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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the Q2 2018 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [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 assessment and assumption 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. Sirs, you may begin.
Thank you, Crystal, and good morning, to you all. We were pleased with the results across our platform this quarter as our MI segment continued to produce outstanding results while slightly improving conditions in our P&C operations and higher investment yield helped to produce an annualized operating ROE of 11.6% and an increase in book value per share to $20.68.
As you may know we believe that an opportunistic approach to underwriting and active capital and risk management will produce higher risk adjusted returns over time. As a result of this dynamic allocation of capital, we may be underweight or overweight in certain segments or areas of the markets at any point in time.
Our MI focus right now is exhibit A of the strategy and we believe that the current level of returns available in the MI space justifies the deployment of additional capital there.
In our P&C businesses, market conditions seem to be improving modestly. In most of our insurance lines, rate increases appear to be outpacing claim trends. However, in assessing how this will ultimately impact margins, there are several issues with estimating insurance margins that temper our current market view.
First, the calculation of trend is based on past experience while actual trend is dependant on future circumstances, which in many lines means looking several years out. Second, at the center of rate adequacy projections is an implied perfect knowledge of the current loss estimates. As we all know, loss reserving in our industry is a cumulative result of self-graded exams and it can take several years for the truth to emerge.
Third, rate changes as reported do not capture new business return or the effects of most changes in terms and conditions. Due to these uncertainties and factoring in the record level of capacity currently in the business, we remain cautious in our underlying posture. With that said, let me provide some color on our P&C premium volume for the second quarter. First, bear in mind that the increase in P&C net premium written was magnified by FX movements, which represent about 30% of the increase in net written premium.
In our insurance segment, more than 60% of the growth in net written premium was due to rate increases and the balance was from exposure growth. On the line of business basis, the increase was the result of our ongoing efforts in travel, programs, as well as from recent market opportunities in property.
We decreased premium again this quarter in the more commoditized lines such as general liability and D&O due to the highly competitive environment. In our reinsurance segment, net premium growth was generated primarily from property other than property cap growing slightly consistent with our view of conditions in our primary insurance.
Of note, net property cap writings were down as most rate levels were below our risk adjusted return requirements. With respect to our P&C underwriting results on which Francois will provide additional details in a moment, there is one topic, which I think is particularly noteworthy.
Large attritional losses affected the results of both insurance and reinsurance, but in the opposite directions. The insurance group benefited from a below average level of such losses while our reinsurance operations were impacted by a higher than normal level, mainly in a facultative area.
This demonstrates that the randomness - that there is randomness and lumpiness of when these type of losses occur. You rarely, if ever, get an even distribution of expected losses in a given quarter or year. But over time, specialty businesses such as ourselves can generate good risk adjusted returns if managed properly.
Turning now to MI, I'm going to focus on our U.S. primary business, which represents over 80% of that segment. Our U.S. MI production for the second quarter was strong at $19.9 billion a 15% increase over the same quarter last year. About 80% of our primary MI was still written through our RateStar platform. As respects growth from a sequential basis, keep in mind that there are substantial seasonal effects between Q1 and Q2 when home purchases typically peak.
Our U.S. New Insurance Written or NIW increase was due to a few additional key factors. First, it's clear to us that MI returns fundamentals are excellent. House price appreciation has been broad and stronger than expected, the quality of credit remains high and our ability to price more finely for many parameters is truly an advantage.
Given the strong market conditions, we turn to have been better than anticipated and remain very attractive. Second, we have been successful in our efforts to expand our distribution and producer relationships with both existing and new customers and in a few cases; we were able to close some large transactions that was attractive from a return standpoint to bring some lumpiness to our NIW in the quarter.
Third, the capital and risk management tools that we have put in place namely the Bellemeade transactions provide additional downside protection and reduce the volatility of our expected returns in MI.
For the second quarter, RateStar again directed our production away from lower return products such as singles to borrow monthly's as singles production declined from to 6% from 9% in the first quarter.
Higher loan to value and debt to income products represented a slightly larger share of our NIW in Q2 but we remain underweight in those areas relative to the market. This growth was opportunistic and occurred partly due to the response by our competition to the rapid shift in mix that occurred in the first quarter.
Market pricing at this point appears to have stabilized after the activity of the last few months. Before I move on from MI, I want to update you on recent developments regarding the pilot programs with the GSEs imagine an EPMI, they are still in their infancy and there was no significant NIW in the second quarter. We will keep you posted as to their progress on future calls.
