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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 Q4 2019 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 starts with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.
Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available in the Company's website.
I would now like to introduce your host for today's conference, Mr. Marc Grandisson; and Mr. Francois Morin. Sirs, you may begin.
Thank you, Crystal, and good morning to you. Arch completed 2019 on strong footing as the mortgage insurance market remains healthy and our property and casualty operations are well positioned for the pricing improvements taking place in many areas of the market.
Our operating income produced an annualized return on common equity of 11.7% for the fourth quarter and 12% for the full year while book value per share grew 3.2% for the quarter and nearly 23% for the year. While property and casualty rates are increasing in several lines of business, we believe the market remains in a transitioning phase between soft and harder conditions. Given the uncertainty of current claim trends, we believe our industry needs further rate increases to provide a more clear risk reward propositions.
In this transitional environment, risk selection and thoughtful capital allocation remain critical to generating superior returns. As we discussed last quarter, strengthening market conditions are evident to us from both the rise in our submission activity and our ability to achieve significant rate increases. This location is ongoing at some industry participants de-risk by tightening underwriting standards and by actively managing down their exposures.
We believe that these conditions are likely to continue in the foreseeable future due to the continuing uncertainty regarding losses from the recent soft policy years. While there are some lines of business where the rise and loss costs can be tied to social inflation, in our review, a large component of the stress on the P&C industry's performance is due to prolong soft market conditions and optimistic loss picks over the last 3 to 4 policy years.
But reported capital levels are still high, combined ratios are still below 100. Therefore, the duration of the transition or hardening market is unpredictable. Within our insurance segments, conditions for growth improve throughout the year, as indicated by 29% growth in our fourth quarter 2019 net written premiums. About one quarter of our premium growth came from recent acquisitions, while 50% was created organically through new opportunities and the rest coming from rate improvements.
Following three years of elevated property losses in both the U.S. and internationally, property rate increases particularly E&S risks in cat exposed area in the U.S. are up more than 25%. We have also seen rate increases ranging from 10% to 20% in large commercial general liability and public company D&O policies. But as we discussed previously, rates are not rising in all lines and in some areas rates are not rising enough.
Switching now to our reinsurance business, pricing in that segment tends to follow primary insurance and we have observed some signs of discipline returning to the reinsurance market. In our facultative reinsurance business, we are seeing increasing submission levels and much improved pricing. Fac reinsurance has been a leading indicator of three market conditions historically and we liked the positive signal fac is giving us at this point.
On the treaty side, we are beginning to see modest improvements in terms and conditions including declines in ceding commissions ranging from 1 to 3 percentage points. Ceding commissions remain elevated however and are 500 bps above the level seen in the last hard market.
Focusing on the January 1st reinsurance renewals for a minute, rate increases in what is primarily a property cap reinsurance renewal period created a few opportunities for our reinsurance group, but we remain underweight cap risk. As a reminder, our self-imposed internal risk limitation is 25% of equity capital. At this point, our 1 and 2.50-year P&L stand up only 6% of equity capital.
Turning now to our mortgage insurance segment, Arch MI continues to perform well. As I mentioned earlier, the operating environment is characterized by strong credit quality and a healthy housing environment. In addition, lower interest rates led to strong new mortgage originations in the quarter. Accordingly, our new insurance written at Arch MI U.S. was strong at roughly 24 billion in the quarter.
Overall, our U.S. insurance in force was 287 billion at quarter end and the underwriting quality of recent originations remained very high. On a macro basis, lower interest rates and high employment have made housing more affordable. At the same time, demographic forces in the U.S. are creating a tailwind as millennials move into their prime household formation years.
Lower interest rates also led to greater refinancing activity in a quarter which explains the decline in our persistency rate in the fourth quarter down to 76%. From a historical perspective, this level remains high and along with good mortgage origination activity, supported growth in our insurance enforce in the quarter.
With respect to our investment operations, interest rates have returned to historically low levels as in our underwriting approach, we have maintained our focus on risk adjusted total return which contributed to our growth in book value per share in this quarter and the year.
In summary, Arch is positioned following years or deemphasizing the most commoditized and soft business lines in property casualty market is favorable. We have the human and financial capital to grow should the market continue its favorable trajectory into 2020.
And with that, I'll hand over the call to Francois.
