Arch Capital Group Ltd

NASDAQ:ACGL

Earnings Call Transcript 2019-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Q3 2019 Arch Capital Group Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded.

Before the company gets starts with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call, that are not based on historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

[Marc Grandisson, President, CEO & Director]

Thank you, Crystal, and good morning to you. Our diversified business model of specialty insurance, reinsurance and mortgage lines of business have produced good growth and acceptable risk-adjusted returns for shareholders in the third quarter.

Operating earnings generated an annualized return on common equity of 10% for the third quarter as our book value per share grew 3.9% and more than 21% on a trailing 12-month basis. Before I discuss market conditions in a broader P&C sector, I would like to address the topic that is currently getting a lot of attention, namely the increased claims inflation or loss trend. In this part of the cycle, we are not surprised to hear about adverse claims development that some in the P&C industry are experiencing. We have discussed our view of loss trends on these calls over the past several years. And I'd like to remind our shareholders that at Arch, we approach pricing, our products and establishing a reserves with a bias towards conservative loss trend estimates. As I mentioned before, history teaches us that on average the P&C industry experiences claim inflation rate about 200 basis points above the CPI, although this can fluctuate over time.

It seems to us that the premium rate declines seen by the industry over the past several years should have led to higher current loss picks. It is important to bear in mind that in many lines of business, it takes 3 to 5 years before an adequate level of trend can be confirmed.

We believe that this gap between the estimated and actual loss trend has contributed to the uncertainty in reserve development. This uncertainty helps fuel both disruption and dislocation in several areas of insurance, which we have been and are capitalizing on.

This location is evident in arise -- in our submission activity this year and it is also reflected by the fact that we are achieving higher rate levels on new business than on renewal business in several segments. To give you some sense of the data, our submission activity in the third quarter was up more than 20% in E&S property and 15% each of E&S casualty and professional lines, specifically P&L.

However, to date, we believe that these descriptions are more indicative of the transitional market than a traditional hard market as we have not yet seen rate increases in hardening across the board. Risks selection is still paramount. Across all lines in our insurance group, renewal rate changes average a positive 3.5% for the quarter as net premium grew 22% in the third quarter above the same period in 2018. About 30% of that growth came out of an acquisition we completed earlier this year in the U.K. small commercial lines space. Rate increases contributed a quarter of the overall segment growth, while new business opportunities generated the balance. It is worth reminding you that we expect to close on our acquisition of the Barbican Group in the fourth quarter, and we believe that the enhanced presence and scalability of our Lloyd's operation will provide us with further opportunities.

Now turning to the reinsurance market. Reinsurance price intends to follow that are the primary insurance industry, but with a few twists. Catastrophe and larger attritional losses can disproportionately affect reinsurance results, creating the localized opportunities in areas of the reinsurance business. Property fact and Marine are examples of improving markets. Over the past several years, we have significantly reduced our net exposure to property cat risk in response to the declining level of risk-adjusted rates. The occurrence of Japanese typhoons in both the third and fourth quarter of this year has impacted global reinsurance industry result, and should support the ongoing need for additional rate improvement.

Turning to our mortgage insurance segment. Arch MI continues to perform well, and market conditions continue to be characterized by strong credit quality in a healthy housing environment. In terms of new production, our third quarter and new insurance written or NIW grew 18% over the same period a year ago. That production was driven by growth in a mortgage insurance market due to a broad increase in mortgage originations combined with an increase in the level of mortgage insurance purchased from private mortgage insurance. Overall, insurance and force grew about 2% sequentially in the quarter at Arch U.S. MI as higher prepayment activity was more than offset by new MI originations.

We continue to be pleased with the credit quality of our insurance and forced as key metrics in our U.S. MI portfolio remain at historically favorable levels. Notwithstanding the good market conditions in the MI sectors, we continue to mitigate our downside risk from an economic cat event through the purchase of insurance linked notes.

With respect to our investment operations, we have maintained our focus on important return and continuously repositioned the portfolio to our just to financial markets conditions, which contributed significantly to our growth in book value per share this quarter.