Briefly with respect to our investment operations, we increased our duration slightly as we moved money out of cash equivalents to predominantly two to five year treasury instruments. In addition the current interest rate environment has and will improve net investment income for the next several quarters.
Finally, a few words on capital and risk management, we repurchased a significant number of shares in the second quarter, Francois will give you the details but it is worth repeating that share repurchase is yet another way for us to manage and allocate capital.
Now to risk management, our property cat exposures remain at historically low levels with our one and 250 year peak zone at only 5% of tangible common equity at the end of second quarter.
For our mortgage segment as of June 30, 2018 exposures under our realistic disaster scenario declined last quarter as growth in insurance in force was more than offset primarily by the capital relief from the Bellemeade transaction and a run up of the pre-2009 business.
Perspectively, we believe that regulatory capital as defined by the PMIERs represent a more conservative capital requirement as of June 30, 2018 Arch MI was up 134% of the current PMIERs and although we are unable to discuss the proposed changes to PMIER 1 that will create PMIERs 2.0, we do not believe that the proposed changes will have a material impact on our capital position and that our estimated available assets will continue to exceed the required assets as proposed on the PMIERs 2.0.
With that, I will turn it over to Francois.
Thank you, Marc, and good morning to all. I'm pleased to join the earnings call this morning and to provide more color on our second quarter earnings. As I stated during our recent Investor Day, one of my objectives in this new role will be to keep providing the same level of clarity and visibility, the investment community has come to expect from us when analyzing our financials and public disclosures.
This practice will remain a key principle of ours. On that note, I will make some summary comments for the second quarter "core basis" which corresponds to Arch's financial results excluding the other segment i.e. the operations of Watford Re whereas the term consolidated includes Watford Re. As you know we affected a three for one stock split on June 20 which impacts per share metrics and comparisons to prior periods. My comments will reflect the latest number of shares after the split which currently stands at approximately 405 million outstanding shares.
After tax, operating earnings for the quarter were $242.6 million which translates to an annualized 11.6% operating return on average common equity and $0.59 per share.
On a year-to-date basis, our annualized operating ROE increased by 200 basis points since last year that highlighting the improved performance of our operations. Book value per share was $20.68 at June 30 a 1.3% increase from last quarter and a 4.1% increase from one year ago despite the impact of higher interest rates on total returns for the quarter and on a year-to-date basis.
Moving on to operations, losses from 2018 catastrophic events, net of reinsurance recoverables and the reinstatement premiums were $14.9 million or 1.3 combined ratio points evenly split between our insurance and the reinsurance segments from a few small events across the globe. As the prior period net losses or development we recognized approximately $60 million of favorable development in the second quarter or 5.1 combined ratio points compared to 6.4 combined ratio points in the second quarter of 2017.
This was led by the reinsurance segment with approximately $32 million favorable. The mortgage segment had about $23 million also favorable and the insurance segment contributing $5 million. This level is generally consistent with the recent periods on an aggregate basis and across segments. The calendar quarter combined ratio on a core basis was down 200 basis points from the second quarter of 2017. While the core acts in that quarter combined ratio executing caps improved 84% down 230 basis points from last year second quarter.
The insurance segment excellent quarter combined ratio excluding caps was 98.5% down slightly from the comparable 2017 level mostly due to an improvement in the current year loss ratio of 150 basis points slightly offset by higher acquisition expenses resulting primarily from a mix of business changes. We are pleased with these results but note that a significant portion of the improvement approximately 90 basis points is due to a lower frequency of large non-cat claims which as Marc indicated are by nature are subject to variability from one quarter to the other.
The reinsurance segment excellent quarter combined ratio excluding GAAPs stood at 100% even slightly better than the 101.1% on a comparable basis one year ago. In a similar vein to the corresponding period last year our results were impacted by non-cat large property claims. This result serves as a reminder of the volatility some of our businesses can experience from time-to-time. The expense ratio benefited from reductions of operating expenses combined with a larger net on premium base.
In addition a reduction in federal excise taxes of $2.6 million or 0.8 points resulted from the cancellation of certain intercompany property casualty quarter share agreements effective January 1 as discussed last quarter. This item will continue to recur for comparisons of 2018 to 2017 results. The mortgage segments excellent quarter combined ratio improved by 380 basis points from the second quarter of last year, mostly as a result of improving trends in the underlying performance of the book particularly within our U.S. primary and my operations.
