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Good day ladies and gentlemen, and welcome to the third quarter 2021 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instruction 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 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 website.
I would now like to introduce your host for today’s conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin.
Thank you, Liz. Good morning and welcome to our third quarter earnings call. We are pleased to have delivered solid results this quarter as our operating units generated a 9.3% annualized operating return on equity and a 12.5% annualized net income ROE despite an active catastrophic quarter. Premium writings and rate growth remains strong in our P&C unit, driving solid fundamental earnings while our mortgage insurance unit again produced excellent results. The current market condition allow us to demonstrate the value of our diversified platform and underwriting strength as they provide us with plenty of opportunities to deploy capital and generate an expected return on equity in the mid teens.
In the broader P&C arena, we continue to see the market hardening along with ample evidence that our industry is addressing the adequacy of pricing across most sectors. The trajectory and market acceptance of rate increases reinforce why we remain optimistic that improved economics in the P&C market will be sustainable for some time. As you know, the P&C industry is facing many degrees of uncertainty; heightened care activity in four of the last five years, rising inflation, COVID ongoing influence on a global economy and enduring low interest rates. When faced with escalating risk, underwriters need both rate increases and conservative loss estimates in order to build adequate margins of safety into premium levels. With our agile underwriting, established teams and strong capital position, we are well equipped to grow into this improving market.
Turning now to our operating units. We’ll begin with insurance, where our early focus on strengthening our underwriting capabilities and seizing recent market opportunities is working. Gross written premiums continued to grow substantially up 32% over the same quarter in 2020 and our accident year combined ratio ex-cats improved to 90.5%. This is another indication of the progress we have made in our specialty insurance business. We have been leaning into this hardening market for two years now as rate increases remain well above the long term loss cost trends and have spread to more lines than last year.
Overall 2021 rates are up around 10% compared to 2020 and we expect that the benefit of higher premium levels will be realized well into 2023 enhancing our expected returns for that period. This quarter had many bright spots including positive rate increases have accelerated and lower limits account. These lines have previously lagged the increases in larger accounts that is no longer the case. Two, our early focus on Lloyds and business in the UK has improved our scale and our economics in this market. Three, some of our business lines that were most impacted by COVID, like travel are recapturing some of the lost volume, as both business and consumer travel increases. In summary, our specialty insurance group is making the most of the current opportunities.
Pivoting now to our reinsurance group. It delivered strong growth in the quarter with gross written premiums up nearly 25% over the same period in 2020. On a net basis reported growth was only a modest 3% versus the same quarter in 2020 due to a catch up in sessions to Watford following the purchase of the company with our partners at July 1.
Francois will provide more detail during his comments. But absent this one-off transaction, reinsurance net return premium growth was still very strong at 30% and our outlook remains favorable as similar to instruments, we’re experiencing broad rate increases in our specialty and casualty reinsurance lines. In the quarter our reinsurance segments reported a combined ratio of 106%, reflecting the effects of the third quarter caps, primarily Ida and the Central European floods. But reinsurance accident year combined ratio ex-cat is excellent at 83.2%.
There are signs that property market rates could adjust higher due to cat fatigue, as you’ve likely heard on other calls this quarter. The recent five year period of elevated losses from catastrophes proves an important insurance adage. Losses don’t know the level of the premium. There are also early indications that retro sessional and aggregate excess of loss protections are becoming increasingly hard to come by and we believe that this will be reflected in higher property rates broadly.
As you know, we were and remain judicious in the deployment of our cat PML, which was effectively flat in the third quarter. At less than 6% of our tangible equity, we remained under weighed in net property cat exposure and we will deploy more capital to the line as expected returns improve above our target. It’s too early to make a call on a January 1 renewal process, but pricing in this sector is heavily influenced at the margins and if ILS or other capacity phase, there is a possibility for significant rate corrections and increased engagement on our part. In the meantime, our reinsurance teams are demonstrating their agility and like insurance are leaning hard into the markets where returns are most attractive.
Thirdly, our mortgage group continues to deliver exceptional returns. It generated $234 million of underwriting profit in the third quarter and continues its impressive rebound from last concerns associated with the pandemic. At September 30, insurance in force of $457 billion for the segment was up modestly. Further good news is that notices of default have declined to pre-pandemic levels at September 30, which is a good indicator of improved conditions.
Additionally, loans in forbearance continue to decline as federal programs conclude and we remain cautiously optimistic that most of these loans will ultimately cure. Rising home prices have broadly increased homeowner equity and you will recall our position that equity levels are the best indication of whether a delinquency will ultimately result in a loss. We estimate that 98% of our loans in forbearance today have at least 10% equity, providing significant protection against potential losses.
