at the improved results of our insurance business, it's apparent that the work of our teams over the past several years is paying off. We have developed a platform that responds swiftly to opportunities presented by the hard markets while at the same time building more sustainable positions in lines that are less cyclical. We have the capital, the people and the desire to lead in today's environment, as long as attractive opportunities are available, Arch will be there to write them.

Our reinsurance segment continued to deliver excellent top line growth and bottom line earnings this quarter because of the diversified and specialty focus of our reinsurance business. The strong growth reflects our increased writings of quarter share treaties which allow us to participate in the rate increases experienced by our [indiscernible]. The 61 and 71 renewals showed a property [cap] market in transition and while I hesitate to make predictions, we are cautiously optimistic that this momentum will continue in January 1, 2023.

The general psychology of the market appears to have shifted to requiring substantial rate increases to accept cat exposure. As an example, in Florida, where capacity remains constrained, property cap rates were up in excess of 30% and our P&L in a one and a 250 year events increased as we selectively expanded our writings. Rate pressure was evident also beyond Florida. However, we will need a few more quarters to confirm we are facing a hard property cap marketplace.

Turning to our mortgage segment. The group continues to deliver the consistent underwriting results we projected when we began building our EMI business a decade ago. Our embedded book of high credit quality risks as well as continued on price increases have been key elements to our exceptional return this quarter. All the rising mortgage interest rates have slowed the volume of new originations, the purchase market remains strong, as housing demand continues to outstrip new supply.

Rising rates also mean that persistency is increasing which allowed Arch to grow its U.S. primary mortgage insurance in force to $292 billion and all time high. The forbearance programs continue to roll off and cures have brought our delinquency rate down to 1.77%, which is consistent with what we experienced before COVID.

Last and perhaps most important, the credit quality of homebuyers remains excellent. And we believe our portfolio is well-positioned for a variety of economic scenarios. We will continue to be deliberate in managing our mortgage portfolio, benefiting from a diversified business model that gives us the flexibility to focus on credit quality and profitability, not on volume.

Briefly on investments, where rising interest rates and market volatility are setting the stage for additional investment income contributions over the next several quarters. We're seeing the benefits of not chasing yield during the past several years as well as the work done to reposition our portfolio in response to the changing interest rate environment. Earlier this year our investment team reduced our equity exposure in our fixed income portfolios shorter duration has allowed us to quickly move our investments into higher rate securities that provides further cushion against potential inflation impacts. This year surge of inflation has been a call to arms to underwriting teams across the industry. And by and large the industry has proactively incorporated higher trends into its models. We believe that the uncertainty surrounding future inflation should keep upward pressure on rates.

At Arch, we manage inflation by business segments as we said before. We believe inflation is a net benefit to our MIS portfolios performance while our P&C exposure to inflation is mitigated by many tools available to us. Overall, we're very pleased with our underwriting results and returns in a quarter. And we are optimistic about the rest of '22 and into '23. As always, our objective remains to generate profitable growth and deliver long term value for our shareholders and this quarter's results are another example of our ability to do just that.

I want to thank the Arch team for everything they've done this past quarter and over the last several years. Our people have made Arch into an employer and insurer of choice and have us well-positioned to sustain our growth trajectory into '23 and beyond. Francois?

[Francois Morin, Chief Financial Officer and Treasurer]

Thank you, Marc. And good morning to all. Thanks for joining us today. As you will have seen by now we had a very strong quarter and with very few unusual items to discuss or highlight to you. I have kept my prepared remarks relatively brief to allow for more time for the Q&A session. So here we go.

For the quarter we reported after tax operating income of $1.34 per share, resulting in an annualized operating return on average common equity of 17.1%, two excellent results. In the insurance segment net written premium growth of 27.5% over the same quarter one year ago, combined with excellent underwriting performance resulted in an excellent year combined ratio exploiting cats of 90% a 140 basis point improvement over the same quarter one year ago.

Like last quarter, a change in our business mix resulted in a slightly different split between the loss and expense ratios, compared to the same quarter one year ago. In the reinsurance segment, net written premium grew by 25.7% over the same quarter one year ago. The segment produced ex-cat accident year combined ratio of 82.8%, 430 basis points lower than the same quarter one year ago. Here also a reduction in the accident year ex-cat loss ratio was partially offset by a slight increase in the expense ratio due to growth in areas with slightly higher acquisition expenses, and targeted personnel expansion to support our growth.