The excellent quarter loss ratio of 15.4% in the second quarter of 2018 compares favorably against the 19.5% in the same order of 2017 due to lower delinquency rates. 3.1 basis points of the difference or $9 million is attributable to favorable development on first quarter of 2018 delinquencies due to very strong cure activity in 2018.
The expense ratio was at 22.8% slightly higher than prior period as a result of higher incentive compensation costs. These figures highlight the contribution to our pretax underwriting income from the mortgage segment which remains strong this quarter, however, after allocating corporate items such as investment income, interest expense and income taxes to each segment. The mortgage segments contribution to were 2018 year-to-date net income decreases to approximately 65% of the total.
Total investment return for the quarter was a negative 19 basis points on a U.S. dollar basis but was a positive 33 basis points on a local currency basis. These returns were impacted by the effects of higher interest rates on investment grade fixed income securities, partially offset by positive returns on alternative investments and non-investment grade fixed income.
The investment duration was 2.89 years as at June 30, up sequentially from 2.6 years at March 31, as a result of the shift in our portfolio from short-term commercial paper primarily into treasury where we saw more attractive investment opportunities. Also, during the quarter we continue to shift our position from municipal bonds into corporate due to improved relative evaluations.
Corporate expenses $6.6 million lower than in the prior year as a result of retirements and departures of senior executives. The corporate effective tax rate in the quarter on pre-tax operating income was 9.8% and reflects the benefit of the lower U.S. tax rate, the geographic mix of our pre-tax income and a 60 basis point benefit from discrete items in the quarter. As a result, the pure effective tax rate on pre-tax operating income excluding discrete items was 10.4% this quarter, identical to last quarter's rate.
As we look ahead to year-end 2018, we currently believe it's reasonable to expect that the effective tax rate on operating income will be in the range of 9% to 12%. As always, the actual full-year effective tax rate could vary depending on the level and location of income or loss, and varying tax rates in each jurisdiction.
With respect to capital management, our debt to total capital ratio was 16.9% at June 30, and debt plus preferred to total capital ratio was 23.0%, down 250 basis points from year-end 2017 and the 480 basis points from year-end 2016 when we closed the UGC acquisition. This leverage reduction is driven mostly by the redemption of $250 million from our revolving credit facility in the quarter.
As for share repurchases, we repurchased 6.4 million shares during the second quarter at an average price of $26.59 per share and an aggregate cost of 170.2 million under both open market purchases and a Rule 10B5 plan we implemented during our window period. Since the start of the third quarter, we have purchased an incremental 414,000 shares at a cost of $10.9 million. The remaining authorization which expires in December 2019 now stands at 262 million after consideration of their share repurchases through July 30.
Operating cash flow on a core basis was 34 million in the second quarter of 2018 down on a sequential basis primarily reflecting the premiums seated for the reinsurance transaction with Catalina General Insurance Limited which we discussed during the last quarter's call.
With these introductory comments, we are now prepared to take your questions.
Thank you [Operator Instructions] And our first question comes Mike Zaremski from Credit Suisse. Your line is open. Please check that your line is not on mute.
Hi. Thanks.
Hi, Mike.
Hi, Mike.
My first question is regarding the mortgage insurance volumes. It looks like you guys took market share. And you mentioned some lumpiness in the prepared remarks. So I'm just kind of hoping to maybe understand you feel that the market share will be sustained or we should assume a material amount of lumpiness as you said in the comments?
Thank you for the question, Mike. I think first and foremost we do not look at market share as an operating principle. We are just looking at the opportunities as we see them in the marketplace. So what I can tell you is what we saw in the second quarter, which generated those - that production. But I think that the pricing situation in the industry was different as we have gone to the second quarter, and it's changed since then, and it's a lot more stable. So whatever opportunities we have to do what we did in the second quarter may not - keeping being there for the remainder for the year. So it's a really hard question to answer, because I don't know the answer to that.
Does it imply that risk-based pricing is causing more - is part of the reason you are winning some of these deals, or it's separate?
Yes. A large part of our wins was through the RateStar, its ability to more finally price for the risk, and the ability we have to shape the portfolio the way we would want. As I mentioned, we did that more monthly. So it's clearly an advantage, and we think the advantage could probably sustain itself going forward, specifically in light of the loan originators, margin being squeezed. So it represents most likely an ongoing advantage. But their advantage is that we - RateStar has been there for a long time. So yes, we do believe it provides us some advantage.
Okay. And lastly, sticking with mortgage insurance; thanks for the comments about PMIERs 2.0 not having that material of an impact. I'm curious, is that because you will get a number of quarters to let the impact, you know - sorry; it's a few quarters before the impact takes place or if it happens today, it wouldn't have a material impact?