Overall, the MI market remains competitive but rational and our business continues to generate returns on capital in the mid teens. Mortgage originations continue to pay similar to last year’s record origination volume and credit quality remains excellent. As you know in all of our operations, we actively manage capital to enhance shareholder returns. The strong result in our mortgage segments have enabled us to optimize our capital structure via increased reinsurance sessions through our Bellemeade mortgage insurance-linked notes as well as traditional reinsurance. Additional reinsurance purchases enable us to reallocate capital towards faster growing areas and specialty property and casualty lines while enhancing our return profile and MI by reducing required capital. MI remains a very attractive business for us.
Now a point of pride and interest to us and perhaps to you all is that last Saturday, October 23 Arch celebrated its 20 year anniversary. So I want to say to our investors, thank you for believing in us and to our employees past and present, thank you for your contributions to Arch for last 20 years and our client for showing support and conviction in our capacity to provide products to you.
Finally, the PGA Tour is in Bermuda this weekend, so golf is top of mind. A golf tournament is interesting in that it takes place over several days and therefore consistency is critical. You have to be sure to pick your spot and lower your score. But if you want to make the cut, you have to limit the bogeys early so that you can play more aggressively in the stretch. And then once you get to the weekend, you can play with a bit more freedom and really try for the birdies and eagles. At this point in the cycle, we feel we’ve made the cut and now we focus on really taking advantage of our positioning to make sure we end up at the top of the leader board. Francois?
Thank you, Marc. And good morning to you all on this first day of the Butterfield Bermuda championship here in Bermuda. Thanks for joining us today. Before providing more color on our solid third quarter results, you will have observed that while our earnings release still makes a distinction between core and consolidated for purposes of comparison to prior periods, there is no difference between the two presentations this quarter.
As we discussed on the last call the closing of the Watford transaction on July 1 gave rise to a reconsideration event and as a result of our updated VIE analysis, we no longer consolidate the results of Watford in our financial results. Our 40% share of Watford results is now reported in the income from operating affiliates line and there is no longer a need to make a distinction between core and consolidated results in our financials.
As Marc shared earlier, our after tax operating income for the quarter was $294.7 million or $0.74 per share, resulting in an annualized 9.3% operating return on average common equity and book value per share increase to $32.43 at September 30, up 1.3% in the quarter, a very solid result in light of the catastrophe activity that was much higher than the long term average for this quarter, which we estimate that over $45 billion uninsured losses for the P&C industry approximately three times the average third quarter cat losses observed over the last 10 years.
This quarter, I wanted to first give you some additional detail on the results of our reinsurance operations which were impacted by the Watford acquisition especially on the top line. As part of the agreement signed at the beginning of the year with our co-investors in Watford we committed to ceding varying percentages of the premium written by our Bermuda and U.S. treaty reinsurance operations to Watford effectively enhancing the existing business model to also serve as a sidecar for Arch. While their retrocession agreements were effective as of the start of the year, their signing was contingent on the transaction closing which delayed their recognition in our income statement until this quarter.
As a result, the third quarter ceded written premium reflects a catch up of approximately 161.2 million from the first half of the year. The impact of the premium catch up adjustment on underwriting income for the reinsurance segment was minimal.
Growth in gross written premium remained strong at 24.6% on a quarter-over-quarter basis, and growth in net written premium would have come in at 29.5% adjusting for the Watford catch up. The growth was observed across most of our lines but especially in our casualty, other specialty and property other than property catastrophe lines or strong rate increases and growth in new accounts helped increase the top line. The segment’s accident quarter combined ratio excluding cats stood at 83.2% compared to 83.1% on the same basis one year ago. On a year-to-date basis, the ex-cat accident year combined ratio has improved by approximately 250 basis points over the same period last year reflecting the improving underwriting results and most of the lines in which we write.
In the insurance segment, net written premium grew 40% over the same quarter one year ago and the segments accident quarter combined ratio excluding cats was 90.5% lower by approximately 360 basis points from the same period one year ago; excellent results across the board, which demonstrate the progress or insurance segment has made over the last three plus years and improving its performance and provide us with optimism on the underlying quality of our franchise going forward. Losses from 2021 catastrophic events in the quarter net of reinsurance recoverable and reinstatement premiums stood at $335.9 million, or 17.4 combined ratio points compared to 12.5 combined ratio points in the third quarter of 2020. As noted in our pre-release, our P&C operations were impacted by Hurricane Ida, the European flooding events of July as well as a series of other events across the globe.
Our mortgage segment had an excellent quarter with a combined ratio of 26.2% reflecting favorable prior development of $48.4 million about half of which came from U.S. MI from better than expected cure activity in pre-pandemic delinquencies and recoveries on second lien loans. And the other half from our CRT portfolio and international MI. The decrease in net premiums on a sequential basis was primarily attributable to lower levels of single premium terminations in the quarter for U.S. MI business and to a lower level of call to CRT transaction than what was observed in the second quarter. Recall the second quarter benefited from higher earned premiums due to an unusually high number of CRT transactions being called which we highlighted as effectively being a non-recurring event.
