Arch Capital Group Ltd

NASDAQ:ACGL

Earnings Call Transcript 2020-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2020 Arch Capital Group Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby.

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

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

[Marc Grandisson, President and Chief Executive Officer]

Good morning, Liz. Good Morning and welcome to our fourth quarter earnings call.

Overall, we are pleased with the current market conditions and the opportunities available to Arch as we close out 2020 and spring into 2021. One of our fundamental principles is that achieving growth and book value per share above the cost of capital over the long run is the best way to create and sustain shareholder value.

We believe we delivered on that front in 2020. Our disciplined underwriting and diversified business model enabled Arch to grow its year-end book value per share by 5.4% over the third quarter and by 14.7% for the last 12 months.

We've responded to broadly hardening market conditions and as a result, all three of our segments grew their premium writings in the quarter. In particular, the hardening markets allowed for significant growth within our P&C units, increasing our net premium written for the P&C by 32% for the full year.

On the whole for 2020 we achieved an operating profit of $557 million and grew book value to $30.31 per share. Now, as most of you know, cycle management is core to who we are. Arch lean strongly into improving markets because history has shown that times like these are when superior risk adjusted returns gradually compound and accelerate book value growth and Arch is positioned to significantly expand as others derisk, rethink their underwriting strategies or even retrench.

As we look at the opportunities ahead for Arch. I'm reminded of a situation in hockey that is exciting for any fan. In hockey, you get a one player advantage, if the other team takes a penalty. It's called a power play. When that happens, a few things need to be kept in mind as you deploy your specialty power play unit to try and improve the odds of scoring. You need to have a clear five on four strategy you need to be defensively savvy enough to not forget to protect your own zone and you need to have a sense of urgency because the clock will stick done and you will soon be back to even strength. These are the few moments that make a difference in a hockey game.

The advantages position we find ourselves in is similar to that hockey power play where the odds are in our favor. I'm proud of how our team performed last year during the challenges of 2020. Now after spending a good portion of their last several years in a defensive position, we're embracing a more offensive mindset. Here's what that looked like in the fourth quarter. Let's begin with our insurance segment.

Across our worldwide Insurance Group, renewal rate change has increased approximately 12% up to 200 bps from the prior quarters rate changes. Our fourth quarter growth occurred in many lines, with D&O, property, energy and marine all exhibiting strong advances. E&S casualty and our alternative markets business also grew this quarter. We believe that rate momentum in these lines is healthy and we also see it building in other lines albeit at a slower pace.

Increasing margins helped improve our insurance accident year x cat loss ratio which decreased by 4.6 percentage points in the fourth quarter. As you may know, the full effects of increased rate levels can take approximately five quarters to become 40 reflected in underwriting margins. So today, we are earning the higher rates from the past year.

In addition, our operating expense ratio has benefited from rising production this past year. We are pleased with the continuing progress achieved by our Insurance Group in the last two years.

Turning next to our reinsurance segment, underwriting results were significantly better than the fourth quarter of 2019 despite the impact of $94 million worth of cap losses, while market conditions are not uniformly strong in the reinsurance sector, dislocation from other carriers that are reducing their positions is creating pockets with heartening rates that Arch is well positioned to capitalize on.

Reinsurance also benefits from the underlying insurance market rate increases through its clients. For 2020, we grew reinsurance net written premium by 53% with the two main areas of growth being non-cap property and specialty. At the January 2021 renewals, we saw continued rate increases in most areas. However, we agree with the market consensus that property cap pricing moves were more subdued than expected or hoped, as capacity for that risk still remains strong. Accordingly, we maintain a cautious approach to this business.

Our mortgage segment delivered good returns in both the fourth quarter and for the entire year despite the economic headwinds. We are confident in the continued earnings strength of this segment and frankly, the uncertainty we were facing during the early stages of COVID has been largely mitigated. Both premium rates and the credit quality of the new insurance written improved in 2020 and accordingly, the return on capital for our new U.S. MI business is essentially back to 2018 level, which was a strong year.

Here's why MI is unwell this past year. First, housing markets have remained strong despite the difficult economic conditions. Second, the government forbearance program achieved largely what it was intended to do, which was to provide financial respite to many homeowners; and third credit criteria in the mortgage sector tightened in 2020 and as you know, credit quality is a critical factor in determining underwriting profitability.

On a side note, just yesterday, the FHFA announced that a forbearance program has been extended an additional three months, which should help further mitigate the risk in our delinquency inventory.

The delinquency rate of our portfolio decreased by 50 bps sequentially in the fourth quarter and year-end roughly two-thirds of our delinquent loans were in the government sponsored forbearance program. We currently estimate that 89% of delinquent borrowers in our portfolio at year end have at least 10% equity in their homes and as we have discussed on prior calls, the amount of equity in a home is a single most important factor in determining MI losses, as it plays a significant role in mitigating claim activity. We are cautiously optimistic that delinquencies will continue to cure as vaccines enable the economies to reopen.