And with that, I'll hand the call over to François.

[François Morin, EVP, CFO & Treasurer]

Thank you, Marc, and good morning to all. Before I give you some comments on observations on our results for the third quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e, the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $261 million, which translates to an annualized 10.3% operating return on average common equity and $0.63 per share. Book value per share grew to $25.61 at September 30, a 3.9% increase from last quarter and a 21.1% increase from 1 year ago.

This result reflects the effect of strong contributions from both our underwriting and investment operations. Starting with underwriting results. Losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $68 million or 5.2 combined ratio points. These losses impacted both our insurance and reinsurance segments and were primarily due to hurricane Dorian and Typhoon Jebi. As for prior period net loss reserve development, we recognized approximately $51.7 million of favorable development in the third quarter, net of related adjustments are 3.9 combined ratio points compared to 6.7 combined ratio points in the third quarter of 2018. All 3 of our segments experienced favorable development at $3.9 million, $14.7 million and $33 million for the insurance, reinsurance and mortgage segments, respectively.

We had solid net written premium growth in the insurance segment, 22% over the same quarter 1 year ago. While approximately 30% of that growth comes from the U.K. regional book of business we acquired earlier this year, we also had a strong quarter of new business and an improving renewal rate environment in most of our lines of business. The insurance segment's accident quarter combined ratio, excluding cats, was 100.3%, essentially unchanged from the same period 1 year ago. Some of the pricing and underwriting actions we have taken over the last several years have begun to filter through the loss ratio, while our expense ratio remains slightly elevated, primarily as a result of investments we are making in the business.

In particular, as discussed on prior calls, the integration of our U.K. regional book and other smaller acquisitions is ongoing and increase the overall insurance segment expense ratio of this quarter by approximately 130 basis points. Investments in our underwriting claims and IT operations explained most of the remainder of the increase in the expense ratio. We continue to expect that the expense ratio for this segment will remain higher than the long-term run rate, until the growth in net written premium we achieved over the last few quarters, both organically and from acquired businesses, is fully earned.

Now moving to on our reinsurance operations, where also had solid growth this quarter, with net written premium up 40% over the same quarter 1 year ago. Over 60% of the growth came from the casualty segment, where we were able to write select new opportunities and distress sectors of the market, including a multiyear treaty that represented approximately 65% of the growth for this line of business.

As we have said in the past, some of these opportunities can be lumpy and distort quarter-over-quarter comparisons. Property, excluding property cat and property cat make up most of the rest of the increase in net-written premiums. The reinsurance segments accident quarter combined ratio, excluding cats stood at 92.8% compared to 92.5% on the same basis 1 year ago. Parts of the large attritional loss activity we experienced this quarter includes some exposure to the Thomas scope collapse. Our expense ratio remains satisfactory at 26%, down 140 basis points since the same quarter 1 year ago.

The mortgage segment's accident quarter combined ratio improved by 290 basis points from the third quarter of last year as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 3.8% is higher by 60 basis points than the result observed in the same quarter 1 year ago, although last year's loss ratio benefited from favorable prior development that was approximately 320 basis points higher than what was observed this quarter. The expense ratio was 20.8%, lower by 60 basis points than in the same period 1 year ago.

Total investment return for the quarter was a positive 100 basis points on a U.S. dollar basis points as our high-quality portfolio continued to perform well. Our investment portfolio duration is overrated relative to our fact target allocation, up slightly to 3.64 years at quarter end, as we continue to expect a continued slowdown in economic growth and a lower for longer global interest rate environment.

The corporate effective tax rate in the quarter on pretax operating income was 11.7%, and reflects the geographic mix of our pretax income and a 40 basis point benefit from discrete tax items in the quarter. Excluding this benefit, the effective tax rate on pretax operating income was 12.1% this quarter.

This time, we believe it's still reasonable to expect that the effective tax rate on operating income will be in the range of 11% to 14% for the full year. As always, the effective tax rate could vary, depending on the level and location of income or loss and varying tax rates in each jurisdiction.