The delinquency rate for U.S. MI book came in at 2.67% at the end of the quarter, a material reduction from the peak we observed at the end of the second quarter one year ago. We had another solid quarter in terms of production, mostly from the purchase market and with refinance activity coming down from prior levels the insurance in force for our U.S. MI book grew slightly. The increase from last quarter in the insurance in force of our international mortgage unit is mostly the result of the acquisition of Westpac Lenders Mortgage Insurance Limited in early August.
Although income from operating affiliates grew significantly to $124.1 million it is worth noting that approximately $95.7 million of the total is attributable to a one time operating gains resulting from the acquisition of a 40% stake in Watford which was offset in part by a realized loss upon deconsolidation with a resulting net income gain of $62.5 million. The remainder of the operating income from affiliates represents our share of the net income generated this quarter by our operating affiliates, which consists primarily of Watford, Coface and Premia.
Total investment return for our investment portfolio was de-minimis on a U.S. dollar basis for the quarter. Net investment income was $88.2 million during the quarter down by $1.2 million on a sequential basis, driven by lower coupons on fixed maturities and lower income on consolidated funds. The duration of our portfolio remains low at 2.68 years at the end of the quarter, reflecting our internal view of the risk and return tradeoffs in the fixed income markets.
Equity and net income of investment funds accounted for using the equity method produced $105.4 million during the quarter, more than half of the total income generated by our investment portfolio and a key contributor to the growth in our book value. As we discussed on prior calls, we have increased our allocation to alternative investments in the last few years and these funds now represent approximately 12% of our total portfolio at the end of the quarter. We are also very pleased with their performance so far this year which stands at 13% year-to-date.
Of note, had we included income from funds using the equity method in our definition of operating income, our reported operating ROE would have increased by 3.2% on a year-to-date basis to 13.3%. While these funds returns are potentially more volatile than core fixed income strategies, we believe the incremental returns they provide more than compensate for the liquidity constraints and volatility that are usually associated with them.
The effective tax rate on pre-tax operating income was a benefit of 0.7% in the quarter reflecting changes in the full year estimated tax rate, the geography mix of our pre-tax income and an 8.2% benefit from discrete tax items in the quarter. The discrete tax items in the quarter primarily relate to partial release in the valuation allowance on certain U.K. deferred tax assets.
Now a quick comment on the two acquisitions that we closed on this quarter, Westpac and Somerset Bridge. You will have seen that in accordance with purchase gap we established approximately 337.4 million of intangibles and goodwill this quarter most of which will be amortized through our income statement going forward. To help with your modeling efforts, we now expect our amortization expense to be approximately $25 million in the fourth quarter of this year and $21 million quarterly throughout 2022.
On the capital front we redeemed all of our outstanding series e-non cumulative preferred shares for $450 million on September 30. Separately we repurchased approximately 9.7 million common shares at an aggregate cost of $386.9 million in the third quarter. If we include the additional common shares we have purchased in the fourth quarter the year-to-date totals are now approximately 24 million shares or 5.9% of the common shares outstanding at the beginning of the year for $917.7 million. Some of the additional share repurchases in the fourth quarter were effectuated under the new share repurchase authorization of 1.5 billion approved by our Board of Directors earlier this month.
As we have said since our formation 20 years ago, our core operating principles are anchored in active cycle and capital management. We believe this quarter results demonstrates our ability to execute on this philosophy and leads us to invest in opportunities where we believe the returns are most attractive. At recent prices and with the prospect of improving returns, we believe buying back our shares continues to represent another compelling value proposition for our shareholders without compromising or capital flexibility nor lessening the quality and strength of our balance sheet.
With these introductory comments, we are now prepared to take your questions.
Thank you. [Operator Instructions] Our first question comes from Elyse Greenspan with Wells Fargo.
My first question Marc, you’re talking about the mortgage business you talked about buying more reinsurance. So there was more capital for growth on the P&C side, which I found interesting. In the past you spoken about mortgage running at around a 15 plus return and P&C kind of 10 to 12. Has the dynamics changed that that caused you to buy some more reinsurance to pursue more growth on the property casualty side?
Yes, I think all opportunities on the P&C side just have improved right over the last couple of years and I think we’re even more convinced of the length and that has legs for the foreseeable future. So that makes us be more proactive to balance, if you will, the capital allocation between more than one year. I mean, we did rely heavily on a capital deployed in MI for quite a while because the returns in P&C as release weren’t as attractive. But now that we have a new attractive and increase and improve returns in the P&C, it behooves us to balance the risk profile in the portfolio. That’s one of the reasons why we would do some more reinsurance and again, the reinsurance also helps our return on the net basis as well which is also another benefit.