Okay. So we are under an NDA, we cannot really talk about the various parameters, but being at 134% and if we tell you that we think we are comfortable, that sort of gives us a rough idea to where we think it's going to land. That's a good change. They will lay their final determination between now and I believe the end of the third quarter, which will be implemented in 2019. And those comments, Mike, I would tell you have been echoed by our competitors as well. And I think it speaks to the health of the results and the returns, and the profit that have been generated by the platforms in the MI industry.
Thank you.
Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open.
Hi, good morning.
Hi, Elyse.
My first question, François, you said the tax rate was going to be 9% to 12% this year. Is that the right level that we should use in 2019 and onward as well?
It's a good question. Thank you for that. I would say we don't have the answer right now. Certainly as you know, we can't sell some intercompany quota share agreements at the start of 2018. We are re-evaluating those on an ongoing basis. Certainly as we get into a 2019 planning exercise, which is underway now, we will have more clarity on that throughout - internally in the third and fourth quarter. So at this point, it's a bit - and we don't know certainly the B tax as you know, goes up from 5% to 10% next year, so that will have potentially some impact, but we have certainly a couple of things we can look at that we will look at a couple of tools in our toolbox that hopefully will, you know, we will try to obviously minimize our tax liability, but we really don't really have a view at this point of what 2019 is going to look like.
Okay, thank you. And then, on capital return, you guys - the share repurchase picked up in the quarter, obviously at the start of the quarter your stock was trading at a cheaper evaluation and where it sits today, I know you guys have your metric and you look at the payback period as you think about share repurchase. So how does the higher evaluation today change your philosophy around share repurchase in conjunction with the fact that we are now also approaching Peak 1 season?
Yes. Couple of points on that, I don't think it really changes how we think about things. Historically, as we said - we said in the past week, we typically don't buy back stock in the third quarter, although we are not really a big cap player anymore. So that's really not something that worries us as much as it might have as a percent of equity going years back. And we have said it many times, we are always looking at opportunities that comes to us in terms of potential small transactions and that's a factor in how we look at share repurchases and buybacks. And there is couple of things we are working on right now. So we don't really have a definitive view on how the rest of the year is going to look for share repurchases, but to answer your main question, I think is that I don't think it really changes our view even in light of the slightly higher share price that we are currently experiencing.
Okay, thank you. And then my last question, going back to mortgage, and maybe this ties some of the questions that Mike was asking as well, but do you think part of the reason that maybe the NIW did grow so much sequentially, were you guys able to lower the pricing variables in your RateStar engine ahead of some of the other changes made by the other primary MIs and their pricing grids and you think maybe that led to higher NIW that might not be sustained, are you able to kind of pinpoint any kind of impact on specifically to your RateStar engine that might have had on the NIW?
I think your assessment is a very fair assessment.
Okay, thank you very much.
Thank you. And our next question comes from Michael Phillips from Morgan Stanley. Your line is open.
Thanks, good morning everybody. I want to drill little bit more down on the expense ratio for the two segments insurance and reinsurance, kind of going in different directions, higher acquisition expenses in insurance from exchanges and then if you back out the excise taxing and reinsurance, it's still pretty good improvement in reinsurance, so kind of if you take those two separately kind of just what do you see leveling off continued improvements in reinsurance here 25, 26 low, I don't know if that's going to continue and then insurance kind of what is that peak?
Yes, thanks for the question. Let me start and sort of Marc will chime in. The way we certainly look at in totality, so the geography of loss ratio versus expense ratio, we look at it but it's not the primary factor we look at, we look at the totality of the combined ratio, if we focus on the Insurance segment certainly in the quarter, we grew into some areas that have are expected while we will have little loss ratios at the expense of a higher acquisition expense ratio.
So there's a bit of a trade-off here we're seeing a lower loss ratio against and counted it out as higher expense ratio and it's a similar story in the reinsurance although re-insureds is a bit more opportunistic, we have fluctuation from one quarter to the next on what kind of deals we write, what actually ends up coming to financials but certainly in the few instances, we have some agreements and share agreements where there's a sliding scale commission where you wills see that the loss ratio is a bit lower or if it's high mean vice versa but it's lower we will have the higher slightly higher expense ratio. So it's a similar story that we look at it in totality and there is going to be movement between the components, correct.