Turning briefly to risk management. Despite the recent increases in catastrophe pricing, our natural cat exposures on a net basis remain at historically low levels at October 1, with the Northeast still representing our peak zone at slightly more than 4% of tangible common equity at the one and 250-year return level. We remain committed to deploy more capacity in this segments, if rates and expected returns on catastrophe exposure counts continue to improve over time.

In our mortgage segment, we recently completed our 10th Bellemeade transaction earlier this month, with coverage of $577 million. Currently, the enforced Bellemeade structures provide aggregate reinsurance coverage of over $3.7 billion. With respect to capital management, we did not repurchase any shares this quarter. Our remaining authorization, which expires in December 2019 stood at $161 million at September 30, 2019. Our debt to capital -- our debt to total capital ratio stood at 13.5% at quarter end, and debt plus preferred to total capital ratio was 19.5%, down 300 basis points from year-end 2018.

In terms of fourth quarter activity, we expect to use resources on hand to fund the Barbican acquisition at closing, once we receive regulatory approval.

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

[Operator]

[Operator Instructions]. And our first question comes from Mike Zaremski from Crédit Suisse.

[Michael Zaremski, Crédit Suisse]

In the prepared remarks, I think you talked about some stress in the marketplace. And it's my understanding that in the primary insurance pace, it could be wrong in this reinsurance, it feels like the greatest locations in the mega sized account space where capacity is very constrained. Is -- just curious if there is there an opportunity that Arch Capital can gravitate? Or that's not your sandbox? Maybe you can talk to where you see the greatest dislocations in the marketplace and which could benefit you?

[Marc Grandisson, President, CEO & Director]

I think your assessment is right on. I think that you'll here on other calls that from the marketplace that the record are larger carry more limits are going to more dislocation because compared -- competitors are reevaluating their risk appetite, which is where the most deployment was, shall I say, overextended in the last several years. And this is where most mediation is taking place. And you'll find that mostly in the E&F and the large commercial, risk is this is where we've seen most of the increase in submission activity. We had been historically been who we are on the defensive for those risk, and we are very well positioned to take advantage of that. I think we are on a receiving end of looking at more of those opportunities as we speak, and this is where we're able to flex more of our muscle.

[Michael Zaremski, Crédit Suisse]

Okay. So just want to confirm. So you obviously have a great rating from the rating agencies and you have a relatively large balance sheet, but the primary insurance balance sheet is smaller. So you -- in terms of counterparties and the brokers, they -- do they see you as like they look at the total Arch entity at balance sheet, when kind of assessing whether you guys can take a big piece of the larger account space?

[Marc Grandisson, President, CEO & Director]

Yes, they are. And I think there are also looking at us from a perspective commercial -- some commercial anecdote for you that we are one of the few that have heightened up the appetite for risk for our price appropriately. And I think community -- the book community and client community is very open to that and very willing to engage with us.

[Michael Zaremski, Crédit Suisse]

Okay. That's helpful. And switching gears to mortgage insurance. There is a recent agreement with the FHA and Department of Justice earlier this week. And there's been some talk about maybe it's shifts mortgage insurance volumes, things coming back kind of to the FHA and maybe out of the private marketplace. I don't know if you have any thoughts there from barking up something that could take place?

[Marc Grandisson, President, CEO & Director]

I always have thought about everything. So my initial comment to you Mike is that, it's very early, right? It was announced last week. It's not early this week. And I think it's an attempt to, I guess, decriminalize being FHA as the result of banking -- the banking system sector sort of being reluctant to provide FHA part to its channel. But we'll see how that goes and where it ends up. There also uncertainty as to whether a different administration would have a different view. And the agreement would like to say and you do. It's too early I will say to tell you. In general, what we here in Washington, though is that the private sector is still most favored area where the government wants the mortgage insurance to be deployed. We have seen this for many years. We'll see where that takes us. But we're watching it, and we'll have more sense for where it goes and it's going to take a long time over the next several years.

[Michael Zaremski, Crédit Suisse]

And just one last one on mortgage insurance volumes. Do you -- I believe in past quarters you kind of alluded to me be given that some market share as competitors all have their own proprietary systems. It feels like probably didn't give up market share this quarter, but it's too early to tell. is that because -- is your view still kind of you might over the next year or so move down a little bit one-off market share still strong obviously on absolute basis?