But are the returned numbers I gave still kind of where you see the three businesses. So 50% plus and then 10 to 12.
Yes. I would say on the P&C side, at least I would say it’s getting up is north of that now. I think we have our prospects closing, the gap is closing between MI and P&C if you will.
So north of a higher than 12%.
I would agree. Yes, I would think it’s the case, yes.
And then, in terms of capital, you guys put in place a 1.5 billion authorization. It sounds like you’ve bought back a little bit under that so far this quarter going through the end of next year. I know obviously, what you buyback depends upon the market also for your shares and the trading over the course of the next year. But when you put that in place was that designed to set a mark of what you will buyback, or either just other factors that could cause you to either fully buyback that level, or maybe come in lower, just help us kind of think through that as we think about capital return through 2022?
Well, I mean, two things. I mean, we bought, we’re close to a billion dollars this year. So we don’t want to go back to the Board every three months and ask for more. So we thought, okay, what may we need, could we need by the end of 2022, over the next 15 months effectively, 1.5 billion that’s just a number that nice round number, nothing special about it. But are we committed to that number? The answer is absolutely not. If the market keeps improving and we have the ability to deploy your capital, all the capital and then some in the business, we may not end up buying anything back. So it’s really, again, a function of the market conditions and vice versa. If the market doesn’t really generate give us a lot of opportunities to grow, we might be in a position where we buyback more than not. So it’s really, again, it’ll be a function of what we see in front of us over the next 15 months. And if we end up going through the billion and a half sooner than next year, then we’ll do something else. So again, it’s very dynamic, very real time I’d say and we’ll see where things take us.
Thanks for the color.
Our next question comes from Jimmy Bhullar with JPMorgan.
So first, I’ve question on just what you’re seeing in terms of pricing both on the insurance and reinsurance side. And to what extent do you think price increases are going to hold versus may be especially on the reinsurance market? Seems like things have been getting a little bit softer over through the course of the year. But how do recently high catastrophes affect your view of what one knows?
Right Jimmy. If we bifurcate the market into property cat you agree, I would tend to agree with you that the property cat raise did not increase as much as we had hoped collectively as an industry I would say not only at Arch, it’s not a single Arch phenomenon. Therefore, that’s why you saw us right less property cat over the last nine months as a reaction to those rate levels. It’s still early, like I said in my commentary, but I think we should have a re-pricing, definitely re-pricing in Europe and in the U.S. even for the layers that have been impacted, that’s for sure. And I think it would start to spill out even on to those that have not sustained a loss because I think there’s a recognition of heightened cat activity. And I think that the market is sort of bracing for that as we go forward. It’s going to be a matter of degree.
On the rest of the marketplace I think that overall since if you look at the liability lines in general, overall you can think of in terms of a quarter share if you’ve got quarter share of casualty or liability lines you’re benefiting from the rate increases in the business and I think the ceding commissions which were held high through 2020 are starting to come down a little bit. So there’s a recognition that so there’s a bit of an improvement from that perspective and a quarter share on the excess of loss in general for liability, the ratio is stable to somewhat and is more stable, but again, you apply those rate against a base that is increasing in premium level. So they are also getting some price uplift.
And I think that big as soon I mean, the reinsurance market, Jimmy feeds off of the insurance market, right in a positive way, I want to make sure it’s a positive message. We actually, we on the receiving end of a portion of what the insurance market writes and to the extent that interest market writes premium at a higher level, we are benefiting from those rate increases.
And then can you quantify how much you’ve got in terms of COVID reserves, especially for business interruption and I’m assuming they’re mostly still IBNR as you’d been quantifying last year and just discuss what the process would be and the timeline would be for releasing these given that for the most part, it seems like the courts have been siding with the insurance companies at least thus far in the U.S.?
Yes, I would say, I mean, we’re still very much, a lot of IBNR and our COVID reserves more than half, 60% or so I’d say, call it COVID reserves on the P&C side are still IBNR. So and how quickly do we, well, we know or not know whether we’ll need those reserves time will tell. I think it’s where we said yes I don’t disagree that so far there have been a couple of positive developments from the cores, but it's going to take a while. I truly think this is a very complicated and issue that will take years to resolve. So I wouldn't expect us to really take dramatic action on the level of COVID reserves on the P&C side for some time.
And Jimmy in our industry and insurance you could win 95 lawsuits and lose 96 and it changes everything. So there's a lot of uncertainty in our space, even though we've been a good streak one change could change everything.
And what is the rough number of or rough dollar amount of reserves?
That's a good question. I don't have it in front of me. We can circle back with you. I know we booked a few 100 million dollars last year and we paid some of that. I don't have the current figure, but we can give you that.
We haven't changed ultimate Jimmy over the last three quarters.