Okay, great, thank you. That's good, I guess if I could drill a little bit further down from your commentary in the press release on the reinsurance development, you talk about short term business and the recent accident years or recent underwriting years and then the longer term, the longer term piece of that, longer term business from earlier years, can you talk about kind of where that is not just in years but I mean the sub-segments, the lines of business that we're driving that longer tail business favorable development?
It's mostly all on the casualty sub segment of the reinsurance certain lines of business in the reinsurance segment, as you know we had a fairly sizable part of our business or market proportion of our production was in casualty businesses, casualty business and the early years of ours going back from 2002 all the way to 2008 and 2009 let's say where we reduced our writings on that particular line, so you're still seeing some favorable development coming through from those years and casualty in particular?
I would add to what Francois just said is in the earlier years, it was more we included in the casualty segment, general liability and professional lines. In the early years, we wrote a lot more GL in proportion than we've written recently, so I would think that the more recent releases would come from professional lines in all treaties that we've done and early years still giving us some release from the casualty, the traditional GL portfolio that we wrote as far back as 12 to 15 years from now. We are, obviously we have deemphasized that line of business very heavily over the last 10 years.
Great, okay, good. Thank you very much for the comments.
Sure.
Thank you. Our next question comes from Josh Shanker from Deutsche Bank. Your line is open.
Hey, good morning, everybody.
Hi Josh.
Can we talk about production in MI and how much capital that required on the margin from where you were year ago and so when we consider the share repurchase and everything and may be a little bit stagnancy in P&C, how much excess capital are you guys generating per quarter given the consumption elsewhere?
I think that, we see our earnings coming through right and the one thing I will tell you, I don't want to tell so much because of couple of things moving in production the way flow through the portfolio, the Bellemeade transaction that we've put together and we're putting together in program average basis. The roll off of the capital from that we are experiencing and benefiting from predevelopment, the claims that are actually rolling off even in Francois mentioned in the curing and delinquency and frankly Josh they all pointing in the right direction which is we are and that party help to inform, it will help us inform our view about how good and how much of fundamentals, how good the fundamentals are in the business.
And I think that we have, we made decision in the past we certainly have committed to embark on that Bellemeade transaction, they're very, very good for us in protecting the downside, they're allowing us to deploy capital in future periods and hopefully we get more excess capital as a result. But we are not running out of ideas in the MI segment, so if anything we're very happy with our production and happy where we are and the effort is to keep on being the same as we see now, we're going to keep on deploying capital there.
The one thing I will add to that just as a counter to excess capital is actually persistency is actually trending up and with higher interest rates as you know, we would expect it would have a bigger book, the book sticking longer on the balance sheet which doesn't require the capital. So it's hard for us to know when to say exactly how much excess capital we're producing on a quarterly basis certainly something we look at, I want to say after the fact not before the quarter starts but that's certainly an important part that we have to be aware of as it is we think the book will stick around for a bit longer and that that just triggers capital requirements that we need to be aware of.
Well let me ask the question another way then and I'm not complaining about $170 million share repurchase but what tells you okay let's stop but how do you know that, how did you are filling the side that you've done enough or I mean was just like you closed out, what was the trigger that you knew how much you want to purchase at what time, I guess is what I'm asking.
Well some of it's the price, I mean some of it is the closed window, so certainly bought back some stock in the quarter. From June 15, we have to implement 10-b5 plan, we set some guidelines in place, we passed them on to the broker and we have to just watch on the sidelines and see what they were going to execute on that, so we gave them the authorization, they filled that, they worked with the parameters of the 10b-5 plan but I don't think, I know it's black and white line on when we stop and when we keep going and the other thing you got to remember is we also wanted to reduce our leverage. So we paid down $250 million of the revolving credit facility which is one of our objectives as well, we want to bring down the leverage, we want to regain the flexibility we had before the UGC acquisition and so those are really two things that go hand in hand that we want to manage through and we think we're on the right path.
Okay. Well, thanks for the answers, and I look forward to the remainder of the year.
Thanks Josh.
Thank you. Our next question comes from Nick [indiscernible] from Dowling & Partners. Your line is open.
Hi, it's actually Geoff Dunn.
Hi, Geoff.
I want to revisit the MI capital question, your position is by far the biggest in the industry right now and given your comfort with 2.0, what is the prospect for a dividend out of that platform in the back half of the year?
It's something we look at, no question that we did declare ordinary dividends in the first half of the year which helped us again to reduce the leverage, pay down the revolving credit facility. We are also, there is restrictions as you know with the state regulators that there's only so much we can dividend out, so if and when we get to a place where we have to, we want to extract more capital, we may have to go down the route of extraordinary dividends and or return of capital which as you know will require regulatory approval.