Thank you, Mark, and good morning to all. Before I give you some comments and observations on our results for the fourth quarter, I wanted to remind you that consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results executing the other segments, i.e. the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford.
After-tax operating income for the quarter was $308.4 million, which translates to an annualized 11.7% operating return on average common equity and $0.74 per share. Book value per share grew to $26.42 at December 31st, a 3.2% increase from last quarter and a 22.8% increase from one year ago. This result reflects the effective strong contributions from both our underwriting and investment operations.
Starting with underwriting results, losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $30.4 million or 2.2 combined ratio points, compared to 9.7 combined ratio points in the fourth quarter of 2018. These losses impacted both our insurance and reinsurance segments and were primarily due to typhoon Hagibis and a series of smaller events.
As for prior period net loss reserves development, we recognized $54.7 million of favorable developments in the fourth quarter, net of related adjustments, or 4.0 combined ratio points, compared to 6.1 combined ratio points in the fourth quarter of 2018. All three of our segments experienced favorable developments at $2.8 million, $19.1 million and $32.8 million for the insurance, reinsurance and mortgage segments respectively.
We had solid net written premium growth in the insurance segment of 28.7% over the same quarter one year ago. The insurance segments accident quarter combined ratio excluding cabs was 101.6% higher by 330 basis points from the same period one year ago. Approximately 220 basis points of the difference is due to an elevated level of large attritional claims in the quarter, primarily from our surety units, which can experience some volatility from quarter-to-quarter. The balance is primarily due to a higher expense ratio, driven by the investments we are making in the business and the integration of our UK regional book and other smaller acquisitions.
Now moving onto our reinsurance operations where we had a relatively stable quarter. Net premium growth was at 4.3% from the same quarter one year ago, and the accident quarter combined ratio excluding caps stood at 92.3% compared to 96.2% on the same basis one year ago. The different is mostly attributable to the presence of a large attritional casualty loss arising from the California wildfires in the same quarter one year ago. Our expense ratio remained essentially unchanged at 26.9%.
The mortgage segments accident quarter combined ratio improved by 200 basis points from the fourth quarter of last year, as a result of the continued strong underlying performance of the book, particularly within our U.S. primary MI operations. The calendar quarter loss ratio of 0.9% is lowered by 120 basis points than the result recorded in the same quarter one year ago, mostly as a result of better than expected claim experience.
The benefit of the loss ratio from current year favorable development was 510 basis points in addition to the 940 basis points related to prior years. The expense ratio was 20.7% consistent within the results in the same period one year ago. Total investment return for the quarter was a positive 177 basis points on a U.S. dollar basis as our high quality portfolio continue to perform well. For the 12-month period, our portfolio returns 7.3% an excellent result driven by particularly strong returns across our fixed income and equity investments.
The duration of our investment portfolio December 31st, was down slightly to 3.40 years from 3.64 years at September 30th, it was overweight relative to our target allocation, as we continue to expect a lower for longer global interest rate environment. The corporate effective tax rate in the quarter on pre-tax operating income was 6.9% and reflects the geography mix of our pre-tax income and a 30 basis point benefit from discrete tax items in the quarter.
The 2019 fourth quarter effective tax rate on operating income includes an adjustment to interim period taxes recorded at an annualized rate. This adjustments increase the Company's after tax results on pre-tax operating income available to Arch common shareholders by 12.4 million or $0.03 per share. As always, the effective tax rates could vary depending on the level and location of loss or income and varying tax rates in each jurisdiction.
Joining briefly to risk management with the recent improvements in catastrophe pricing, we have increased our natural cap PML to 612 million as of January 1, which at slightly more than 6% of tangible common equity on the net basis remains well below our internal limits at the single event 1 and 2.50-year return levels. This change demonstrates our ability to deploy incrementally more capital in an improving market to opportunities that offer adequate returns on an expected basis.
In our mortgage segments, as mentioned on our prior earnings call, we completed our 10th Bellemeade transaction in the fourth quarter, with covers of 577 million. As of year-end 2019, the enforced Bellemeade structures provide aggregate reinsurance coverage of approximately 3.3 billion.
With respect to capital management, we did not repurchase shares this quarter. Our remaining authorization which expires in December 2021 stood at 1 billion at December 31st. Our debt to total capital ratio stood at 13.1% at quarter end and debt plus preferred to total capital ratio was 19%, down 350 basis points from year-end 2018.