Importantly, record home purchases in the U.S. in 2020, supported a 5% price appreciation nationwide, while historically low interest rates, accelerated housing and refinance demand. This enabled Arch U.S. to report record NIW of 38 billion in the fourth quarter of 2020, up nearly 60% from the same period in 2019. Our outlook for continued growth in 2021 remains positive.

Turning back to the current fate of the P&C cycle, there are three conditions that we believe will persist and help sustain the improved underwriting environment. One, social inflation and reserving problems and are starting to apply pressure for companies that haven't been prudent enough; two, anemic investment yields require a sharper focus on underwriting profit; and three, a return to a post-COVID world should accelerate economic activity and increase the demand for insurance. Each of these conditions will put pressure on results for the industry. Our conservative approach to reserving over the past several years means that we are well positioned to drive results in P&C going forward since we expect, our future returns to better reflect current and forward pricing.

Finally, with better visibility into the overall economic conditions and with more clarity on the mortgage and P&C prospects, along with our strong capital generation, we see a compelling opportunity to invest in our shares at very attractive returns, François will talk to it in a moment.

This recent share repurchase is a testament to our capital strategy and designed to enhance shareholder value over the long-term. We still have ample resources to deploy towards new growth and feel confident in our team's ability to be creative in order to capitalize on the opportunities before us. This is a time in the game where our cycle management strategy allows us to play offense and deploy capital dynamically to generate above average returns.

And now I'll turn the game commentary over to François.

[François Morin, Chief Financial Officer]

Thank you, Marc, and good morning to all. We at Arch hope that you are in good health and that 2021 is off to a good start.

On to the fourth quarter results, as a reminder and consistent with prior practice, the following 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 $230.4 million which translates to an annualized 7.7% operating return on average common equity and $0.56 per share. For the year, our operating return on average common equity stood at 4.8%, while the return on average common equity stood at 11.8%. Book value per share increased to $30.31 at December 31, up 5.4% from last quarter and 14.7% from one year ago, again, an excellent result despite the strong headwinds from catastrophe losses this year, which is a testament to the resilience of our operations and our superior diversification strategy.

Losses from 2020 catastrophic events in the quarter including COVID-19 net of reinsurance recoverables and reinstatement premiums stood at $156.4 million, or 9.4 combined ratio points, compared to 2.2 combined ratio points in the fourth quarter of 2019. The losses impacted both our insurance and reinsurance segments, primarily as a result of a series of natural catastrophes in the quarter, including Hurricanes Delta and Zeta and other smaller events, as well as adjustments to our estimates for events that occurred earlier in 2020.

Our best estimate of ultimate losses for COVID-19, for occurrences through December 31, remained essentially unchanged from prior estimates. As of December 31, the vast majority of our COVID-19 claims are yet to be settled or paid, with approximately two-thirds of the inception to-date incurred loss amount recorded as incurred, but not reported IBNR reserves or as additional case reserves within our insurance and reinsurance segments.

As regards to the potential impact of COVID-19 on our mortgage segment, as Marc alluded to, the delinquency rate at the end of the quarter was 4.19%, down from 4.69% at September 30. We are encouraged with a downward trend and delinquency rates over the last few quarters, which continue to come in significantly better than our earlier forecasts.

Our latest assessment of the situation assumes a progressively improving economy in 2021, which should bode well for the housing sector and the performance of our book as we move forward.

In the insurance segment, net written premium grew 21.6% over the same quarter one year ago, 29.6% if we exclude the impact of the pandemic on our travel, accident and health unit. The insurance segment's accident in the quarter combined ratio excluding cats was 93.6%, lower by 800 basis points over the same period one year ago. Approximately 360 basis points of the difference is due to our lower expense ratio, primarily from the growth in the premium base from one year ago and continued lower levels of travel and entertainment expenses. The lower ex-cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business, prior period net loss reserve development net of related adjustments was favorable at 1.2 million.

As for our reinsurance operations, we had strong growth of 44.9% in net written premiums on a year-over-year basis, which was observed across most of our lines and includes a combination of new business opportunities, rate increases and the integration of the Barbican reinsurance business. The segment's accident quarter combined ratio excluding cats stood at 82.1% compared to 92.3% on the same basis 1 year ago.

The year-over-year movement is primarily driven by rate change activity over the last 12 months, in a more normal level of large attritional losses compared to a year ago. Most of the remaining difference is explained by operating expense ratio improvements, primarily resulting from the growth and earned premium.

Favorable prior period net losses reserve development, net of related adjustments was $40.5 million, or 6.9 combined ratio points, compared to 4.9 combined ratio points in the fourth quarter of 2019. The development was mostly in short-tail lines.