So it's certainly part of the equation but and the other thing I'll add to that which is a bit of influx is we're still realigning our legal entities with the merger of UGC and Arch MI, there is a bit of more actions we need to take plate, we need to put through there just to have a bit more optimal capital structure within our U.S. regulated entities in the mortgage space. So it's all being considered, we don't have a hard number at this point but we're actually something we look at quarterly with the local board, the local management team and it's part of the overall capital plan at ACGL.
Have you submitted a special dividend request to your state regulator?
Earlier this year we did and it was approved and something again there's a frequency of interactions you want to have with the regulator, we can't go to them, we got to manage through that but it's certainly something we want to have a fairly systematic way of going in reaching out to them with definitive I want to say views on how the capital requirements what they see as capital requirements.
From their own the state regulators versus PMI, there's also differences in how much credit we get for the Bellamy transactions that come into play so there's a lot of factors that, we're working through but you know we don't have a definitive plan of action. I'd say for the remainder of 2018 to go to them at this point.
Okay. And then two questions on production first your 97 mix has been coming up a little bit fourth quarter first quarter and then more materially this quarter is there anything that's changing on the underwriting basis in that segment that's making you more comfortable or was that you particularly this quarter's gain more due to the unusual pricing that you highlighted before?
So from our perspective, our belief is that we didn't change right if the our view of pricing and risk, appreciation of those risk is probably because the rest of it competition probably put some more extra layers on this enough probably mean that we won a little bit more in that segment, so we increased our share but Jeff as we are still on the way versus the rest of the marketplace and as well I mean to tell you that the production of LTV above 95 grown in the industry, so we're also are on the receiving of this and it's hitting one as a production increase and that segment is probably more and more ability to charge a price to take on the risk.
Okay and then lastly you mentioned a couple large deals in the quarter are you referring to kind of these pull deals where you're quoting on a pool of whole loans in the aggregate?
Yes, I'm pre-agreeing as the forward commitment. Yes.
Okay, thanks.
Thank you.
Thank you. And our next question comes from Bob Glasspiegel from Janney Montgomery Scott. Your line is open.
Hello, I just want to do dig into the insurance segment you've now had three quarters where you, a small underwriting profit in if you just even if you just for the look, you are hitting the tougher Cat the third quarter but you talk pretty optimistically both sort of the environmental changes, do you think the work you've done in the environment are sufficient to that you can actually get to an underwriting profit look out forward in and start to approach your targeted returns in that segment?
We're certainly working heavily towards that Bob I mean I think you know us we're trying to work towards that, I think we've always worked towards that level. I think that we're probably not I just want to put a little caveat what you said and I think we're cautiously optimistic as to what we've seen terms of margins improving and I think that it will take us some time, we have some improvement I think some of it in their loss ratio but that's from some mention some of it due to mix.
In terms of return receipt from improving our returns but we're not declaring for victory yet with global take as a while to really see the results coming through but suffice it to say that there's been an active shift between the businesses that have been going on and it's not of late, so what you see right now on insurance as Bob it is really the sum total of things you've done over the last year and half to two years not up with being right now in allocation to higher return lines of business and we're hopeful that this is the level that will continue and even improve in the future but the future only the future will help us, what happens.
Thank you. For it, what you have a handy there in new money rate for the quarter or current new money rate that you're investing it?
Well, we actually new money rates on the corporate actually exceeded 3% in the last few weeks, so that's good news that's that will help investment income going forward but we're right about like 3.1% in the last 20 days or so.
That's well above your embedded yield to investment income as you should continue to accelerate?
Yep.
And last question it was the tax rate guidance full-year or second?
Full-year.
Thank you.
You're welcome.
Thank You. And our next question comes from Meyer Shields from KBW. Your line is open.
Great, thank you. Marc, when you started your comments you mentioned that rates are little bit above loss trends I was hoping to see whether that's the loss trends that you're currently observing or the longer term loss trends that you have been making enterprising and reserving?
Yes, okay so it's a bit of both. That whatever we use in our last run is informed by the data obviously in our future expectations. The Delta I think significant is a 150 or 125 but Meyer it's been only that margin has only been is a quarter or two with fact hasn't been a consistent no pickup in trend or in rate over the last trend, that we would expect to really start growing book of business.
And so it's a very it's an art more than science at this point I'm specifically for the more recent accent year, takes a really long time to have a clear view of what's happening and frankly we will know until five or 10 years from now and what we're looking for more is margin of safety between the last trend and the rate change.