Finally, as you know, we closed on the Barbican acquisition in November of last year. The integration of their platform is well underway. For the 2020 calendar year, we expect to incur approximately 65 million of intangible amortization across all acquisitions we have made prior to December 31, 2019.
With these introductory comments, we are now prepared to take your questions.
[Operator Instructions] And our first question comes from Yaron Kinar from Goldman Sachs. Your line is open.
So my first question just goes to growth in the insurance segment, if I heard your comments correctly, it sounds like you're so lukewarm in terms of the market opportunities and the rate environment and rate adequacy. And yet, I think even excluding the acquisitions, you grew at a good 20% clip or so. I guess where are you seeing the opportunities? And if you were to become more constructive on market conditions, where do you see that growth of gapping?
The first part is, I think, we're lukewarm in the sense of saying, it is a full on hard markets. We just want to impress upon everyone that, when the early stages that really changes then we don't know how long that's going to last. And I also make comments about the fact of the industry has an all time capital high, and still printing very reasonable combined ratio numbers. So I just want to make the point that it's not across all lines of business.
Having said this, there is a growth, as you see us experience and go through for the year and certainly in the fourth quarter are even the areas where market coming back to our pricing levels and return expectations. So, we had deemphasized those lines of business for quite a while actually as a softer year. We're eating into our on production. And I think of late, we've seen a resurgence of submissions, and we're able to hit and get our pricing and return.
So in the areas where we're growing, I would say that it is definitely an improving market and improving such that we believe we're clearing some of the lost trend or loss cost trend concerns that one may have. So, I also want to remind that we had not grown as much as the market would have, probably would have indicated over the last year.
So, this is hyper -- no, this is good group on a lower number. For instance on the D&O side, our premium written was about half of what it was last year versus five years ago. So, you don't need much of an increase to really make a dent in the overall price increase.
And the second question is. We can grow a lot. And as we saw, you asked, Yaron, whether we can grow based on the conditions. If conditions continue on and we're seeing right now still getting something very, very good, I think we can still grow a fair amount.
I think we have been -- our guys, our people have been very busy even in those softer years, but I do believe that we have extra capacity and an appetite to write more, quite a bit more, if it happens. How much will depend and be dictated like overall rate level in 2020.
It sounds like that premium growth could accelerate in the right market conditions.
That is a fair statement.
Okay. And do you have any sense where you're booking the current, the new business coming on relative to the overall portfolio in insurance, like with the adequacy of returns there is?
Yes, so we haven't changed much of a lost pick. Now, I want to put things in perspective as well is that, the rate changes that have taken place that we're talking about really started to be, we believe enough above the lost cost trend since the middle of 2019. So, it's a bit early and premature to make any changes to your booking of loss ratio. You look at on an accident year basis.
Plus, things could develop on historic, history, all the action years prior to 2019. So, it's premature to make any comment and to lost pick as we speak. Frankly, lost pick, if they ought to improve and we believe everything else being equal, they should improve over the next couple of years. They will take 6 or 7 quarters to really see good tractions and see some movement there.
And our next question comes from Jimmy Bhullar from JP Morgan. Your line is open.
First, I just had a question on the tax rate. It improved the lost '18 to '19 and I think it was lower than what you had expected as well. What's driven that? Is it just the geographic make ups of income? And what's your expectation or sort of likely range for 2020?
Well, yes, a couple of points here. I think, it was a bit lower than what we had, I guess, given as a range earlier in 2019. There was a couple of discrete items that played out throughout the year, which helped out in terms of publishing the final tax rates. So when I just -- I took some of those, I look back and without these adjustments which is really how we think about when we give you a range, the 2018 tax rate was 11.2. This year, it was 10.9. So, very close.
Ultimately, we had some additional benefits that brought it down to 10.4 for the year. So, yes, I mean, as you know, tax rate is very much a -- it's hard to have a lot of precision on the tax rate because we just don't know where the losses are going to be before they happen. So whether there's a gap favorable or unfavorable developments on prior year was et cetera.
So looking at 2020, I'd say, we're very comfortable saying that we're going to probably be in the same range, maybe, if you want to expand, maybe to try to make sure we're in the range, maybe 10 to 14. Last year, we had 11 to 14, so, maybe there's potentially could be a bit lower, but I think it's a bit early again, I mean they were early days of 2020 and hopefully that that's enough for you to update the models.