[Marc Grandisson, President, CEO & Director]

We don't manage the company on a market share basis, as you know, we just put out there are pricing and see where the market gives us in the quarter. But you're right with the new blackbox environment, it's a lot harder to see where everything falls out. And I think we're the only one that most of our competitors will feel the same way. And we're still in the early innings of how they deploy their pricing modules, how we -- how the client react to their versus ours. So I would just see that we put our pricing up there with our return and it so happens that we receive and we're able to write the amount of business that we wrote in this quarter. I would not describe any market share target from what we said.

[Operator]

Our next question comes from Elyse Greenspan from Wells Fargo.

[Elyse Greenspan, Wells Fargo Securities]

My first question -- hey, Marc, how are you? My first question is on your pricing commentary. So insurance, you said 3.5% price in the quarter. And so I'm trying to get a sense, I know there's a lot going on with net book and some new businesses as well as your question. But how do you guys view loss trend, I guess, if you're getting 3.5 points of price, I would assume trying an aggregate probably in excess of that? And can you just help us think that a little bit better?

[Marc Grandisson, President, CEO & Director]

Yes, 3.5% for our portfolio, as you're pointingout rightfully is that it's a very, very diversed book and business. Some lines of business are still, as I said, it's not because of the board housing market. Some lines of business are flattish and some are actually getting way in excess on a 10% and 12% rate increase. And so new business are getting quite a bit of even 5% or 6%, even if you're in the middle-of-the-road. So I would just how you're thinking about your -- the starting point is still pretty important. So it's not -- the 3.5% is the one number at having Capture Rate everything, and it works well when you have a very monolithic marketplace or very monolithic book of business. But as you pointed, our market -- our business is very diverse. So I think that where you see growth is either because we're seeing good opportunities in terms of return -- to the returns regardless of the rate change if we have a rate change in a growing opportunity because than the rate changes clearly beating the loss trend [indiscernible] were always look for margin of safety. We're looking at rate change and claims loss pick it's not a game of decimal.

[Elyse Greenspan, Wells Fargo Securities]

Okay. And then a lot of new business, right, I think you guys said 3 quarters of the insurance book or some new business quarter. So I guess, as we think about that you're getting good price on that, you said, better than renewal. But I would assume you're probably saying the loss picks a little bit higher than where the legacy Arch business would be? So how do we about the ongoing margin profile of the insurance book, right, and like bringing on this business to get down towards that mid-90s underline margin?

[Marc Grandisson, President, CEO & Director]

Yes my to, if we -- if you look at the way we reacted to the marketplace acquiring business that gives us good return, good margin because it did not have to be because of rate change. It just may because we want to find a new home because of this operative report going of the players are set that business rate our balance sheet. And just add one aspect or whether the rate is going up. I think that we have a very, very straightforward actual method to look at where we were, assuming the loss trend and the rate change and we booked that appropriately and I would argue considerably so that we don't have surprises or we actually have enough room to maneuver going forward. But broadly speaking, margin has -- is expanding as we speak on business in this segment -- in this point of time.

[Elyse Greenspan, Wells Fargo Securities]

Okay. That's helpful. And then my last [indiscernible] number question. I think the last time you guys updated us mortgage earnings within the ballpark, I think, like 75%. Is that still kind of about the right level or maybe it's gone a little bit higher this year?

[Marc Grandisson, President, CEO & Director]

Well, yes, it's definitely higher this year because mortgage has done phenomenally well and we've got some cap on the P&C side. As the P&C market I think is improving slightly over the last few quarters, and hopefully, there is more room to grow. We'd like to think that the P&C earnings are going to start growing as a proportion of the total, and mortgage will be a bit less so. I mean, mortgage, we still think has a lot of runway in it as well. But just I think we can see more earnings coming from the P&C segments and that should help balance it out a little bit more.

[Operator]

Our next question comes from Josh Shanker from Deutsche Bank.