The mortgage industry had a second consecutive record breaking quarter in terms of mortgage originations, which allowed Arch MI to produce 38 billion of NIW in the fourth quarter, a full 15.9% higher than our prior high watermark. With refinance activity leveling off from prior peaks, we saw our insurance in force increase by 2.5% across the mortgage segment. The combined ratio was 45.1% reflecting the lower level of new delinquencies reporting during the quarter.

The expense ratio was slightly lower over the same quarter over one year ago and prior period net loss reserve development was favorable at 8.2 million this quarter, mostly from our second lien runoff portfolios.

Improving investor sentiment enabled Arch to issue two Bellemeade transactions during the fourth quarter at terms that are getting closer to pre-pandemic levels. You will recall that we discussed our 2020-3 transaction on the last call and on the run deal covering our production from June through August of 2020.

Our latest transaction Bellemeade 2020-4 provides additional protection on mortgages we insured in the second half of 2019 and already covered by our 2020-1 Bellemeade transaction by effectively reducing the original retention from 7.5% to 1.85% of the risk in force. At the year end, the Bellemeade structure has provided approximately $4 billion of aggregate reinsurance coverage.

Total investment return for the quarter was positive 246 basis points on a U.S. dollar basis. And we ended the year with our investment portfolio producing a 7.77% total return. While our fixed income portfolio generated an excellent return of 188 bps in the quarter, contributions from our equity and alternative investments were also significant and represented approximately 40% of the total return for the quarter.

The duration of our investment portfolio would decrease modestly to 3.01 years at year end, reflecting our ongoing positioning of the portfolio towards shorter term maturities.

The effective tax rate on pre-tax operating income was 6.8% in the quarter, reflecting changes in the full year estimated tax rate, the geographic mix of our pre-tax income and a benefit from discrete tax items in the quarter. We currently estimate the full year tax rate to be in the 10% to 12% range for 2021.

Turning briefly to risk management, our natural cat PML on a net basis decreased slightly to 860 million as of January 1 which at approximately 7.4% of tangible common equity remains well below our internal limits at the single event 1-in-250 year return level. The decrease in our Peak Zone PML this quarter is mostly attributable to our E&S property unit within the insurance segment where we reduced property aggregates in the Florida, Tri-County Peak Zone and made selective additions to our reinsurance purchases.

Our balance sheet remains strong and our debt plus preferred leverage ratio stood at 22.1% at year end well within a reasonable range.

Finally, on the capital front, we repurchased approximately 251,000 shares at an aggregate cost of $8 million in the fourth quarter of 2020. It is worth noting that we have since repurchased an additional 2.6 million shares at an aggregate cost of 83.6 million in the first quarter of 2021 under a rule 10b5 plan that we implemented during this quarter's close window period. Our remaining share authorization currently stands at 833 million.

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

[Operator]

[Operator Instructions] Your first question comes from Elyse Greenspan, Wells Fargo.

[Elyse Greenspan, Wells Fargo]

My first question is related to your returns, Marc, I think in the prepared remarks you associated with mortgage business going back to return on capital levels from 2018. And I'm hoping since for all three businesses insurance, reinsurance, mortgage, can you give us a sense of the return profile, the business you're writing today versus, what you would have said, if I'd asked the same question 12 months ago?

[Marc Grandisson, President and Chief Executive Officer]

I think the high level of 2018, sort of long-term expected return on MI was roughly in the mid teens. So we're not going back to that level, which is really a good place for us to be. On the insurance, I think that we had a bit of a decrease in expected returns, even though the combined ratio did not, get that much better for the industry. But right now, if you factor in all the rate changes and everything, we think we're in the double-digit in insurance return. And we think that reinsurance is a little bit in between those two. So we have a really, really different, risk adjusted return profile in our portfolio that has improved and largerly as a result of the price increase, not as a result of the investment return as you know Elyse.

[Elyse Greenspan, Wells Fargo]

And then my second question on, I think you alluded to this a little bit in your prepared remarks, Marc, when you were mentioning a few issues that would help from the pricing momentum side, like persisting from here. A big question, that I get is, does this momentum persist through 2021 and perhaps beyond and can you obviously, different dynamics in the insurance and reinsurance P&C markets. But, can you just give us a sense, based off of what you know, today, do you think that the pricing momentum can persist through 2021 in insurance and also reinsurance.

[Marc Grandisson, President and Chief Executive Officer]

We expect it to be the case, Elyse, because of all the factors I mentioned, the social inflation, there's a lot of uncertainty in terms of loss ratio picks, for years, specifically 2015, through '19, as we all know. It sort of makes for correcting some of the ongoing pricing so that's definitely sustainable, we do not have as much, protection from the investment returns so that puts a lot of pressure on the returns for the industry. And uncertainty and lack of people coverage and we also had a fair amount of cat losses in the last three or four years. So, there's a lot going on, a lot more risk out there. So I think, overall, collectively as an industry, we all collectively think and know and believe that we need to get better rate and better pricing, because the risk is not being rewarded accordingly.