But it's not something like that's more maybe 2023/ 24 as opposed to 22 in terms of potential releases on these?
There are releases. I will say yes it will probably take another year, year and a half and we might hold a little bit more longer for the reasons I just mentioned in terms of the court decisions.
Our next question comes from Mike Zaremski with Wolf Research.
Great morning, afternoon. I guess some of the prepared remarks, when you guys were talking about the primary insurance segment, talked about kind of seeing rate acceleration actually in the lower limits kind of the smaller commercial space. Any theories on why that's happening? Is it due to loss cost trend increasing, because we're kind of you're seeing a fading of rate a little bit or deceleration in the large account space. So kind of curious if, if you guys have any views, maybe broadly to, on kind of loss cost trend given all the uncertainty during the pandemic on the primary insurance side?
Well, the loss cost trend as we observe it, and it might change is still roughly 3% to 5% it depends on lines of business. But we have already changed our view on this at this point. And we had a loss reserve review, I believe, a couple of months ago. So then it's not changing, although we are putting in a loss ratio pick an extra level of margin of safety to make sure we wouldn't be missing because it could be higher as you know inflation is certainly another concern that we all have collectively as underwriters.
In terms of my theory about why the smaller accounts get those rates right now, it's just, the market is a human psychology market. And pricing gets more acutely needed in a larger capacity play. This is where the market starts focusing its first efforts as the market hardens. And this is not unusual. This is a very, very normal phenomenon and hardening markets. You'll tend to try and fix those are more important, meaning you can put a 10 million to 15 million to 25 million limit, these are the ones you're going to try to fix right away, because presumably those will have caused you a bit more pain over the last two to three years, you were expecting more pains coming from that portfolio.
And it's just a matter of time before people start looking sideways as to what other lines of business need rate. And then you start dipping down into your overall portfolio and seeing where the liability trends for instance, might also be impacted. And this is sort of a second round sort of a rippling effect from the main capacity providing players into the ones who have lower players and at the same time, to be fair, and to be I mean, to be truthful, you also have development ongoing happening on the smaller account at the same time. It's just not as acute and as glaring and as obvious early as a larger capacity play. That's why.
That's interesting. It's helpful. Let me switching gears to mortgage segment. Just curious I know the forbearance levels continue to decrease. If you could remind us I believe there's some extensions to the forbearance program or maybe even new kind of enhanced programs where the P&I could be reduced if the payment can be reduced by up to 25%. Is that correct? And if so, are you seeing your borrowers utilize those options?
Yes. So right now the program is done expires at 930, expired at 930 in terms of foreclosure but, the forbearance I'm sorry. The foreclosure, it's still unclear because they could also come back and extend it further if things were to change and the CFPB is also involved with the FHFA saying that we don't want to have any more, there's a moratorium on the foreclosure process as well. So I think both federal entities are trying to push to go back to your last point of the question, push the mortgage loan or the mortgage originator and provider of providing solutions to the borrowers who are still in forbearance or not current on their payments. And to your point a lot of it is going to be continuous same payment, most of it is going to be continuing the same payment as prior to the COVID forbearance program and is attaching towards the end the lack of what wasn't paid, or what was accrued as unpaid at the end of the loan. So this is roughly what it's going to look like.
But it's going to be another three quarters before we have more visibility because even though the forbearance programs stopped in 930, and people should come now to the banks, and to the mortgage originator and trying to remediate their position from a forbearance perspective, it's still going to take another six to nine months, and I think the agencies are watching carefully. So everything is heading towards a happy resolution, if you will, of the overall forbearance programs like everybody is focusing on this as of this point in time.
And one last one sticking to mortgage and I could take this offline with, but just to want to the increased premium ceded as percentage of gross, is that due to Bellemeade and I guess if it is, can you guys continue to upsize the reinsurance usage in the segment, if you thought opportunistically you wanted to ship more growth towards other lines of business?
Yes. That's very much in that vein, I think Marc made the point earlier. We're always looking to optimize the portfolio and certainly a lot of that is focused on capital deployment. We I think, made the point, last call that we had increased our quarter share percentages on the U.S. MI book at 71. So that's starting to play through basically and that is reflected. We are still very active in the Bellemeade space. So we're purchasing quite a lot there as well and I'd say those two things combined really explained why we have more ceded premium starting this quarter.
Got it and there is more appetite, if you decided to do more, either quota or Bellemeade or both in the future? Are you kind of reaching kind of a max?
I mean I'd say we certainly do a lot of Bellemeade as it is. So I don't want to say we wouldn't do more, but it's I mean, we already are very active in that space and made big placements. So I wouldn't expect us to necessarily increase that vehicle, that mechanism to transfer risk a whole lot. And on the quota share, yes we see more we could, but then it's a risk return trade off and whether the economics work are reasonable or work in our favor, too. So right now we're happy where we're at. But if things change in the market gives us better opportunities we could conceivably see a bit more. Yes.