[Joshua Shanker, Deutsche Bank]

Two questions. One, P&C related and one mortgage related. On the P&C side, obviously, the growth is very strong the quarter. Can we foresee and when can we foresee it a reduction in the expense ratio based on amortizing a larger premium based across a similarly sized cost structure?

[Marc Grandisson, President, CEO & Director]

Yes, Josh, I think, we don't like to have -- mere forecast, but I think it's realistic to see or think that sometime in 2020 as we earn some of the premium that we've, again, the U.K., regional book that we'll shouldering and second half of 2020, like to think that maybe we should see some improvement. Everything else being equal, I think that's kind of we're thinking about. You guys have heard it, we've said before, we're still -- we started target, achieve a 95 combined ratio. That we're not committed to win whether it is at one year, two years or five years down the road. We're making the right improvements along their way, but we certainly -- at least in over the next 12 to 15 to 18 months, like I think that we're going to see some improvement coming through in the combined ratio.

[Joshua Shanker, Deutsche Bank]

Great. And then typically expense ratio, obviously, the loss ratio is up to the underwriting of course?

[Marc Grandisson, President, CEO & Director]

Correct.

[Joshua Shanker, Deutsche Bank]

And then on the mortgage side, obviously, a lot of new insurance written in the quarter, but a very high proportion came from refi's and contracts with LTV lower than 85%. Can you talk a little but about that new business whether this has persistency to it, whether the housing appreciation somebody takes that business off of your book? How should we think about the growth in the core specifically and how it differs from prior quarters?

[Marc Grandisson, President, CEO & Director]

Well, the growth -- the overall market is getting better and you're quite right. Deferred system is actually growing despite the, if you look at of the NBA for the next couple of years to growth and mortgage and origination, it's still there in the purchase market. The refinancing was not a surprise, but it's a reaction to the drop in mortgage rate by 110 bps over the last 12 months. And that's to be expected. So we have this -- I would say flurry, but we had this heightened activity of refinancing that is occurring. And the reason we -- the reason that the refinancing is still the biggest -- I would say the bigger portion with MI attached to it, a lot of it was originated recently, and they still haven't across the LTV blow 80%. So it allows us actually to go back again to the same client and re-up our mortgage insurance offering to them. That's it.

[Joshua Shanker, Deutsche Bank]

Is that refi business more profitable on a risk-adjusted basis because it's closer to getting to a point where there is a low-risk that needs MI, or is it low-risk because of the lower persistency because this is close to getting below 80%? I mean how should we think about that business versus the rest of the...

[Marc Grandisson, President, CEO & Director]

So risk wise it's a little bit -- it's above the same risk wise. It's the same goes for the same price as you are evaluating. I think there is -- pricing is a little bit less pricing and a lot of it has to do with -- it's sort of rolling forward the same book of business. It's like a renewal book of business. So we're saying slightly less. But I think of risk-adjusted is very, very similar after you factor everything in.

[Joshua Shanker, Deutsche Bank]

Are these customers likely the same customers you had before or -- because of your procurement skills or is it -- does the mix change that depends on who picks it up or it's a crapshoot, you get that refi from a previous customer?

[Marc Grandisson, President, CEO & Director]

I think you can make some action points to try and protect our book of business, but the latter is more likely if you don't do anything. I think it just goes through it back. It's thrown back to the pool. It may be refinanced by a different mortgage originator to begin with. So that will have different relationships going along with that. So...

[Operator]

Our next question comes from Geoff Dunn from Dowling & Partners.

[Geoffrey Dunn, Dowling & Partners Securities]

First off, could you provide the net ILM cost in the results this quarter?

[Marc Grandisson, President, CEO & Director]

Well, the way we look at it, it varies obviously by layer or some of the old Bellamy's of advertised. But big picture, Geoff, you should think about roughly 3% of the outstanding balance as the cost. So we told you we about $3.7 billion of outstanding Bellamy limits in place, a 3%. And I will let you do the rest of the math.