As in every hardening market, what the length is like, how long is the piece of string, but I think that our hardening market does not only last four or five quarters, I think as you have this initial stages of the initial reaction of rate increases, then you get momentum building in the underwriters mentality, the brokers are sort of accepting as being sort of a new way to deal and do the business. And eventually that builds upon itself, I would fully expect to be lasting to 2021 and into 2022. This is what we believe at this point in time.

[Elyse Greenspan, Wells Fargo]

Okay. One last numbers question. You guys mentioned the PML going up a little bit but in terms of your cat load, I think in the past aren't used to talk to like 40 million of quarterly cats, obviously, we've seen growth in cat reinsurance and other property related lines like you mentioned, how should we think about the cat load from here?

[Marc Grandisson, President and Chief Executive Officer]

Yes. I mean, no question that we've written a lot more property premium in the last, I want to say four to six quarters we've really ramped up our property exposures. I mean, there's a lot of -- in different areas, as you know, different lines of business, U.S. International, et cetera. Yes, so the cat load, I think on a quarterly basis has definitely gone up from what we were -- in the old days, thinking about, like, 40 million a quarter. It's still evolving, but I'd say it's probably more than $60 million to $70 million range right now.

[Operator]

Our next question comes from Mike Zaremski with Credit Suisse.

[Mike Zaremski, Credit Suisse]

Follow up on mortgage insurance and Elyse's question. If you're talking about, you're encouraged about the downward delinquency rates and assuming the economy progressively improves and you think you mentioned mortgage biz can throw off return some of 2018 levels? So are you saying kind of directionally, we should be thinking about a combined ratio that continues to move south that kind of towards 2018 levels or the capital assumptions changed since then?

[Marc Grandisson, President and Chief Executive Officer]

No, Mike. Talking about combined ratio, capital is a different story, because it's a bit of a lagging indicator based on the delinquencies we have. But if you look at the combined ratio, yes, we think that we're tending to go towards more -- so the run rate that we had in 2018, we're just caveat that there was some prior development -- favorable development in 2018. So that will probably adjust for that. But certainly the long-term range of 35 to 45 is not something that is out of the realm of no real possibility if you look at 2018. And I think, depending on what, how the economy recovers that could be in the lower end of that and it's a couple things still develop in a different direction, it might be a bit on the higher side, but you're right, it should be getting closer to where we were in 2018, in terms of combined ratio.

[Mike Zaremski, Credit Suisse]

Switching gears to the -- the non-MI insurance segments, the expense ratio has been better than expected for a number of quarters and you guys have called out some items, maybe you can kind of remind us and talk to kind of watch what you think is kind of cyclical. And what's kind of structural in terms of the expense ratio improvements?

[Marc Grandisson, President and Chief Executive Officer]

Yes. I think this is more structural, I would say, Mike, because right now, you have to factor in the fact that our platform grew both sides, both in the sense of growing the top-line for organic lines of business. And we also had the acquisition in London and really pushed to be much more relevant, much more bigger in London. So our international operations also gained scale. So if you now look at the overall structure or the way the company is laid out in terms of top-line and the way the expenses is constructed between the unit, I think it's much more of a structural change. I would say that it's probably 50:50. But the growth is certainly something that's really important in terms of helping that grow. So that could also get, presumably a bit better over time. But I would also tell you that the growth in our operating expense on the insurance side has lagged the growth in our top-line, which is what we should expect because a lot of the increase if not more work, even though we are writing more business, a lot of the increase in premium is just rate in and of itself. So I think that the company is flexing itself in terms of top-line growth and expense, deployment very, very nicely so a bit more structural than I would have told you probably two years ago.

[Operator]

Our next question comes from Yaron Kinar with Goldman Sachs.

[Yaron Kinar, Goldman Sachs]

I guess my first question revolves around MI. Do you have any comments or thoughts around potential changes to FHA fees and its potential -- their potential impact on MI business?

[François Morin, Chief Financial Officer]

Yes. Listen it's still early on. It is a new administration change, couple of things going on all over the place, Washington, I'm sure they're very busy right now trying to changing things.

We hear the same things that you guys hear about 25 bps, potential price cut that FHA could put in there. And as a reminder for everyone if you take a step back, the FHA was a large market share provider of MI insurance and all in the years where the PMI, private mortgage insurance were not in great of a shape. And, frankly, that was needed to fill the gap and fill the void if you will, of the need for the homeowners and mortgage providers.