Our next question comes from Josh Shanker with Bank of America.
Yes, good morning, everyone. This may not be the best math, but it's rough. I think you guys had the inventory of COVID era Moore's claims, about 120,000, you had about 90,000 cures. I'm estimating that you guys have about $20,000 up or notice right now in the portfolio, may not be exact. Historically, you've had about an average of $5,000 up for notice. It seems like the reserves are stuffed particularly if you tell us that 90%, 98% of the claims have at least $10,000 in equity. So, I mean, I'm trying to rectify all this like, can you explain to me I feel so I've asked this question before I just don't understand what's going on there?
Yes. I think the answer is going to be very similar. So very good question. Hope you are -- by the police in back here. If you look at the average case reserved for annuities it's exactly 23,500 I believe it's in the supplement, you can look into it. And you're right. It was it went up from last year. The run rate pre-COVID was roughly 10,000, 11,000, 12,000, so it did increase. And was about 110,000 for claims that we got as well a COVID in the forbearance and about 78% of them have cured so far, so we’ve about 20,500. So [Indiscernible] we have about 31,770, I think is a number in terms of an NOD outstanding. When you multiply by 23, you’re right it would look on the high side, a couple things I will say here, number one is the average severity of the policies that are facing the COVID-19 are starting from 1819, we'd have a higher phase than the one we had as an NOD back in 2019. Those in 2019, were largely pre-2008. So you have to adjust for the level of coverage that has increased over the last 10-12 years. So that explains one why the 23 would be higher than 1113 historically.
The second part of your question, which was where should it go, and this is where it's more art than science. Josh. We hear you. We are cautiously optimistic that it may not come to pass in terms of needing the reserves, and hopefully some of it will cure better than we anticipated. But I just want to remind everyone on call and as we remind ourselves all the time, it's that this is a political positioning. Things could change very quickly from the FHFA, the GSEs, or the housing department. So we need to be really careful and we've never been through that kind of event. So we are Arch as you know, and we will take a cautious, prudent approach to reserving. And if we happen not to need those reserves, as we do, typically, we'll be taking them by the hand from the liability side down to the capital side. We're not going to have let them stranded for a long time. But again, so much so many uncertainties Josh. We understand your puzzling. This is a very unusual situation for the industry. Therefore we have to and that's what we appear probably to be a little bit unusual in that we're reserving it.
And my second question unrelated. Can you talk about the differential, I guess the new business penalty, between a new business you're putting on the book, and legacy customers who you have a deep sense of their risk factors on those accounts? Is there a gap? Is the business that you're renewing, at better margins at least the way you're booking it to new business, given that more about the business you already have?
I believe Josh, you're talking about P&C right.
Yes. This is totally primary P&C not more.
Right. That makes sense to me. So it's a really very astute question Josh because we're keeping track of the renewal rate versus a new business rate level. And symptomatic or as a representation of the hardening market, the pricing of the new business is coming higher than the renewal business and that's sort of speaks to the fact that they need a new home and they need to be re-priced, and people sort of get tired of that relationship and that goes back through them back into either the ENS or the mid market. So right now, we're still seeing, on average, the new business price better than renewal business.
Our next question comes from Tracy Benguigui with Barclays.
Thank you. Just a big picture question. I’ve seen this quarter with you and your closer peer group is that the insurance growth is outpacing the more primary market focus players without reinsurance arm. Are you seeing a lot of market dislocation where you feel like you just do a better job assuming displaced risks that still meet your risk adjusted return hurdle?
I would like to think we're better than the average guy out there. But the truth I think, overall, the dislocation was much larger in 2020. I think you're still seeing some dislocation right now. It's certainly not, there is still some repositioning of limits provided the market by a lot of players still as we speak. And I think what explains our ability to grow is, first we have a really well established presence and we were very underweight Tracy, historically. We are really, really a good market for people that want a good security for products such as DNO for instance, right. We're really good home for someone to take on new as an insurer, and we're sort of better we're definitely benefiting from that as an incumbent with a good quality, good reputation as we do.
And also, I think the other thing that I want to mention, we had said that last year, we were suffering a little bit from, from a travel, lack of traveling that impacted our travel portfolio. That certainly helps right Tracy, the fact that economy is reopening and people traveling a bit more. That also helps explain why we're able to grow a bit more than probably meet the average than the average would. Lastly, I would say that beyond just new business funding new homes I think they are programs were also going in programs, as you see this is very specialty, smaller risk. I think that again another example of programs, finding a new home going away from the existing incumbent, possibly because of our results in finding a new home and we're definitely on the receiving end of that relationship.