Losses from 2022 catastrophic events net of reinsurance recoverable and reinstatement premiums stood at $82.4 million, or 3.5 combined ratio points compared to 2.4 combined ratio points in the second quarter of 2021. The losses were split approximately 80% to reinsurance and 20% to our insurance segment. It's worth noting that approximately two thirds of the estimated losses came from events outside the U.S. including Australian floods, South African floods, a directional storm in Canada, and other miscellaneous natural catastrophe events. Our mortgage segment had an excellent quarter with a combined ratio excluding prior development of 39.2%. Net premiums earned increased on sequential basis due to increased persistency of our enforce insurance, which now stands at 71.3% at the end of the quarter, and growth in our CRT portfolio.

Production levels also increased from last quarter consistent with the seasonality of the business. We recognized $118.1 million of favorable prior year development across a segment this quarter. A meaningful benefit to our bottom line, as delinquencies cured at a higher rate than expected. Close to 80% of the favorable claim development came from our first lien insured portfolio at USMI mostly related to the 2020 accident year. The remainder of the favorable development came from recoveries on second lien loans, and better than expected claim development in our CRT portfolio in our international MI operations.

In all our segments, we maintain a prudent approach and setting loss reserves considering the uncertainty we face in a variety of factors, such as macroeconomic conditions, inflation, both monetary and social, and lags and settling longer tail liabilities as COVID related delays get worked through the legal systems. Income from operating affiliates stood at $4.6 million. It was generated from good results at Coface mostly offset by the negative mark to market impacts on the summer's portfolio for those securities that are accounted under the fair value option method. Gross investment income before investment expenses increased 20% from the first quarter of 2022 to $123.6 million driven by the reinvestment that higher yields of proceeds from the maturities and sales of investments and securities and the presence of floating rates investment floating rate investments in our portfolio. Total investment return for our investment portfolio was a negative 3.02% on a U.S. dollar basis for the quarter hurt by mark-to-market losses due to rising interest rates and weak equity markets.

As you know, it is worth remembering that while mark-to-market impacts are fully reflected in our financials, a significant portion of this decrease hasn't been crystallized through the selling of securities and has the potential to reverse itself over time, in particular for our fixed maturity investments as they mature.

As we discussed on the first quarter call that defensive investment strategy we have employed for a number of quarters with high quality investments and a short portfolio duration has helped minimize the impact of rising interest rates and the mark to market hit to book value. Our investment duration remains slightly below three years at the end of the quarter and slightly underweight and relative to our liability duration target. The performance of our alternative investments remained very solid this quarter, as we benefited from the returns generated by a number of funds that outperformed broad market indices.

Turning briefly to risk management. Our natural cap P&L on a net basis stood at $888 million as of July one, or 7.7% of tangible shareholders equity. Again, well below our internal limits at the single event one and 250 year return level. Our peak zone P&L is currently the Florida Tri county region. On the capital front, we repurchased approximately 7.1 million common shares at an aggregate cost of 320.7 million in the second quarter. Our remaining share authorization currently stands at $600.6 million.

With these introductory comments, we are now prepared to take your questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo. Your line is now open.

[Elyse Greenspan, Wells Fargo]

Hi, my first question is on the rate versus trend discussion which we've had a lot so far this earnings season. Marc, you started off your conversation by saying you continue to see hardening and many lines. Where would you place when you think about your insurance business where you place price and loss trend? And how do you think that could go from here as we think about higher inflation levels?

[Marc Grandisson, Chief Executive Officer]

Yes, I think the pricing, nice hearing from you Elyse, I think the pricing in the market is definitely clearing the last round. You've heard us on some of the calls that we would concur with that conclusion.

[Elyse Greenspan, Wells Fargo]

And you think as you're thinking out the next year, do you think that remain as especially right to your comments when we've heard about weight on top of weight on top of rate. Or do you see dynamics? They will keep talking about that for the next year or so?

[Marc Grandisson, Chief Executive Officer]

I see what you mean. So I think I would answer by saying the perceived risk in the marketplace has actually increased. So there's all this on the property categories. I mentioned briefly, my comments. And also on the liability side as well. I think that the uncertainty about the social inflation, and what it could mean and also geopolitical risks, just a lot of stuff going on in the world, I would expect this to continue well into 2023. But I've been wrong before. So I have to be careful the way I tell you this.

[Elyse Greenspan, Wells Fargo]

And then on the investment side, where are you putting new fixed income money to work in terms of rates and then how much of the portfolio is turning over the next 12 months?