And then on the MI business, obviously, your overall margins have been very strong and same goes for peers as well. And a lot of that strong results on the legacy block, but if you look at new business ROE, are those in the sort of double-digit range? Or is this more sort of a single-digit ROE type business in terms of new sales? And I realized, it will take a while for your overall leadership towards your business ROE.
I am almost choked out now. We're solidly well in the double-digit returns still in the market. It's still very good quality. I would even argue to the risk of the later, last half of the year, actually improved so much for the industry, not only for us. And I think that has to do with Fannie and Freddie so putting bit more constraints on the risk layering in the business, so no, still very, very healthy returns, very healthy.
And then just lastly on any comments on the 1-1 renewals and specifically what they better worse than your expectations? And anything, any sort of views on the sort of upcoming 4-1 renewals in midyear?
The 1-1 renewals were in continuation might you have some rate increase in the third quarter, broadly in industry. Fourth quarter was a bit better. The first quarter lined up to be, yet better yet, so yes, better rate environment at 1-1 clearly for the first quarter. We don't know what it means for 4-1. I am done prognosticating what the future will hold. It's the low of supply demand and perception of relative risk is a market based thing. So, sometimes, I think markets should go up and if it doesn't and sometimes it goes on, it's all over the place. So, it's too early to tell where 4-1 and 7-1 will end up, but clearly if the momentum that 1-1 continues, no, it's going to be -- it's an improving market, clearly.
Our next question comes from Elyse Greenspan from Wells Fargo. You line is open.
My first question is, I guess on 1-1 a little bit. We've heard about the retrocessional market being pretty strong this year. Has Arch written more of that business? And just how did you observe on what went on in the retro market at 1-1? Is that a sign of potentially better things to come? Or would you think it would be for some of the 4-1 and 6-1 renewals?
Yes, I mean, you see that a little bit in our cap P&L. They went up in large portion because of additional retro business that we wrote that I would say was very much opportunistic. So whether that sticks and whether that means tells us something about 4-1s or 6-1s, we just don't know. But for sure, we saw some definite, some good opportunities in the specifically in the retro space at 1-1 that we were happy capital to be able to deploy and take advantage of the opportunities.
And then, with the insurance book, I know you guys in the past have talking about that expense ratio being elevated just due to the accounting and earn in from some of the more recent deals you have done. I'm assuming that there was still somewhat of an impact on that in the fourth quarter. And can you just kind of give us a sense to think about, if you have far between coming on how we should think about the expense ratio within the insurance book in 2020?
So, as I said in my remarks, I think the expense ratio was roughly call it, a 130 bps or so was, in this quarter was the result of the effectively bringing on online, the UK regional book. So, we're now a year into it. So everything else being equal 2020, we should see the premium being earned out and the expense ratio coming down.
The new twist is Barbican and as Lloyd market in particular has a slightly higher elevated expense ratio, which we think is. There's an offsetting benefits and the loss ratio, but I mean, to give you a bit of directionally a bit more we think it's only 2020 expense ratio is going to be pressures, we think it should be right around where it was for 2019. It's not going to improve materially, I don't think it's going to get worse, because we're going to see some benefits, but I think it should be about at the same level.
And then lastly on the insurance pricing, Marc, you seem to be pretty positive especially relative to where your comments have been for most of 2019. And it's a developing market and I guess every market seems to be different and no capital, obviously, a lot more robust. And if you don't back past up turns. Is there any running market, like, if you think back to or just history? Does this compared to the early 2000s, this compared to kind of 2013? Is there a market that this feels similar to when we can kind of think about pricing improvement? Or does it feel because of the social inflation issue may be different than any of these past markets?
It's different in terms of the health of the industry and the combined ratio as I mentioned us for sure. So that makes it a very unique opportunity. But I do believe we have major players pulling capacity out. So even though it's printed capacity, effectively used capacity is definitely lower. In the overall market specifically in the larger risk and some of the players and we've talking about them being clearly one of them.
I think I would tend to think it looks as field -- and more of the 2005 after Katrina, Rita and Wilma because capital were still plenty, people pay that claims, a couple of companies have some issues but by and large, the pricing went up and this was larger as a result of perceived risk. And I think this is what's going on. I think people as an industry, this uncertainty about around socialization is creating a lot of uneasiness and pushes us to want to charge more to make sure we cover as much of the eventuality as we can.