[Geoffrey Dunn, Dowling & Partners Securities]

Okay. And then, can you talk by the trend this year in terms of detachment points? It looks like the new business deals we've seen this year have moved beyond just our mask cover and now we're looking at mass plus cap cover. Can you talk about the decision to do that? Market reception for continuing to do that going forward? And how you weight the risk benefit versus cost?

[Marc Grandisson, President, CEO & Director]

Right. Well, certainly initially the attach and detach structures were very much focused on PMI or coverage and capital requirements. I want to say in the last few weeks we moved a little bit, like you said beyond that, there's a bit more focused with rating agencies that have slightly different views on capital requirements. So we're always interested in the trade-off and making sure that, yes, maybe we can get some additional protection at a rate -- at a cost that is efficient for us, and that's part of our capital management decision. So it's -- that's how we look at it. And I think part of your question, there is tremendous appetite in the investment community for such products. As you know, and the fact that we're expanding the programs a little bit and going up a bit more in to the, like you said, pass the [indiscernible] we've had tremendous success in placing those instruments. And we think they are hopefully there for us down the road.

[Geoffrey Dunn, Dowling & Partners Securities]

Okay. And there's a quick last follow-up. The other IIF was basically flat sequentially. Are you -- is that just lapse rate experience or are you seeing any change in the attractiveness of the GSE, CRT market?

[Marc Grandisson, President, CEO & Director]

It's just a normal rolloff, Geoff, or -- as you know, we've been added since 2014 so you would have a sort of a seasoning and still getting sort of a run rate in terms of appetite and having frankly our allocation did more stabilizing for the last 2, 3 years.

[Operator]

And our next question comes from Yaron Kinar from Goldman Sachs.

[Yaron Kinar, Goldman Sachs Group]

My main question is just around the premium growth and insurance and reinsurance. Seems some growth have longer tail lines, and I think you explicitly talked about a multiyear program that you signed or multiyear treaty signed in the casualty reinsurance. Just given the options that we're hearing about and just kind of increased concerns around deterioration thereof. Can you maybe tell us or talk us through how you gain comfort in growing of those lines here?

[Marc Grandisson, President, CEO & Director]

Yes, that transaction is very unusual. And I would call -- I would put in the camp of a bit more opportunistic in nature. We don't want to renew it for the foreseeable future but, you know, this came to us with a lot of these changes to the pricing, detachment point, and whatnot. So it's not that we renewed the same structure that you're necessarily on. So there's a lot of moving parts to that transaction. That one would be squarely in the camp of -- tremendous distress, which you said in your comments, François, differently at the heightened level of return that we believe more than covers any of the range of outcome of potential outcome on the loss trend going forward. That's about safety here.

[Yaron Kinar, Goldman Sachs Group]

Okay. And that's specific transition. And then more broadly, be the other program construction that's a surplus casualty?

[Marc Grandisson, President, CEO & Director]

Very similar. I mean the construction in national accounts would have -- workers comp so we have a good more view on the loss trend in there that helps taking our loss picks. On the E&S casualty, I think you would a very similar phenomenon not to the same distress level, that I just mentioned in the reinsurance transaction, but certainly you have similar overtones of distress being pushed into a different marketplace than having to be a repriced. And at price level that we believe far make up for any uncertainty we had in terms of really loss trends.

[Yaron Kinar, Goldman Sachs Group]

Got it. And then may be more broadly as you are looking at deploying capital into insurance or reinsurance, where you think of something this year reinsurance you are getting the benefit of improving underlying conditions then may be additional improvement on the reinsurance side. Does that become more attractive than the insurance book?

[Marc Grandisson, President, CEO & Director]

I think the reinsurance playbook is a little bit different. I think you have, you can buy Steckler pen, embarked on a significant partnership with a leading company and reinsurance and really move the needle quickly as we saw on the transaction just mentioned on the insurance slower build. But I think, if you look back at our 2002, 2003 history, the reinsurance team is a lot quicker because I had the ability to be much more quicker and get access to business that's going through rate change and improvement rather much quicker than our insurance group well. But the insurance group is not far behind as you seen in the numbers in this quarter. SO more from the same playbook, Yaron.

[Operator]

Our next question comes from Brian Meredith from UBS.