[Francois Morin, Chief Financial Officer and Treasurer]

Good question. I think we don't plan specifically how much of it we're going to turn over. But we've been less than that. Our investment team has been pretty active trying to make sure that a first of all, we did take a lot of investments. So offer risk in the first half of the year. And then it'll all be about how much of what kind of opportunities we see as with the environment we're in, but we certainly with a short duration that we're at three years, you could certainly think that a meaningful amount of it, there's going to turn over the next 12 months.

[Elyse Greenspan, Wells Fargo]

And then what's the new rate today?

[Marc Grandisson, Chief Executive Officer]

Well, new rate want to be a little bit careful here. Certainly corporates you've heard it we're calling for approaching 4.5% in some places and the corporates investments on and corporate securities that we made in the month of July. With the Fed announcement yesterday, I mean, the risk for you the treasuries I think everything is going to move up a little bit from there. So that's kind of where what we're seeing today, it's going to evolve as we move forward. And that compares to an embedded book yield of 2.2% or so at the end of the quarter. So it's meaningfully higher than what we're the portfolio has been at.

[Elyse Greenspan, Wells Fargo]

Okay, thanks for the color.

[Marc Grandisson, Chief Executive Officer]

Yes.

[Operator]

Thank you. Our next question comes from Jimmy Bhullar with J.P. Morgan. Your line is now open.

[Jimmy Bhullarn]

Hi, good morning. So first just had a question on the mortgage insurance business. How are you, what's your view on the operating environment in the business, but just as the threat of a potential recession and then its impact on margins, and then just with the higher interest rates, and how that's going to affect top line growth in the business?

[Marc Grandisson, Chief Executive Officer]

Yes, and I think it's quite answered a bit more specifically, I think that as I mentioned in my comments that we mentioned more than once on the calls, you're going to hear some of the other I believe, competitors is that the credit quality of the borrowers that we see right now is exceptional. By and large, the credit quality has actually improved through the pandemic. So we're very, very pleased with this. And I'm saying this, because the biggest driver of default in distress is a credit quality of the borrower. It's by far and it overwhelms the risk possibility.

We also are in position where we have substantial equity buildup in the housing stock. So that's also helpful. So we're very comfortable with the way the portfolio is position. And I think it's, we're not recession proof. But I think we have a lot going for us if there were to be a recession. Now, the top line, as you know, if there's less production, there's some indication that the third quarter might be a bit slower than usual, then that would mean no production that's less than positive for the industry in that quarter. But the impact on your premium will take a little bit longer to be felt because as you know, monthly premiums are written through a longer period of time and most of what we write and earn at this point in time comes from prior underwriting years 2020, 2021 and 2019.

So we're not going to see a huge impact immediate impact. It's not like a property casualty portfolio. So, again, it's a somewhat of a tempered impact on top line, we believe.

[Jimmy Bhullarn]

Okay. And then on share buybacks, you've spent, I think it was $321 million this quarter, $255 million last quarter. And if I look over the past year and a half, they've averaged almost $300 million a quarter. Do you expect to be at the same pace going forward? Or should we assume a slowdown?

[Marc Grandisson, Chief Executive Officer]

That's a good question. I think, yes, we've been active. I think we, it's part of our evaluation of all the alternatives in front of us when we buy back stock compared to how we deploy the capital in the business. The one thing that I want to make sure as you're aware, I mean, realizes and we're bullish on the market, right, we think the market that we see today is strong and has some potential for even getting better. Time will tell. We certainly need to put odds on that. But the reality is, if it gets better, and we have the ability to deploy more capital in the business at one-one, will certainly want to do that.

So the -- we'll reevaluate that daily and weekly, like we always do, but I could see a scenario where we have to pull back a little bit on the share buybacks really just to have the capital base that we need to fully execute on deploying the capital in the business and the three segments which are, as you see all humming and growing at a very good clip, make sure that we can execute on that opportunity in '23 and beyond.

[Jimmy Bhullarn]

Okay. Thank you.

[Marc Grandisson, Chief Executive Officer]

You're welcome.

[Operator]

Thank you. Our next question comes from Tracy Benguigui with Barclays. Your line is now open.

[Tracy Benguigui, Barclays]

Good morning. I also had a loss turn question. Marc you've said in the past that your view of last trends, your book is roughly 250 basis points above CPI. And for access layers, it could be even higher. Can you just share your latest take on that? Because I think when you talked about these levels, CPI was below 2%?