So that's sort of what I would say the proceeds. The heightened risk perceived is higher, it's not a bankruptcy driven, reinsurance driven, necessarily market term. So, it's a blend of a few of those. It's hard every month, I guess you live and learn and experience new things as you go. But that's what I would summarize it to be.
Thank you. And our next question comes from Mike Zaremski from Credit Suisse. Your line is open.
First question on U.S. MI, one of your competitors this morning spoke to decline in -- expected decline in premium yields in 2020. Any color there whether you expect similar dynamic given on pricing on a new business might be a little tighter versus using risk-based pricing?
I think that the phenomenon that's going on as a result of refinancing, clearly points you to our lower price and lower premium rate and that's because the risk is less. A lot of the refinancing we saw in the last two quarters and accelerated in the fourth quarter is people sort of refinancing because the interest rates are just that much better and it makes sense for them to refinance.
By doing so, the LTV that was originally put on a book of business, two or three years ago, is actually lower, which is lowering the risk. And everything else being equal, it also has a knock on effect on the DTI right on the debt-to-service, to income servicing and improves them as well. So that risk that you -- the same people, same house, same environment, but -- and there's also there was also some house price appreciation. So you get all these things going on. This is a not as risky proposition now as I just said it was two or three years ago.
So would lend itself to the pricing should be indicate the lower pricing because of all these various moving parts. But it doesn't either return does change. And that's really the key that we want to share with you guys, is top-line in MI I is really, really hard to pin down or singles as cancellations. And it's very hard to see how it all evolved.
But in the what we care about and what we've seen is a return characteristics and the things that will be financed which one could say is underlying as somewhat decrease in price and premium rate is actually just top-line phenomenon is not a return phenomenon. The returns are still very healthy. And that's what we're actually focusing on.
Okay, that's, that's helpful. Next, just kind of broad question about the reinsurance segments. If I kind a look at the combined ratio, the last couple years has been the mid-90s. I think that translates into a single digit ROE, but you can please correct me, if that's not right? And I guess catastrophe levels don't appear to have been materially higher than expected, either. So, just kind of thinking about the future, is it largely reflective of just simply the competitive operating environments? And I guess hopefully there's continued momentum it's doesn't 20 to improve the ROE profile of the segment?
So, first, you're wrong, it's not in single-digit. So let me clear. I think this is much burden here. I think that the -- our reinforced portfolio is not a, is a different one and then just a mix shift over the last two or three years. We were a lot more -- we're a lot more property cat on probably 10 to 12 years ago. So, there's always moving part in the reinsurance platform. And I would say that our play for instance in motor in Europe will by definition lead us to a higher carbon ratio, but the returns are feel pretty, you know, very well in excess or well in the range of where we would want them to be to write that business.
So, I think your combined ratio in reinsurance is just a reflection of this constant calling, pulling, pushing through realigning capital within the various lines of business. And I think what you're seeing is a combined ratio that is just reflective of what we see in terms of opportunities in terms of returns I can tell you for certain that our reinsurance group has a very, very ambitious return on equity expectation when you would like the business and that's what every underwriting decision is based upon not to not a combined ratio.
Okay, got it. I was wrong that there's your portfolio that host probably less capital than I was assuming then again versus some peers.
But the one thing I'll add to that, Mike, just quickly on the returns and that's really, it's all about our cycle management where our premium volumes went down quite a lot over the last number of years on the reinsurance segment. If the market gets healthier, which it's showing some signs of that, I think I don't think our returns will necessarily get that much better, but I think we'll be able to have a bit more growth on the top line, expand the platform and see more opportunities.
And our next question comes from Brian Meredith from UBS. Your line is open.
First, just on the insurance segment, you talked about how Barbican is going to impact your expense ratio. Will it have any impact in underlying loss ratio? And I guess just to add to that, is it going to prevent you from maybe achieving an underlying combined ratio below 100 in that the insurance area in 2020?
Well, Barbican is in the big picture doesn't really move the needle, it's brings a lot of nice trace with it. It has some key businesses that we like. It has also gives us -- it makes us more relevant in London. But the one thing that you should be aware of is, a lot of the capacity that Barbican is deploying is actually third-party capital. So that doesn't stick to our ribs. In terms of the combined ratio, yes, we'll have some benefits on the fees and et cetera.