And this clearly is not we don't believe it's deficient enough at this point in time in most lines of business in someone like property were really getting way about trend and that helps inform our position in allocating capital and getting a more known better assurance that ROE expectations is going to be there and we're able to meet it.
Okay, thanks. Related question on the casualty lines are this I guess different views from different executives right now but whether there is an uptick in claim frequency in lot of casualty lines I was hoping you tell us what you're saying?
But we're seeing frequency not increasing dramatically but we're not seeing decreasingly and the problem with frequency Meyer that you're an, that as well as I do is that the frequency to look back estimate takes a long time for the true losses to emerge, so we have seen some rate frequency decreases. I would be of the mind and most of us are to be of the mind that some of it is due to looking back at to a lower economic environment, lower activity over the last 10 years and carrying on doing a projection in the future.
I'm reminded that the workers' comp years in 93, 94, 95 when things were being extracted frequency going down very heavily and there was just a matter of time before top picking up again and another line of business of more recent experiences is auto liability, it was looking pretty good in frequency and a frequency shut up over an 18 months to 24 month period, so I'm worried about the small sense of security of ongoing frequency be decreased especially in light of an economy that has a lot of friction, a lot of pickup in it and lot of steam in it.
Okay, that's very helpful. Thank you.
Thank you, Meyer.
Thank you and our next question comes from Brian Meredith from UBS. Your line is open.
Yes, Thanks a couple questions. First one just curious pickup in property business you're seeing on your insurance side. I know you talk about some of that's rate but then also adding some new business there, what do you see as the attraction right now on the property business that is that area you think that it rates well in excess of trend, What's going on there?
So rate, yes, we believe rate is an excess of trend. There's also the rate on our ENS portfolio which is more to ENS portfolio player it's not the global property side over the small commercial that we see some of that in certain areas but buying large the ones that have ENS in nature including the London business. We're seeing rate increases because of dislocation in the marketplace, some players have been to hurdle that been some question as to where the viable book of business, so the opportunities to slide in and able to seek opportunity.
On the reasons because I want to mention on this world-wide it doesn't matter there are also opportunities that arise because of some placements not being finalized and we're able to pick and choose some faculty replacement that are to just complete the quilt of coverage that no larger risk would have to do to play, so there's a little bit of a shrinking of capacity in the space specifically on the ENS have property it's an 8% trend, 8% to 9% rate increase but it is one long area where we have, we think some terms and conditions getting better, actually working towards as the nation's carriers and as I say in my notes. We like to see rate increases going up one way in terms of conditions following soon meaning giving us an extra kick up and we believe this is what's going on in the property although it's not widespread, we have to pick and bought but it's certainly what we've seen in the business that we write.
Right. And then next question, Marc, at Investor Day it was talk a little bit about maybe some initiatives to try to get the combined ratio down that insurance segment be at expenses be at risk selection and stuff, just maybe an elaborate a little bit on what you're doing to try to consistently maybe improved access. I can't think the return to business that creates when you're sitting here kind of 100 combined ratios of 99 to 100?
Correct. So it's we're really identified it as an area of opportunity but I will take years to develop and the initial things that we've done and we're doing currently right now is there's a little more integration going on for some things such as IT for instance that we think we need to do and then can be done even though we have no multiple platform. So it's a couple of things, integrating services, leveraging some of the overseas employees that we have that are in lower cost jurisdiction and there are some initiatives that we are talking that will be we will be working on going forward to try and decrease it. But I will tell you what happens when they happen and we are give it to - give us ourselves some time to get there.
Okay, great. Thank you.
Welcome, welcome.
Thank you. And our next question comes from Ian Gutterman from Balyasny. Your line is open.
Hi, thanks. So we are early, is it? I can't even ask you for lunch is yet.
Hi, Ian.
So first, François, thank you for doing the script in a slower cadence that we are used to. That was helpful. So my first question is to follow-up on the tax. Can you talk specifically about why it's coming lower than you expected for the year?
Well, thinking about the gone by. I mean no question that when we started the year, there was a lot of uncertainty after the tax reform, trying to figure out. It was all based on plan. So when we gave you the estimates back in February, it was all related to where we saw the profitability of the units and what local jurisdiction they come from. Six months have gone by and now we have a bit more clarity on the actuals and that's what we are just updating. So I can't pinpoint any one particular thing on why it's come down a couple points let's say. It's really more just the fact that we replaced forecast to plan with actuals.