[Francois Morin, Chief Financial Officer and Treasurer]

Yes, I think it's on a long term basis, right. These surge and inflation may create distortion in that spread over this but over the long haul. I still maintain this and seen another statistics recently that concurs with that sort of analysis. I think that the CPI we've fitting it right now in the shorter lines of business, shorter pay lines of business and property specifically, as you know, we've had all collectively a lot of labor and cost material that went through hire, very significantly.

I think in some lines of business, we're not seeing evidence of yet of trend above the CPI significantly above the CPI. So I think our position has been to maintain, as we said before, Tracy, a longer term view of the loss trend. And when we had indication, perhaps zero to 1% in certain years, we probably have higher from a longer term perspective. So that helps on a cumulative basis when you buy the business not having to do as much catch up. It keeps you a little bit more balanced through to changes in inflation sometimes we see right now.

[Tracy Benguigui, Barclays]

Okay, so it's more of a view, not what you're seeing today.

[Marc Grandisson, Chief Executive Officer]

Correct.

[Tracy Benguigui, Barclays]

Okay. Also started a conversation yesterday on the intersection of investment yields and combined ratio targets typically combined ratio targets we share with underwriters is informed by ROE. And I believe you guys, when you come up with these targets, you're actually looking at new money yields on a risk free duration match basis. So not your portfolio yield. Are those the right clicks and takes of your pricing model? I guess, ultimately, could hire new money yield risk free in your case change your indicated rate need?

[Marc Grandisson, Chief Executive Officer]

Yes, it's a great question Tracy. And I like the way we've built our compensation scheme for our underwriting team. It's actually self correcting and self adjusting as we go forward. Number one, when the prize the business, this is our underwriting underwriters. They actually look, they used to look in the Wall Street Journal at a three to five year equivalent treasury rate. And that's what they would ascribe to the cash flow in terms of investment income, that he could earn on the premium that we could earn on the premium.

So it's really a treasury return. This is what you get credit for their compensation plan. So as interest rates go up their interest yield go up on their on the floor that they create, or help generate for Arch from the insurance perspective, but as a counterpart to that our targets is also in flux and actually moves in lockstep with that treasury equivalent.

We have actually set a target that 950 bips above treasury for the target. So while at the same time they're getting more investment income, you can see a higher margin, they're going to have a higher threshold on the target that they're that they're looking at. And we do this continuously. I know our reinsurance folks, because it's portfolio based, it's almost a daily occurrence, they actually look it up every day, on their own insurance, on the insurance basis, we actually look at it through a portfolio on a quarterly basis.

Unless there's a big change that we just saw, then they'll be like immediate changes made to the pricing model. So everything is linked together. So interest rates go up. Yes, you get more investment income, but hey, guess what, we need to have a higher return.

[Tracy Benguigui, Barclays]

Okay, that was excellent color. If I could just speak and this was really quick. What is your new insurance rate in MI go up this quarter sequentially?

[Marc Grandisson, Chief Executive Officer]

Can you repeat the question again please?

[Tracy Benguigui, Barclays]

Sequentially, yes, sequentially what is your new insurance written for mortgage insurance went up?

[Marc Grandisson, Chief Executive Officer]

Yes. Okay. Yes. [indiscernible] it's $23.5 billion versus $20 billion in the first quarter. And largely, as you know, Tracy, it's a very seasonal marketplace. A lot more origination takes place in the second quarter. The school year finishes, people move, the size of summer gets around. That's why there's other people moving and buying houses and refinancing even, not so much these days, but certainly purchasing houses in the second quarter. So historically, the first and fourth quarter are about the same. They're lower than the middle two quarters. So that's sort of a, it's just a by virtue of the market origination. There's nothing in our pricing or appetite has changed in the border.

[Tracy Benguigui, Barclays]

Thank you.

[Marc Grandisson, Chief Executive Officer]

Okay.

[Operator]

Thank you. Our next question comes from Brian Meredith with UBS. Your line is now open.

[Brian Meredith, UBS]

Yes, thanks. A couple of them here for you. First Marc just curious. Big growth in Florida property cat. How do you get comfortable reinsuring some of the less credit worthy companies down in Florida?

[Marc Grandisson, Chief Executive Officer]

Yes, we have a very good question, Brian. I think probably like other competitors of ours. We have a very, very extensive list of clients and we've done auditing of all of them even if they're not our clients throughout the years. Two aspects that we will look at the claims paying ability how good they are adjusting claims because as you can appreciate, Brian is very important.