But, big picture, Barbican on a net basis wrote about $125 million of premium last year in 2019, split roughly 50-50 between insurance and reinsurance, whether that business, we're certainly going to shut down some lines, we're going to do some re-underwriting along the way. So, once you do a bit of math on it, you'll quickly hopefully appreciate that, for these are segment on its own, I mean, Barbican is not going to be a big factor in how 2020 plays out in to the combined ratio.
On that note, to François point, realistically, Brian, we need to focus on and as we are right now growing and seizing the opportunities as it presented into our insurance segments. And if anything that will bring us to the combined ratio that will lead us to 12-ish our return on equity, I think it's going to come through to the current opportunity that we see in our ability to see upon it, which is no plenty.
So I guess what you're saying is that it could be the underlying combined ratio kind of dropping below 100 and getting to those returns. We may not see it here in 2020 but it's 2021 or whatever is the opportunities for you to come in?
That's right. If you look, Brian, the rates really move starting middle of last year and a lot of stuff is being renewed still in the new "rate environment". So, we have to write the business first, you have to earn it. So, 2020 and 21, you're exactly right, you're exactly where we are. That's why it takes a while to see the good deeds being reflected. The same way takes a long time for bad deeds to get reflected, may I add.
And then other the reinsurance, Marc, I'm just curious. I know a lot of the businesses you write is quota share type business. How much is your reinsurance businesses, political those 2 areas where you're seeing a significant amount of price increase be it E&S, certain property lines and then you might see a good benefit from the subject premium pricing coming through?
I think the beautiful thing about our friends on the reinsurance group is that they go anywhere kind of company. They can do anything, go anywhere, do anything. So, in general, they have access and are able to see the deals that are E&S, casualty property, whatever. So there, we have it. We've been around for 18 years. We've written a lot of reinsurance, we're still a billion and a half plus. We're not as smaller the grand scheme of things, but we still have a lot of selling points in London and Zurich, in the U.S. and Bermuda. So, we're able to grow, if a growth opportunities are there. There's no issue in whatsoever.
But what about your subject premium basis that are already in the books. So are you seeing kind of growth there?
I think by virtue of the improvement used for point, we don't give guidance, obviously, as you know. Nice try. If rates keep on increasing and keep at the level they are at the healthy, no positive rate. And if it keeps into 2020, 2021, we will have a more premium, clearly. I'm not sure it's what you asking for not the answer the right question. So I'm trying to give them the right issue.
I think I'm just, what I trying to get at is that I get the premium growth situation, right. And then it's more the underlying obviously business, is obviously seeing improved price too in write and rate. Just like you're seeing in your own business and just would impact that could potentially have on your reinsurance margins?
Of course, yes, you're right. We're seeing through the full year share. The newer phenomenon is anecdotal. It just seems to be starting. Even the excess of loss pricing now is taking up in speed. So that's also encouraging. So we may have some, at your point, you're right. We're not a huge excess of loss at least in a traditional, general liability lines and professional lines. You're right. We're benefiting from our quarter share participants and company. Yes, we are.
And our next question comes from Meyer Shields from KBW. Your line is open.
I had a couple of small questions to start off with. First, are there any plans to change the amount of mortgage insurance that's retained on U.S. paper versus ceded to Bermuda in 2020 versus 2019?
No plans at this point. I mean, as you know, it's all about we try to have as much capital as we came in offshore just because it's a better domicile, gives us more flexibility. But at this point and as you know, there's tax implications, we don't want to trip the BTAX issue. So, at this point, no plans to change anything.
Okay, perfect. Second, I know in the past, you've talked about capital deployment opportunities that ended up at Barbican and in the UK. And I was wondering, if you could give us a sense as to what you're seeing now in the pipeline and some other potential opportunities?
I think we're seeing a bit less. I think people are busy more looking at their stuff and trying to improve their book of business. I think there's really a more of an inward focus. I think, M&A, we see all of them or we believe we see most of the transactions that have been talked about. I think we were a bit more open and we're able to strike some transactions over the last year because the pricing was right and the opportunity was there. But yes -- no, we don't see acceleration or somewhere to decreased activity. But I think just as a result of this current marketplace being a bit more dislocated, that's really what I would say.