Yes. And one thing I'll add quickly, I think, both depending on the mix of business of what you call the more established and the traditional insurers I mean workers comp and commercial auto typically will make up bigger shares of their portfolio. Auto is moving up nicely, but I would say that certainly comp is and had a really good period of excellent results. So rate increases on the comp side have been pretty flattish. So again that's probably worth adjusting for comp because it's such a big line for some of these carriers.
And I'm wondering how much of that is structural in nature like, are others raising attachment points, and you're lowering attachment points or offering lower deductible?
No. We don't do that. No, we don't play that game. I think we would just be replacing most of our play typically on specialty lines Tracy is mid access versus second access is sort of what we play a lot of times and high access, of course, in certain our areas. So for the record Tracy we're not seeing any of the deductible being played out in the marketplace. And that's been fact, there are deductible increases, if anything else. We just see a lot of shortening of limit toward in the stacking. We saw that in 2020. It's ongoing as we speak, instead of adding stretch of 25. I'm talking about a larger placements. You'll have stretches of 10 or 5 or 5 or 10, really in 15, perhaps till saying but there's a lot more players needed to fill up the towers. That's definitely happening more so. It's still continuing to some extent less sort of in 2020.
And then just shifting to reinsurance where are you seeing your favorable reserve development coming from?
Yes, I mean, the vast majority, and we'll talk to it obviously in the Q1 the vast majority is in short tail lines, I mean, I'd say probably 80% in short tail lines. Mostly property other than cat where we've grown a lot in the last couple of years, and while the tail is always a bit longer than we think it should be, it's still we have a pretty good idea to three years out after writing the policy or the account and we're seeing a lot of that coming through in this quarter, a bit of favorable development on prior year cats as well. And a bit on trade credit and surety from a few years ago where we had some reserves that proved out to be a bit more required. So we released those this quarter.
Our next question comes from Meyer Shields with KBW.
Thanks. This is a cycle management question, I guess for Marc. When if ever do we decide that there's never going to be an appropriate hard market and property patent just get out of the line?
I think that by virtue of well, first, I'm an optimist. I've always been an optimist. I've heard so many times over the last 27 years from some of our own underwriters that there will never be a hard market again. And when I hear this it's music to my ears because that means we're cruising for bruises. So I think that things will get better and get at some point. It may not be this quarter, but might at some point. Numbers speak for themselves. If you lose money every year people just get disenchanted and just walk away from. It's happened early storms in Europe, 92 Andrews earthquake in California 94, terrorist attack Katrina, Rita and Wilma. I mean there's always changes and it's not I rattled by five or six of them. And you got to believe that the world is a dangerous place Meyer.
So I think something will happen and again losses don't necessarily change the market pricing, but perception of risk will and would. So maybe we're on this place where people say, you know what, why bother? And if that's the case, then that's in the demand for cat as protection is inelastic. So if supply shrinks then the demand will stay as is and pricing will therefore increase. So I'm an optimist. I'm not sure when it's going to happen, but I believe it will happen at some point.
No, I understand. That's exactly what I'm looking for. Thank you.
Our next question comes from Brian Meredith with UBS.
Yes, thanks. A couple quick questions here for you. First, just want to follow up on the comment about new business pricing better than renewal pricing. And I've heard that from other carriers. I'm just curious, when you actually go to book the margin on that new piece of business are you booking a better margin than perhaps that renewal piece of business? Or do you have to build in some level of cushion because it is new?
Well, it's that's a very good. I think the latter part is what we would do. But even we would also take a higher level of cushion margin of safety, if you will now reserving even in our renewal business. I think that we're reserving wise and loss ratio pick wise at Arch we tend to be more conservative and hope for the best. And hopefully, good news come down later. We're trying to figure out a way to have as much cushion as we can early on so that we're not surprised down the road. That's not changing. We say the same approach renewal or new business, right? Not much of a change.
Not much of a change. Got you. Second, just quick question here. Are we still seeing admitted market shed business to the ENS market? Or is that slowed?
That's slowed down a little bit, but it's still happening. We're not seeing a return back to the market quite yet. It's going to take a little bit longer, we think.
Got you. And then one kind of bigger, I guess, philosophical question for you. I think with MI business clearly you've demonstrated that it is not a big of a volatility businesses maybe some perceived just given the results we've seen through this recent crisis. If that is indeed the case, in the amount of cash that business throws off, because it's not a growth business I guess I see you guys using share buyback as your means of capital management, and I completely get that where your stocks trading now. But what about a dividend? In the end, maybe remind us about your philosophy with respect to a dividend?
Well, I mean, I'll take that, Brian, I think it's something we talked about with a board and between ourselves all the time. We had a pretty long discussion at our last board meeting on that. It's always on the table. I'd say right now I mean I think it's, I mean, the share buybacks that we went through this quarter were very attractive towards economics. We were very much I think they're easy to justify, justify sorry. But could we ever introduced a dividend? Certainly that's on the table. Not saying it's imminent, but it's something that we evaluate pretty much definitely regularity. And we'll keep looking at it.