And secondly, we're looking at the financial situation. So we have rank order them in two or three buckets. And we actually tend to focus our limit in the ones that are healthier, and the ones that we believe have better claims adjustment processes and teams and expertise.

So but having said this does mean that we won't do a business with someone who's a bit more fragile from a financial perspective, but you probably heard it already that there are conditions that put in a contract such as prepaying reinstatement premium to make sure that we don't have to run after two credit risk. So there's a lot of things you can bells and whistles. So we treat, different clients different way based on our assessment of claims, paying ability, and then expertise and credit worthiness.

[Brian Meredith, UBS]

Got you. Thanks. And then second question, just curious, professional liability premium insurance still really strong growth. That's the one area we've actually been hearing some concern from some companies may not concern to the right word for it, but are you seeing some competitive pressures in the public market DNO area? Maybe talk a little bit about what's in that professional liability line for you all and are you seeing the same type of trends?

[Marc Grandisson, Chief Executive Officer]

Yes, the excess DNO I think is a little bit more stable, more sideways, some go down, some go up, but it's clearly not as -- as heated as it was three or four years ago. But one thing I want to mention, Brian, that people forget, race and excess DNO are two, three, four times what they were three or four years ago. So it's extremely, still a very, very healthy marketplace. I think we would argue that capacity is stable. There's not much -- no longer any dislocations. I just think that for the right company, for the ride experience, no claims or very good quality, there's a tendency that there's a willingness on the marketplace to give more credit to those companies, which is sort of normal. And given where we are in the market after four years of extreme rate pressure.

I think on the second question, with our growth a lot of our growth isn't a cyber products. We actually have put cyber in a professional line. And that's one area which we said before, we're very keen to develop and grow as we're seeing really great opportunities there as well. And much needed. Capacity is much needed in that in that marketplace actually.

[Brian Meredith, UBS]

Makes sense. Thank you.

[Marc Grandisson, Chief Executive Officer]

Sure.

[Operator]

Thank you. Our next question comes from Josh Shanker with Bank of America. Your line is now open.

[Josh Shanker, Bank of America]

Thank you. I'm understanding your answer to Tracy correctly, you have a long term view of inflation and the changes in inflation wouldn't cause you to change your the inflationary outlook embedded in your in your reserves. Now, if that's correct, does that mean some years you're going to run a little hot because inflation will be higher than you expect? And in some years lower. And would you need would you or any other insurer need to take a charge in order to shore up higher inflation for an extended period?

[Marc Grandisson, Chief Executive Officer]

No. I think that what I say is when there's lower interest rates, lower inflation rates loss trend, we tend to take a longer term view. And as you know, Josh, we had multiple years of, I would argue depress loss cost trend, which was great for the industry, but we still maintain a healthy skepticism as to how we can last and over the long haul. So that makes us maintain a pricing actually higher, during times of, I would argue softer times. What I think it means is that our bright line as to where we think we can make a great return or a good return is doesn't move as much around as we go forward. Right. Because we have a property, we believe we want to have a healthier or more conservative, if you will view of the loss cost trend as we price the business going forward.

[Josh Shanker, Bank of America]

So your loss cross trend assumptions are already higher and inflation [indiscernible] has been meeting the loss trends you already assumed?

[Francois Morin, Chief Financial Officer and Treasurer]

Yes. I think that's fair. Let me add a bit more on your question. I think Josh, specifically on reserves, I mean that's where the feedback loop comes into play where we do start with more long term assumptions around trend. And as Marc said, we've been through a period where inflation has been pretty benign. So we effectively over time, because we've been pretty, I guess we're slow to react. The good news has been that that's been an Arch kind of philosophy for a number of years forever, really.

We effectively end up building a little bit of a cushion that may come in handy if things do pick up again. If there's a bit of a spike in inflation, which depending on the lines of business and some lines of business property, short tail, no question that we're seeing a little bit of higher inflation on labor and goods and materials.

In some other lines of business, we're just not seeing it. So it doesn't mean it's not there, it doesn't mean that it won't happen. But for the time being, we have built up this again, buffer that we would call or a little bit of cushion in the reserve base, which would prevent us or what actually, we use up first before ever having to take a charge which in our 20 year history, we've never had to take charges. And we certainly hope to keep it that way.