[Brian Meredith, UBS Investment Bank]

A couple of questions here. First, I'm just curious on the big transaction, reinsurance transaction. Did it distort any of the ratios? And also was there any under premium portfolio that came in to what intuitive may be the unpaid premium?

[Marc Grandisson, President, CEO & Director]

No. It's early. So I mean, there is no LBD, there is no incoming port in. So it's a great multiyear deal. And then in terms of ratio is not really. So there is normal level of loss ratio, expense ratio, it's been a whole lot has been hard it is. So it really in the big picture for the segment. There's no impact at this point.

[Brian Meredith, UBS Investment Bank]

Great. And then just curious in the insurance segment, some of the investments that you're making that you highlighted claims, et cetera, et cetera. How long are those expected to continue here for? And another way to think about it if I look at your underwriting expenses growth that you're seeing, how much of that is due to the acquisition versus just investment you are making?

[Marc Grandisson, President, CEO & Director]

I'd say, roughly speaking, there is probably a good, I mean, more than half, may be 2/3 is from the acquisition that we've made. So we brought on a fair amount of people with the acquisition, and as I said before, beyond the premium as to earn and we think that by early 2020 that portfolio would've been fully with us for a full year. And then, on top of that, there is still a few more adjustments or investments we've made in terms of staff. We brought in some other underwriters to help supplement some of the lines of the business where we see opportunities and other small areas, like I mentioned, claims and IT where there are still investment that we think are making that are appropriate than at the right time for us to make them. I don't think those will keep growing as much. So once the premium that we're putting on the books now turns out or earns over the next 12 months, it should stabilize and level out and may be even kind of go down a little bit.

[Brian Meredith, UBS Investment Bank]

Great. Great. And another question, if I look at some of the growth that you guys are putting on, excluding this multiyear trade agreement, why is it more heading towards property, kind of property cat? Businesses tend to be a little bit more volatile, is that something we should expect perhaps going forward a little more volatility in the results but maybe lower underlying combined ratio is kind of shift mix of business?

[Marc Grandisson, President, CEO & Director]

The property that we are growing leaves some balance is not necessarily -- some of it is getting exposed on the insurance side, but there is a cat cover reinsurance protection against the volatilities as a result. On the reinsurance side, I think most of that probably growth is not necessarily cat exposed. So it's a bit of a different growth. Some of the cat exposed, some of the grant cat growing, although we wouldn't say we are relatively underweight very small compared to what you would expect to be on our side. So no we don't expect much more volatility as a result of that.

[Brian Meredith, UBS Investment Bank]

Great. And my last question, just curious, as we look at this kind of terrific growth you guys are putting on in the insurance in the reinsurance area, I'm just curious how fundable is the capital between your mortgage insurance business and your insurance and reinsurance businesses? Is it easy to take money out of MI operations, maybe fund growth in the insurance or reinsurance? How's it all work?

[Marc Grandisson, President, CEO & Director]

Well, it's not, 100% comfortable. But maybe you noted in our numbers this quarter the PMI ratio went down in the third quarter as a result of a fairly substantial evidence that was upstream from the U.S. and MI operations to the group. So that is money that was -- that is available to find growth in both insurance and all their other lines of business segments. So how easy is it to do? It's a process. It's not certainly can't do it on a whim or, just overnight. But once we get the regulatory approvals and we sit down with them and show them scenarios and stress scenarios and forecasts and certainly figuring out also conditions he reserves, so there's a lot of sad stories we have to abide with, but picture, we have the ability to use some of that capital and move it around and used in other areas.

[Operator]

Our next question comes from Meyer Shields from KBW.

[Meyer Shields, KBE]

I only had one question. Marc, I was hoping you could give -- understand how to think about the expenses associated with these submission flow contingency?

[Marc Grandisson, President, CEO & Director]

Yes, it's more expensive. And I think that more one of the investments that we talk about is to get much more efficient in dealing with those submissions and being more proactive using tools, such as [indiscernible] to really get to the one that we have a higher chance of hitting. So that is certainly part of, yes, absolutely, to the point that we are investing to be able to augment the throughput on the platform. That's one of them.