Our next question comes from Elyse Greenspan with Wells Fargo.
Hi, thanks. Just one additional question. You guys spend time highlighting that session to Watford in the quarter, given that that transaction close. So my sense is, they're going to become more arched like in terms of the business that you're receiving to them versus prior to this transaction. So as we think about your 40% stake, can you just help us think about the earning stream there? Because I would think that as we go through next year that that could become a meaningful contributor to your earnings as the underwriting income of Watford pick up from what we're used to?
Yes. I think the 40% share would grow at an average sort of reinsurance market results. Why? Because we are writing business on the balance sheet of Watford. So you would expect that. I think that what you would also see is our collecting fees or for our efforts, a compensation for our efforts for Watford's that would be for the 100%. So I think that the overall return would be slightly better even though at least as you can appreciate with the accounting rules it might not show us such but I think that our results will be as good I would hope for if not better than our overall results. So it's definitely an a creative return generator for reinsurance platform. It's going to be hard to see.
And that should pick up within that other income line as we move through next year?
Yes, so a couple yes so 40%. Correct. The other income line is well, the fees are picked up by the reinsurance sector because it's for the underwriting services they provide to Watford. But you're correct in saying that the net equity picked up of the 40% that we own in Watford if you're modeling and what kind of combined ratio is it going to operate at, what kind of premium are you going to see in terms in the volume I would you're right. I mean, it's probably more and more over time, it's going to look more and more like archery, the reinsurance segment. The percentages we seed to Watford are not uniform across all our divisions, but directionally, I think that's a good way to think about it.
And the other thing, too, which has somewhat been an issue with Watford is the performance of the investments. And that has, that's being a little bit as being addressed as we speak. I think there's a process underway to reduce the volatility from the investment portfolio of investment strategy at Watford. So think of it more as that, yes, a more less volatile stream of income with more reliance on underwriting income and less on investment income. And hopefully that gets you in a good place to start modeling out how Watford is going to play out for us or the 40% for Arch going forward.
And then maybe I'll squeeze one last and I'm not sure if you provided an updated tax guidance. And so I missed it, if you can just let us know that. And then we've heard about some potential tax changes whether in the U.S. and also abroad in relation to Bermuda, any kind of prospective tax loss and just some of what we're hearing in the market and how that could impact Arch?
Yes. I'd say first of all that question your fourth quarter, we're still in the 9% to 11% kind of tax rate for Arch in the fourth quarter. For 2022 and beyond and Marc will chime in its way too early. Unfortunately, we track it we look at all developments very carefully we're on top of things. And the reality is they change daily. So it's very hard for us at this point, to give you any kind of guidance or any expectations and what we think 2022 is going to look like. We will be more than happy to have a good discussion on the next call. But for now, it's we feel it's just premature to because we really don't know.
At least just to make the point about daily, literally last night our tax director, or this morning just sent us like there's a new proposal on the Hill that brings back shield and then corrects other things and then dispenses of other areas of the tax proposal in [OECD]. So, again, a moving target. It's politics. We will react to it when we do, when we see it.
Our next question comes from Matthew Carletti with JMP Securities.
Thanks. Good morning. I just wanted to circle back on the discussion about kind of pandemic reserves and Marc, you're pretty clear on the P&C side in terms of get 95 good outcomes, but the 96 can change everything. How about MI? I mean it kind of follow up to Josh's line of questioning, like things look pretty conservative there. Can you help us with a little bit the timeline by which things can kind of continue to unfold well the timing by which we might see things unwind?
Well, let me start, I'd say we may see a little in the fourth quarter, but that will be, I don't think everything will be resolved. But I truly think that the first half of 22 is when you'll see most of the movement or the corrections and our assumptions and the link cure rates and mediation so I'd say we're going to start seeing some data as early as this month internally and the number of cures and people moving out of forbearance, but the way it's going to flow through our numbers, again, given some of the uncertainties that Marc talked about, I think will be first half of 22.
And the reason also Matt has to be said and understood that they had 18 months of forbearance worth when you get into forbearance earlier in 2020. And some of them went into forbearance, came out of forbearance and went back in again, but they still get to get to do to benefit from 18 months was forbearance. That's why some of them will coming out of there 18 months in fourth quarter, and many of them in the first and second quarter next. So it seems like some of them were able to get back current for four or five months and went back to forbearance program. That's what we have this lengthy adjustment period.
Alright. Thank you. That's very helpful. Thanks.
I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.
Thank you so much for being here. We're going to be, going from watching some golf, Francois and I and happy 20 years and have a good weekend everyone. Thank you.
Ladies and gentlemen thank you for participating in today's conference. This concludes the program. You may all disconnect.