Okay, and then that brings me to third question. I'm wondering whether you talked about how combined ratios are still being reported as profitable but there's also the soft market impact, which at least I would interpret as suggesting that maybe the real from our initial aren't as good. Does that delta look any different now than it is before past hard or hardening market?
That's a really good question, Meyer. I don't know the answer this. I haven't looked at the numbers of the end of '99-2000. It doesn't seem -- I'll tell you my gut feeling, right now, it doesn't feel to be as much of a delta. And also in terms of what impact it could have on a capital market, if we were more levered as an industry '99-2000. We're running a 1.3-1.4 premium to surplus. Now we're point 0.7-0.65-0.8, whatever. So a lot less than ever, so probably more absorbable but at the same time, there's this investment income.
So if you look at if you think that the market changes as a result of being cash flow negative or having to not having recurring income then I think that it's we're probably in a similar position, meaning that the loss -- the losses or if you combine the underwriting income with the negative at the end of 99with the investment income, which was very positive I think we're probably in combination in a similar place. We have higher capital, so more cushion to absorb it.
Thank you. Our next question comes from Ryan Tunis from Autonomous Research. Your line is open.
Hey thanks. I just had a couple. I guess first one, thinking about 2020 is a potential year, given what's happening from a pricing standpoint for margin improvements for the industry. I understand why that could be challenging for some, but I think when I look at our relative to competitors. There is more of a short tail mix, whether it's in primary insurance also facultative re. So, I guess, Marc, if you just comment on why isn't there more constructors near-term outlook for margin improvement, given you're clearly getting rate, in some case, rate on rate in some these property lines where there does seem to be kind of a layup argument for margin expansion?
So let me collect you quickly, Ryan, on insurance side. We're 70% 75% liability, in terms of premium written. So that was sort of sort of dampens if you will, the acceleration or the recognition of the improvements in terms and conditions. So make us a bit more cautious. So that's something you need to bear in mind. This is only insurance segment.
And again, on the insurance segment, even speaking to the short tail is still does take a while to get through, again, like I said, significant improvement rate should we took place starting middle-ish of 2019, so it does still take a while to recognize and really see the earning coming through the earned premium. It's a combination of for other underwriting years.
On the reinsurance side, I'm trying to think of it, I think it's also -- there's a fair amount of liability as well in there, right, François? There is also a fair amount of property, although property, as you, as we mentioned, is also deleverage on the property cap, we did increase the other property.
We're running a lot more on the non-cap itself. This is more opportunistic and that you're right. We should probably see whether we were, what margin expansion that was and we needed there, we should see it, but again, it was written last third or fourth quarter so will come again over the next 12 months. So it takes a while, you have to be patience is a virtue in our industry.
Understood. And then my second one is just around I think we've, it seems like we've heard the last from the reinsurers about the casualty environment and loan losses coming in and maybe you could just talk about your expense ratio, what do you seeing on the reinsurance while compare to the claims activity on the casualty side versus primary? This is a real lag of the claims starting to happen or is that's probably still on the comment any theory as to whether this how we might see more paid losses I guess in the reinsurance side?
It's a very, very good question. I think when we do have a tale of two cities here. I think that our insurance, our senior claims, of course, we have the advantage or the luxury to have an insurance company that's on top of claims and no, and participants the marketplace. When we look at what information our reinsurance folks are getting, there is clearly a lack. I'm not saying this nothing is informed or whatnot, but there was clearly a lag.
And it's been there forever. This is not a new phenomenon online, this has been going on for years and for as long as we've been I've been in the business, it's been there and it was there before my time. So, there's always information in symmetry and information delay. By the time it gets to the insurance company, they have to look at this evaluate, book or reserve or not book the reserve and then they in turn, inform their reinsurance partners.
On the quarter share, it's a little bit easier because you're able to do more claims review and beyond to be side-by-side with them. You can also compare whether we have other of our clients from similar risks and whatnot on excess of loss, as you could expect, it's a little bit more difficult. There is a further lag on that one as well.
So, we clearly have a lag in recognition and our reinsurance company has been really, really adamant and proactive and try to recognize some of the losses that may not be enough, enough reported. And that's also what made us be a bit more careful in our current ratings or lack thereof in the liability space, but there's clearly a lag on the reinsurance side.
And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Marc Grandisson for any closing remarks.
Thank you, everyone. Happy Valentine's Day. Make it a Happy Valentine's weekend, if you have a chance. Talk to you next quarter.
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.