[Meyer Shields, KBE]

Okay. In general to the distribution -- I would ask this. Are the [indiscernible] as the percentages more adequately now or is there enough description in the marketplace that you're seeing or agents are e pitching that doesn't make sense to you to our Arch right now?

[Marc Grandisson, President, CEO & Director]

So right now, we're seeing more submission coming to us. Our hit ratio is not -- it's still in its early stages of finding its footing. Is also reactive to the marketplace price. So -- but clearly, we are finding, and the new business, similar and possibly in a growing modes -- more of our liking as to what's being proposed, can the marketplace. By virtue of the fact that that business did not put out in the EMS market for pricing or for consideration, tells you that it will be most likely repriced. The problem that we have with this, as you could appreciate it, it doesn't mean it's repriced. It's repriced adequately. Right? You could come in come out of a place where it needs probably a 30% increase to get to this E&S marketplace and only command at 10%, to 15%, that's not enough for us to do. It's still very important to be selective in what you do and maintain as we have our underwriting discipline.

[Operator]

Our next question comes from Ronald Bobman from capital returns.

[Ronald Bobman, Capital Returns Management]

I had a question about Watford. It's obviously treating at a huge discount to book. And it's sort of indicates sort of disbelief from my view, a disbelief in the underwriting quality or the investment portfolio or strategy. And not that I subscribe to it, but at least the market seems to describe -- subscribe to sort of one of those 2 justifications. What are Arch's thoughts about where it sits stock-based wise and the plan and may be the use the capital at Arch to remitted it if you're so motivated? Obviously, there are some personal investments, sizable in the last few months by Arch executives. But beyond that, would you comment please?

[Marc Grandisson, President, CEO & Director]

Yes, I'll start. And then something will join in. At a high level, certainly, there's only so much we can say but we're still very committed to the Watford platform. It's been good for us. I think it gives us the ability to access business in a different way that we couldn't be able to do. So just with Arch. Third, the stock price, who knows what the market is thinking. I would argue that maybe there's overreaction in -- based on some of the others hedge fund reinsurers and platform. So I would expect late or think that words can ago but I -- my personal believe that it's probably a bit -- some of the reaction going on. So, Marc, anything you want to we make anything you want to add to this, Ron, I'm still in and I feel like the company's perspective and I would even argue that it's even better this point time I think that marketplace is getting better and watch for is uniquely positioned to sit side-by-side with us and as we underwrite in right could business from the books. So I'm actually more positive if anything today or 6 months ago, which I was already positive to begin with. There you go.

[Operator]

Our next question comes from Ryan Tunis from Autonomous Research.

[Crystal Lu, Autonomous Research]

This actually Crystal Lu from one question I had was just on elevated losses on reinsurance, you mentioned there's impact from Thomas Cook collapsing. Could you may be give a breakdown of how much of an impact the large losses had on the underlying results there?

[Marc Grandisson, President, CEO & Director]

Yes, I mean, it's not major. I think I just made the point to what, have you guys think about it so that, it can happen. These things happen. This quarter was Thomas Cook, this could have been something else. So right, it's not out of the norm. It's. Right now it's around at 3% impact on the loss ratio this quarter. That's right we are in the business of doing. We ensure. We are in the risk business, and we're not making excuses. We just letting you know, very consistent that what we've seen the something and highlighting it. So that's -- that's all I want to see no.

[Crystal Lu, Autonomous Research]

Okay. That's helpful. And then one more question on just getting the insurance profitability down to your 95% target eventually. How is the changing pricing environment changed your view on your internal timeline and strategy in terms of business mix there?

[Marc Grandisson, President, CEO & Director]

I think it's not changing where we are going. I think that the market is most likely helping us getting there quicker and sooner. What I would tell you.

[Operator]

And I am showing no further questions from our phone lines. And I'd like to turn the conference back over to Marc Grandisson for any closing remarks.

[Marc Grandisson, President, CEO & Director]

To everyone there, happy Halloween. Thank you, and see you next quarter.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.