Okay. I guess I would have thought - I guess I can turn to my model. It's not your internal model obviously. But I would have thought that the upside in earnings has come more from MI which obviously would be more in the U.S. So I would have thought if anything like the geographic mix would have advised you higher if anything. So I don't know if there were other actions you were taking trying to offset that or…
I mean it's not a big difference. The 21% the tax rate, we get a 50% quarter share on the mortgage book so that brings it down to 10.5 right there. There is - we can do it offline. There is a couple of other things that I think one offs that can move it in different directions. So it's really hard to kind of give you a lot more clarity over this range at this point.
And this is the primary U.S. business, Ian. Just for your benefit some of it in the U.S. segment is also with Bermuda which would have a different tax.
For sure, for sure.
So, yes.
Okay. And then you can give us color on the fac [ph] losses? I mean the dollar amount was about somewhere to last year [indiscernible] is it coming from the same parts of the book bill or is it different parts of the book, or different geographies? Any color you give us on what happened there?
It's different. It's one off. It's a one class of business that we unfortunate - well, I mean one major event that came in for the quarter. We don't see any trend in it. It's really - I mean yes, it's coincidence that is it's happening in the exact same quarter or 12 months later, but other than that, again that we have been very happy with our performance of that book over the years. No question that we are going to look into it some more as we move forward. And does that force us to re-evaluate some underwriting decisions? But at this point, we don't see anything that's really problematic.
No, and that loss versus last year they are different in nature. I mean…
Yes.
Exactly. It's very different in nature. I mean it's a fire loss, but it is different types of risk, different types of characteristics, different coverage - like a very - different occupancy. And that - yes, it's a very lumpy book of business. As you Ian, we are sitting here having Q on Q loss. We could have five quarters with no losses.
Okay. Was this the fire that I maybe read about in the press somewhere that happened call it in an island near Europe?
No, that was not that one.
Okay, okay. And maybe just - but I think about see the full-year '17, in fact, I mean obviously there was a bad Q2, but I am just trying to see like what's normal over the course of the year. Well, last year [indiscernible] have normal year or worse than average year, just how should I think about that?
Last year has been a worse than average. I am not - I am not comfortable giving you what we think long term pricing and then returns are that we want to keep it proprietary, but it's shown a very healthy, very profitable book of business. But last year, yes, for - in the 11 years it's been running business for us we are together. It is the one year that sticks out. Everything has been actually below the than long term expected when all years except for that one last year.
Okay. I am trying to think about volatility like given this Qs in a row with eight bad quarter, would it be normal to have a quarter like this once every - probably not once every four quarters, once every eight quarters, once every five years? I am trying to get a sense of sort of how unusual the last two Q2 are.
It's a very good question, Ian. I don't know the answer to that.
Okay. Fair enough. Fair enough. Okay, and then just quickly on mortgage.
Sure.
You talked about the environment being healthy. And obviously - I mean that seems fairly obvious. But I guess sort of the incremental news maybe over the last month feels like there is a bit of softness emerging. I know that's maybe more the high end which wouldn't have MI than the broader market. But are you seeing any signs of that? It feels like that may be price has just gone up a little too fast in certain geographies where affordability become an issue?
I won't describe the market as being soft. I would tell you though that the types of risks that find their way to the MI purchase market have a little bit of credit you know, wider than it was possibly three or four years ago. And it's just the nature of the business and the business that we are in. The rates are increasing. That's refinancing. There is more first time home buyers. And there is house price appreciation. So that tends to be higher LTVs and there are more first time homebuyers. And that's - but it's just the nature of what they are, but I would believe - and I think the market and certainly from our perspective with RateStar we believe the pricing is appropriate for those risks.
For sure, I was just wondering - yes, margin affordability was impacting credit at all. So, it doesn't sound like…
Affordability is actually 15% above the long-term trend. So affordability is still decent. It's not all created equally in all cities like San Francisco and other country, but certainly affordability it's still there. The DTI equivalent is about 26. So, it's not that bad.
Okay, perfect, it sounds good. Thank you.
Welcome.
Thank you. And our next question comes from [indiscernible] from Goldman Sachs. Your line is open.
Hi, Ian.
Please check that your line is not on mute. Again, Sir, please check that your line is not on mute.
And I am showing no further questions from our phone line. I would now like to turn the conference back over to Mr. Grandisson for any closing remarks.
Thank you, guys. Welcome Francois to the call, and we look forward to talking to you after the wind season. Thank you.
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.