So this has changed, I think that the FHA, also ultimate role and core role is to provide, mortgage insurance for the ones those are probably could be perceived as this more risky for the private sector. And so we've done the analysis, which means that if you look at our portfolio on, we're high FICO, very high quality, most of the borrowers that we have on our portfolio do not really need to consider FHA. So, from our perspective, we'll react obviously to whatever's out there. But we, we believe that this if it comes to fruition at 25 bps rate cut in FHA will help to lower FICO and high LTV borrower, which is really not the ones affecting and the ones that we're currently having success with, because our pricing is actually better, if you compare our pricing versus the FHA in that sector, our pricing is better and execution is cheaper for the borrower, so we're not losing sleep over that.

[Yaron Kinar, Goldman Sachs]

And then, my second question, you previously talked, I think about shifting capital deployment from MI more into P&C, I think last call you used more of a basketball analogy that was easier for me to follow. Thank you for explaining. But I guess as market conditions, your views on market conditions change a bit, seems like reinsurance may be a little less exciting then maybe a quarter or two, the outlook was a quarter two ago and MI maybe a little better than the outlook was a quarter or two ago? Does your appetite for capital deployment between the three segments, has that shifted, or will it shift into 2021?

[Marc Grandisson, President and Chief Executive Officer]

I wouldn't say it shifts in any major way. I think we see all three segments with very good opportunities in front of them. And maybe, we'd argue somewhere overdue, especially on the P&C side. So we're bullish there. Mortgage has always been and basketball, 7.6 guy down low and ready for dunks and that hasn't really changed in our view. So yeah, I mean, we got certainly have more visibility into what the ultimate or what the current market conditions are -- especially in mortgage, given what we -- the second half of the year how things progress. And that's good. I mean, that's something that we take -- I think it works in our favor. So, but in a big picture, we don't see major changes in how we deploy capital.

And Yaron, one thing I wouldn't mention to you that it's always -- it's hard for people not to see us being in Bermuda as being a property cat writer on the reinsurance side, but I would argue that, yes, on property cat side is not as good and you've heard it from other people. And we certainly agree with that. But we're still growing in areas that are non-property cat right exposed. So we're seeing a lot of other lines to be honest, between United are actually better now or the prospects for '21 better than they were in 2020. We're not growing necessarily in the one that get a better headline, if you will, from your perspective, but by and large, I think that our prospects is very, very good on the reinsurance side, very much so.

[Operator]

Our next question comes from Jammi Bhullar with JPMorgan.

[Jammi Bhullar, JPMorgan]

I had a couple of questions. First, if you could just talk about your sort of comfort level with the RBI reserves given that the developments in the U.S. seem to be favoring the industry for the most part. So do you feel like you're overly conservative on your reserves? And obviously, internationally, things haven't gone as well. And then I have another one as well.

[Marc Grandisson, President and Chief Executive Officer]

We never would say that we're overly conservative. We want to be prudent and conservative for sure in how we set reserves. I'd say starting again with international which maybe has gotten a bit more a headlight -- made the headlines a bit more. Our position hasn't changed in the U.K., again, the book we have as a small regional book. We're well protected by reinsurance protection. So we feel that the reserves we have there, even after the call it slightly adverse rulings from the courts in the U.K. are going to affect our bottom-line, so no changes from our point of view there.

And in the U.S., for the most part, as you said, all the rulings have kind of been in favor of the industry, a couple of places where there is maybe some that didn't go as expected, but on those items, our view is that the policies that were being challenged were manuscript policy. So not the standard ISO form that we typically use without necessarily the strong wording around virus exclusions and property damage, the trigger coverage. So on both those fronts, we get, as we said, before, vast majority of our policies well north of 90%, across the book that has these -- both of these call it protections. So we're very confident that our results -- our reserves at this point won't develop adversely and we will keep looking at it but we're in a good spot.

[Jammi Bhullar, JPMorgan]

And I think you said about two thirds or three fourths were IBNR as of last quarter, what's that number now?

[Marc Grandisson, President and Chief Executive Officer]

Two-thirds, went down a little bit. So roughly from 75 to 67, roughly and it hasn't changed much. And some of that is around as you can expect mostly on the reinsurance side, right, a lot of our reserves are still on the reinsurance side with significant IBNR and ACRS on that book.

[Jammi Bhullar, JPMorgan]

And then on buybacks, you did a decent amount in, you've done a lot of this year. So what's driving your sort of action there? Is it the stock price, is it I'm assuming there's decent opportunity to deploy capital in your businesses given pricing? But what drove the big up tick in buybacks versus what you've done in the last few quarters?

[Marc Grandisson, President and Chief Executive Officer]

Yes, certainly more visibility. I think that we said that from the start, at the end of the first quarter of last year, we said, listen, we're going to take a little bit of a pause, because we need to know where things are going to play out and mortgage being a major driver in that performance. You've seen the results. So we were a lot more confident where the economy is going, vaccines are rolling out. So there's a lot of things that yes, we'll take some time. But, as we look forward, I think that gives us a lot more comfort that the worst is behind us and that gives us a more clarity on how do we deploy capital, we're still in an online world, we are fully capable of doing both, we want to grow the book and also buy back shares. There's no reason why they have to be exclusive. We think our growth is still very strong, we expect to keep growing in '21 and across the book. But we also see a good opportunity at the current level, pricing levels for the stock to buy back at this point.

[Marc Grandisson, President and Chief Executive Officer]

So before we get to the next one, I think I have to stop the broadcast, I think I believe we have a breaking news just hit the wire. So I think we have to go to François for some commentary that he wants to share with us.

[François Morin, Chief Financial Officer]

Long overdue Marc, but just wanted to take advantage of the opportunity to fill everybody on the call on the latest developments with our proposed acquisition of a 29.5% ownership stake in Coface, the global trade credit insurer. To confirm what some of you may have seen across the business wire over the last few minutes, if they weren't paying attention to what we were saying but we closed on this transaction within Texas earlier today. And the reason for the timing is that we have to wait for their markets to close which they have so the consideration paid by Arch was €9.95 per share for an aggregate 453 million euros in aggregate including related fees.

In connection with our minority stake in the company Arch now has four representatives on the Coface Board of Directors. As we stated before, we continue to view this transaction as an investment and we currently do not intend to increase our ownership position in Coface.

From a financial reporting perspective, you should all expect us to include our proportionate share of Coface's results in our financials starting next quarter. We intend to report the contribution in a new separate line titled equity method earnings from operating affiliates, which will be included in our definition of operating earnings. This line will also include the contributions from other non-consolidated affiliates, such as premier holdings. So that's the breaking news, Marc.

[Marc Grandisson, President and Chief Executive Officer]

Thank you, François for the update. And Liz, if we can go back to Mr. Dunn who is waiting in line I believe.

[Operator]

Geoff Dunn with Dowling & Partners.

[Geoff Dunn, Dowling & Partners]

Couple of questions on MI. First of all, what was the incidence assumption for the current period provision as well as the average severity factor this quarter.

[Marc Grandisson, President and Chief Executive Officer]

So 9.4% for the new annuities in the quarter and the average reserve for the Q was a little bit over 5000, pretty much in line with the third quarter, Geoff, because the risk that came in were a little bit less coverage in this quarter. So that would explain the average thing a bit lower, or bit more in line.

[Geoff Dunn, Dowling & Partners]

Okay. And so as you think about '20, or the first part of '21, there, to my knowledge, they extended the forbearance period of 15 months, but you can't enter new forbearance activity. So what did your provision for non-forbearance loans? Are your incidence assumption for non-forbearance loans look like in the fourth quarter?

[Marc Grandisson, President and Chief Executive Officer]

Yes. I don't think we did not -- the way we reserve it, we sort of tried to make an overall all encompassing assessment and put that in that number. So I think that's what you might have said, might have thought in the past, our number could have been a bit higher. So we think that we have enough in the reserving in totality, based on the number of factors we've used.

[Geoff Dunn, Dowling & Partners]

Okay, but with forbearance options going away fair to assume that instance assumption will probably climb in the first half?

[Marc Grandisson, President and Chief Executive Officer]

Yes, Geoff, we might, but we'll have to evaluate when we get there. I think you're right. I mean, so you have to till February 28, to actually ask for this -- be under the forbearance program. So we'll see how that develops. We have a surge in a couple of weeks of people asking for forbearance that might help. Again, more, we'll have to readjust Geoff, as we see the end of the quarter, we'll have another month of non-forbearance, effective new, not new forbearance. So we'll have to reevaluate when we get there.

[Geoff Dunn, Dowling & Partners]

Okay. And then, within the PML, can you talk a little bit about what drove the pretty notable sequential drop in earned premium, as well as some of the movement on both the expense lines? Was there any reallocation on the expense stuff?

[Marc Grandisson, President and Chief Executive Officer]

Specific to any segments or I mean…

[Geoff Dunn, Dowling & Partners]

Premium line was down 15 million sequentially. And then you had some just -- looks like a little bit of abnormal movement, particularly in the acquisition expense line fell to the third quarter, but just a little bit more volatility than what we tend to see.

[Marc Grandisson, President and Chief Executive Officer]

Yes. The first one, I'd say, a) was a -- I call it an accounting catch up or true up on our Australian business, how we on the written side. So that I'd say that's more of a one-off kind of blip that we had to adjust for, or was actually was present last quarter and more than this quarter. So that's how that explains that movement.

On the acquisition, there's -- we entered into a quota share agreement, starting last, at the middle of the year, covering our U.S. MI book and that actually gives us, a benefit in terms of the acquisition, it's a reduction towards the acquisition during the seeding commission. So that is what is starting to flow through in our numbers.

[Operator]

Our next question comes from Philip Stefano with Deutsche Bank.

[Philip Stefano, Deutsche Bank]

So you had mentioned that roughly two thirds of the defaults are in forbearance, I was hoping you could give us a flavor for how many people are nearing the end of their forbearance window and how many people in forbearance does it feel like are apparent on their mortgages?

[Marc Grandisson, President and Chief Executive Officer]

Yes. The numbers we report to you are that are in forbearance and who have skipped two payments at least. So we have a few more, as you could appreciate, that are in forbearance and are still current. The data is coming in very, very haphazardly. So it's very -- I wish that we are constantly asking and prodding for that kind of information. I think that most of the forbearance that are still there are lower in the year, most of the forbearance that were declared early in April, May June, the vast majority of them have cured by now. So it seems to be the pattern of getting to forbearance and sort of thing in there for four, five months, and then eventually things get back to normalcy. So that's what we would expect it to be the case going forward.

[Philip Stefano, Deutsche Bank]

I think the one question that we're trying to get to and I get a lot of questions about is, you had mentioned 89% of the delinquents have at least 10% in equity in the home. And you had talked about the visibility allowing you to repurchase shares. I mean, what point do we get visibility that maybe the MI reserves are a little more redundant and we can start to see a release there? How do we think about what you are looking for in the visibility to adjust that.

[Marc Grandisson, President and Chief Executive Officer]

So from your lips to God's ear, I hope you're right, that it's going to be redundant, we'll see, only time will tell for us. I think the way we look at reserve, Phil is very simple, it's just -- we have to wait to get the data that we feel confident that we're going to get there. And as you know, you've seen us do the reserving on MI and P&C for a long time. You tell me when a forbearance program is done, and when the unemployment rate goes down to three or four and the economy picks up again, then I'll have a better sense for what it is. So we hope -- having said all this, I hope that by the summer after the vaccines have been rolled out that we'll have much, much better visibility as to what, if any, the reserve needs to be released or is not necessary to pick links.

[Philip Stefano, Deutsche Bank]

Understood. Okay and switching gears on the reinsurance business, I appreciate the remarks you made in response to an earlier question. Is there any way you can help frame for us what the opportunity is for premium volume? So maybe, how their one one's go versus last year? Or how should we thinking about the growth potential in 2021?

[Marc Grandisson, President and Chief Executive Officer]

I think the growth in 2021 should be more in line at least, what we have seen last year. I think the opportunities on the reinsurance side -- I think the reinsurance opportunities are still very, very solid, very strong. They're not necessary as I mentioned earlier, in a traditional property cat arena, but we're definitely looking at a lot of transactions and a lot of them will have to do with what you would expect a reinsurance company to be providing, which is capital, as we get into harder market, a lot of people -- some of our clients are looking for capital at least looking for validation of their plan going forward and want to make sure that they -- they reunderwrite and repurpose their book of business that we're there to help them. And we're able in that case to help them get through that transition period.

So the opportunity in reinsurance was great last year and I think it's actually very, very good again, as we go this year. One interesting fact for everyone that one of the key leading indicator to us, to me, at least personally, based on my history, as to what is a leading indicator of the treaty reinsurance conditions are, the facultative industry is still really, really strong. And you typically have a hard market or hardening market for as long as the fact market goes, you'll have a treaty market, no staying strong, well beyond that a year to two years beyond that. So we expect that to be yet again, a strong leading indicator and we are facultative team is telling us that it's a really good market for them at this point in time, which is encouraging.

[Operator]

Our next question comes from Meyer Shields with KB W.

[Meyer Shields, KBW]

Great, thanks. So two questions on the P&C side. First, Arch's confidence in the pricing cycle is clearly borne itself out. But is it safe to say that maybe this is as good as it gets on the property cat side because there is this level of capital available? So that cycle will play out along historical lines?

[Marc Grandisson, President and Chief Executive Officer]

Yes. I will tell you Meyer is my experience, we did a lot of property cat writing in 01 in 02 and if you remember, at Arch, we were not heavily focused on property cat XL at the time, we were more on the liability side and the market was going down in 04 and well in 05. And we thought we had seen the last of the hard market for a little while and Katrina Rita and Wilma happened it change the whole thing. So my answer to you is, I don't know. I don't know is the short answer. I think that there's clearly a lot of capital that, again, found its way over the last four or five years. And once capital found its way to a niche, it gets sticky, it wants to stay there for a while and we will sort of justify itself for a while longer, perhaps than it should.

But I think we're always hopefully it doesn't happen but we could be one major event away from changing the perception of risk in that area. And that I think will mean actually probably a much harder market you would expect Meyer because the volatility and the knee jerk reaction would be like an elastic like when this happens. I think you'll have a -- you may have a massive excessive capital out of the door. And that might create more opportunities for us. I'm not saying it will happen Meyer but I could see a scenario where your premise does not actually hold true. So there's always a chance.

[Meyer Shields, KBW]

Okay. No, I just want to understand what you're thinking about. Second, you talk, I think on the insurance segment about market dislocation. And I think maybe the sense is out there that that has been a major factor or was a major factor in 2020. But now most companies are kind of settling down and are comfortable with their books of business. Are you still seeing like today, that level of market dislocation?

[Marc Grandisson, President and Chief Executive Officer]

Dislocation is, you're right, there's some realignment, there is a couple of people, going back to the market, this is truly happening. But it's not across the board. And there are still, we believe bad news that needs to come find their way through the system. And that might make somewhat of a difference as we go forward. But again, if you had a 20% rate increase on one transaction on the insurance side this year and you had, this is on top of a 10% last year, if you get rate on, rate on rate perhaps three times it's not a bad place to be and plus, I think what we hear Meyer for what it's worth, and it's actually not insignificant, we're hearing terms and conditions funny changing and moving in the right direction.

So rates will move first and terms and conditions sort of follow right behind them, we're hearing that this is what's happening in marketplace. So even though we may not have a headline, going as high in terms of reaching it as much as it was over last two, three years. I think underlying conditions in their policies, could actually help improve it way beyond the number that we see on -- as the headline number.

[Operator]

Our next question comes from Brian Meredith with UBS.

[Brian Meredith, UBS]

Couple of them for you here. The first one, Marc, first, I wonder if you could just confirm it used to be that your determination on whether you buy back your stock or not is that if you could actually recoup the premium you paid relative to book value over a three year period? Is that still the case? And if it is, does that basically mean that you could just continue to be pretty aggressive with your share buyback given where your stocks trading right now?

[Marc Grandisson, President and Chief Executive Officer]

Yes. I think that rule of thumb is still in place. I mean, obviously, it's not a black and white. I mean, there's always factors we consider around deploying, whether there's business opportunities and et cetera. But, yes, we still think in those terms of the buyback, the premium we bake and we want to earn it back over -- no more than three years.

And you're right, I mean, I think the fact that the stock price is not as, is below that level, suggest that maybe we'll be up there buying more stock as we go through the year. Well, we'll assess, obviously, as we every day, every quarter, we will look at what's in front of us but for the time being, I think we're certainly something we're considering and we probably will do more of.

[Brian Meredith, UBS]

And then just on that topic. So just maybe a little bit on uses of capital or cash kind of here going forward in the next 12 months, it sounds like you've got 453 million that's going out here, we've got Watford that I think is yet to get the close, is that it's all going to be constraining to your ability to actually buy back stock, given you also capital you need to fund your growth in your business and particularly as Marc just said on the reinsurance business is going to be very capital kind of generated type transactions.

[François Morin, Chief Financial Officer]

No, because we I mean, we raised a billion dollars of capital as you know last summer, we didn't deploy fully until, there was all part of that kind of on1/1 looking ahead as to what the 1/1 we were doing all these transactions, we're on the horizon. And we have a lot of faith in our ability to generate earnings moving forward on our own, I mean, self-funding the growth. I think is something that is part of the plan. And we don't really have, a whole lot of constraints other than that.

[Marc Grandisson, President and Chief Executive Officer]

And Brian, both of these acquisitions, as you mentioned will actually be accretive and grow book value for us. So they're capital positive for us.

[Brian Meredith, UBS]

And then last question, I guess, now that is closed Coface, maybe you can give us a little bit of color and what the title insurance market looks like in Europe kind of return profile. What should we expect here?

[François Morin, Chief Financial Officer]

It's been about what, 20 minutes that we announced this, so you're going to have to give me a couple of more quarters.

[Brian Meredith, UBS]

[Is that] [ph] challenging?

[François Morin, Chief Financial Officer]

No. We have it but listen we got -- we have to think it through, we are going to have a directors on there to -- are going to be working very closely hand in hand with Coface and we're very excited as you know, Brian. I think there's more than meets the eye in this one. I think strategically, it's going to be a very, very valuable thing for us, way beyond just know the initial investment. I think it's a formidable, established company across so many countries with so many client contacts where we're really excited about that.

[Operator]

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

[Marc Grandisson, President and Chief Executive Officer]

Thank you very much, everyone. Have a nice several months ahead. We're heading for the first quarter returns. It is an exciting time to be at Arch and we're very pleased that you are there with us to enjoy. Thank you.

[Operator]

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