[Josh Shanker, Bank of America]

That makes sense. I'm trying to understand mechanics. So you have a high, I don't mean to repair it, but you have you have a high assumption going in, nothing has changed that assumption. If something were to happen, that would change the assumption, by definition, it would mean you need to carry more reserves. But you have a buffer in there. And so you don't need to?

[Marc Grandisson, Chief Executive Officer]

On the old years. On the new years, we right. So the new business that we priced today, we will increase, we have increased. And again, it varies by line. But in some lines of business, no question that we've raised our assumptions, our pricing assumptions and loss cost trends so implicitly that when we reserve those new business, those new years '22 and moving forward they will start at a higher level reflecting the inflation assumptions that we put in place today. When we worry about reserves on the older, [in force] the old years, right '21 and prior, the fact that we priced them with more conservative assumptions on loss cost trends gives us that buffer that we think will be a mechanism to absorb some of the volatility.

[Josh Shanker, Bank of America]

And in terms of buffers, could you update us on your IBNR reserve for COVID?

[Marc Grandisson, Chief Executive Officer]

Our total reserves for COVID are still at $160 million, 75% of which are either IBNR or ACR within a reinsurance segment.

[Josh Shanker, Bank of America]

That's very complete. Thank you.

[Marc Grandisson, Chief Executive Officer]

You're welcome.

[Operator]

Thank you. Our next question comes from Ryan Tunis with Autonomous Research. Your line is now open.

[Ryan Tuniss]

Hey, good afternoon. Just one question from me. Can you talk a little bit about the impact that global minimum tax would have on the MI tax rate?

[Marc Grandisson, Chief Executive Officer]

It's pretty mature Ryan to analyze all this. There are so many moving parts of these global minimum tax right now whether it's going to take place, whether it's going to happen, which country is going to enact it? So way too premature. I mean, of course, our tax folks are working always every week, there's a new notion, something new coming from all the various governments and agencies and treasuries around the world. But right now, it's still a moving target. Too early, too premature to say what it would mean for us.

[Ryan Tuniss]

Understood. Thank you.

[Marc Grandisson, Chief Executive Officer]

Thanks.

[Operator]

Thank you. Our next question comes from Meyer Shields with KBW.

[Meyer Shields, KBW]

Good. Thanks. First, I want to follow up on Brian's questions if I can. Nothing much in terms of the quality companies in Florida. But given the sort of bizarre litigation environment there, how do you get comfortable that even the good companies are with reinsurance?

[Marc Grandisson, Chief Executive Officer]

It's a very good question. I think that in general, that's why we actually ask and want a higher margin of safety in Florida. So I think if you look at our expected pricing in Florida reflects all of these. And we need a healthier margin and you will find that the margin in Florida is higher than most other jurisdictions around and I think we've increased a little bit in Florida. We know we didn't go as Francois mentioned the P&L went up slightly in the Florida Tricounty area. But these prices, the prices that we saw as well Myers at some point, they're not necessarily sort of settled market, they might be sort of harder to place or a layer that needs to be fun finalized. So the pricing will be quite a bit better than you would expect than the average market would be.

Again, Meyer there is no guarantee in this slide specifically an insurance as you know. I think we tend to think about having a higher margin of safety in Florida and several deals gave us that opportunity this year.

[Meyer Shields, KBW]

Okay, no, that makes perfect sense. Second question, if I can look over your shoulder on the reinsurance side. You talked a little bit about the industry recognizing faster rates of inflation. How much does that vary when you look at potential feedings?

[Marc Grandisson, Chief Executive Officer]

Wildly, it varies wildly. I think now we probably have more consensus building in the industry. But it does vary wildly, because to be fair to our clients, they have different books of business, they have different lines, they have different focus geographically or line size. So it does vary a lot. But there's clearly among our clients that we can see and sense that there is development coming, there is some of that inflation taking up a little bit, which they have, by and large, already understood and appreciated would come. But I think like, it's, I would say it's varies by [sitting] company, the level but I think the general direction of pricing for more and recognizing more is there than [sitting] company clearly. They've been very, very proactive, most of them if not all of them.

[Meyer Shields, KBW]

Okay, no, excellent. Thank you very much.

[Operator]

I am not showing any further questions. I'd now like to turn the conference over to Mr. Marc Grandisson for closing remarks.

[Marc Grandisson, Chief Executive Officer]

Thank you very much, everyone. We're looking forward for the second half of this year and there we'll talk to you soon.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect.