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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 Arch Capital Group's Fourth Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please [Operator Instruction] on your touchtone telephone. As a reminder, this conference call is being recorded. Before the company get 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.
So 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. 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 fact, 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 by 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.
Thanks. Atif. Good morning and welcome to our fourth quarter earnings call. We ended a good year. Here with a great quarter on the year Arch generated a return on net income of 16.7%. And importantly, book value per common share grew by 10.7% with net earnings per share of $5.23. We accomplished these results despite elevated CAT activity, and a short-term effect, that substantial share repurchases had on our book value per share. Our ability to effectively allocate capital also contributed to our 2021 results. Whether opportunistically investing more resources into the most profitable pockets of our business or buying back $1.2 billion worth of our common shares fully, 7.7% of the shares outstanding at the start of the year.
We remain committed to a capital management strategy that creates value for shareholders. I'd like to begin by sharing some highlights from our operating units. In our P&C insurance segment, net written premium grew 24% and earned premium grew 34% over the fourth quarter of 2020 as we earned in the rate increases of the past several quarters. Growth occurred across many lines with profession lines and travel exhibiting the strongest advances. Overall submission activity and rate momentum remained healthy and rate increases were above loss trend. A change in business mix led to a slightly higher acquisition expense in the quarter.
However, we believe that this increase belies the underlying return potential of the segment. More accurately, it is a reflection of the insurance group's outstanding job or positioning itself to act on the better opportunities available in today's market. Turning now to reinsurance, our shareholders continue to benefit from the extraordinary talents of this group, which grew gross written premium by 88% and net written premium by nearly 45% from a year-ago. On haul, the reinsurance group grew in nearly every line, a reflection of our diversified specialty mix of business and our larger participation in quota share reinsurance, which allows us to participate in the improved premium rates of [Indiscernible] more directly.
Briefly on renewals at January 1st, while property cut raise were up broadly, the increases were not enough for us to deploy more capital into our peak zones. However, we found many opportunities to grow in the other 93% of our reinsurance business, that its specialty in nature, including property ex-cat. Finally, onto the mortgage segment, which again delivered excellent underwriting results, even as written premiums declined in the quarter. Seasonally, the fourth quarter, as you know, it's lower for mortgage originations and rising interest rates further depressed refinance activity reducing new insurance rhythm. However, our insurance in fourth, the ultimate driver of earnings, still grew modestly in the quarter mainly due to the lower refinancing activity.
Credit conditions remain excellent in the U.S. with a strong housing market and demand for housing continuing to exceed supply. As most of you already know, home price appreciation remains robust across most of the country. This is a net positive for mortgage insurers as increasing borrower equity ultimately leads to a lower risk of default. Competition in this sector remains robust but stable, and we believe that the better credit quality of our recent originations compensates for marginally lower premium yields. We continue to focus on a more stable returns available in higher credit quality business, instead of broadly chasing top-line growth, a luxury afforded to us by our diversified model.
Turning to the fourth leg of our stool, investment income contributions were up materially for the year, primarily due to alternative investments accounted under the equity method. These investments are primarily fixed income in nature, but because of the structure of our investments, their contributions are excluded from net investment income and our definition of operating income. Notwithstanding, these investments contributed $366 million or $0.92 per share for the full year. Over the past five-years below the line investment returns have added between 75 to 125 bps to our net ROE. But taking a step back to get more of a big picture view, we like the way our businesses are currently positioned.
Within our P&C segments, we believe that P&C pricing and returns have more room to grow in this part of the cycle, and in the mortgage segment, insurance in force is benefiting from both solid credit conditions and good house price appreciation. Underwriting income for our P&C insurance and reinsurance segments expanded significantly in the fourth quarter. It's worth noting that if we were to include components of investment income that relate to the flow-generation farm underwriting. P&C [Indiscernible] contribution to arches earnings were roughly in balance. We believe that this balance improves the risk adjusted returns for our shareholders.
Our corporate culture of being patient in soft markets while maintaining an agile mindset is a key to our success and allows us to seize opportunity when the odds for success are more in our favor because different sectors have their own cycles, our disciplined, defensive underwriting during the softer parts of the cycles is what has enabled us to grow faster than many of our peers in the current environment. We have begun to read the benefits of the strong defensive posture we maintained from 2016 through 2019. The Winter Olympics are underway, and I found an analogy to our business in a somewhat unexpected place. The most exquisite and exciting game of Curling.
You may or may not be aware that Curling has been dubbed, chess on ice. And like insurance, it's much more strategic than the uninformed may realize. Curling is played over ten long ENS or rounds. A defensive strategy is most common, patiently waiting for an opening to pivot to offense. Unfortunately, defending is not exciting. It's about minimizing your opponent scoring opportunities and avoiding mistakes. But like insurance, patience is often handsomely rewarded because when her opponent makes an error, the SKIP knows that now is the time to pounce and all of a sudden, patient is out-the-door and action is in.
Most games are won in that one crucial reversal of fortune. That's how we play the insurance cycle. One year at a time, patiently waiting for the market to give us that opening. And once we see it, we're all-in, just like the last 2.5 years and counting. Don't ever let anyone tell you that curling or insurance are not exciting. For 20 years, we've been committed to taking the long-term view of the insurance cycle being thoughtful and balanced with our capital management strategy and differentiating ourselves by being committed to a specialty model, all with the aim of enhancing shareholder value over the long term. Although every year is different and markets aren't always predictable, we've demonstrated that we can succeed in any market. So we're looking forward to what 2022 has in store for us. Francois?
Thank you Marc. And good morning to all. Thanks for joining us today. As Marc shared earlier, our after-tax operating income for the quarter was $493.3 million or $1.27 per share, resulting in an annualized 15.6% operating return on average, common equity. Book value per share increase to $33.56 at December 31 up 3.5% in the quarter. For the year, our operating return on equity stood at 11.5% while our net return on equity was 16.7%, excellent results in deed. In the insurance segment, net written premium grew 23.7% over the same quarter one year ago. And the accident quarter combined ratio excluding [Indiscernible] was 91.2%, lower by approximately 240 basis points from the same period one year ago.
The growth was particularly strong in North America, where a combination of new business opportunities and rate increases supported this profitable growth. One item to note this quarter for the insurance segment relates to the acquisition expense ratio, which was higher than in both the prior quarter and the same quarter one year ago. As we mentioned in the earnings release, some of this increase is related to premium growth in lines of business with higher acquisition costs such as travel. But it also reflects increased contingent commission accruals on profitable business, as well as lower ceded premiums in lines with higher ceding commission offsets. As we have said before, our focus remains on the returns we are able to generate from all our businesses, and we remain positive on the current pricing environment and the opportunities that should be available to us in 2022.
For the reinsurance segment, growth in net written premium remain strong at 44.5% on a quarter-over-quarter basis. The gross [Indiscernible] the growth was driven by increases in our casualty property other than property catastrophe and other specialty lines where new business opportunities, strong rate increases, and growth in new accounts helped increase the top line. For the full 2021 year, the ex-cat accident year combined ratio was 84.4%, improving by approximately 160 basis points over the 2020 year, a reflection of the underwriting conditions we have seen in most of the lines we write. Losses from 2021 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $72.3 million or 3.5 combined ratio points compared to 9.4 combined ratio points in the fourth quarter of 2020.
The losses came from a combination of fourth-quarter events including the December U.S. tornadoes, and other minor global events, as well as some development on events that occurred earlier in the year. Our estimate of our ultimate exposure to COVID related claims decreased by approximately $3 million during the quarter. We currently hold approximately $195 million in reserves for this exposure. Two-thirds of which are recorded either as ACRS are IBNR. Our mortgage segment had an excellent quarter with combined ratio of 11.7%, due in part to favorable prior-year development of $72.9 million.
The decrease in net premiums earned on a sequential basis was attributable to a combination of higher levels of premium ceded, a lower level of earnings from single premium policy terminations, and lower U.S. primary mortgage insurance monthly premiums, due to lower premium yields from recent originations, which were of excellent credit quality. While approximately two-thirds of the favorable clean development came from [Indiscernible], related to better than expected cure activity and recoveries on second lien loans. We also saw favorable prior year development across our other mortgage units includes our CRT portfolio and our international MI operations. Consistent with historical practice, we maintain a prudent approach and setting loss reserves, especially in light of the uncertainty we are facing with borrowers exiting forbearance programs and moratoriums on foreclosures.
The delinquency rate for our US MI book came in at 2.36% at the end of the quarter, more than 50% lower than the peak we observed at the end of the second quarter of 2020. Production levels were down from last quarter, certainly a typical outcome given the seasonality in new purchases, and also partially, as a result of the lower level of refinance activity due to higher interest rates. Offsetting lower origination activity in the quarter is the improving persistency rate now at 62.4%. We expect persistency to keep improving throughout 2022 on the heels of lower refinance activity. This goes well for our insurance in force portfolio. And accordingly, the returns we can generate on our mortgage business.
Income from operating affiliates stood at 40.6 million. Again, an excellent result primarily as a result of contributions from Coface and summer's reef. We are pleased with the returns these investments have generated for us so far. Total investment return for our investment portfolio was 39 basis points on a US dollar basis for the quarter. And net investment income was $90.5 million this quarter up slightly, in part due to slightly higher dividends on equity investments. The duration of our portfolio remains low at 2.7 years at the end of the quarter, basically unchanged from last quarter and reflecting our internal view of the risk and return trade-offs in the fixed income markets. Alternative investments representing just under 15% of our total portfolio performed well this year, returning 12.6%.
The portfolio we have constructed has a slightly heavier bent towards debt strategies and should produce we believe, returns that are relatively less volatile over time given the level of diversification across sectors and geographies. Amortization of intangibles was $33.1 million up sequentially as a result of the acquisition of Westpac LMI and Somerset Bridge Group Limited which were completed in the third quarter. For your modeling purposes, we are currently forecasting an amortization expense of $110 million for the full 2022 year which is expected to be recognized evenly throughout the year. The effective tax rate on pre -tax operating income was 4.7% in the quarter, reflecting the geography mix of our pre -tax income and a 2% benefit from discrete tax items in the quarter.
That discrete tax items in the quarter primarily relate to a partial release in evaluation allowance on certain international deferred tax assets. For 2022, we would expect our tax rate on pre -tax operating income to be in the 8% to 10% range based on current tax laws. Turning briefly to risk management, our natural account PML on a net basis stood at $748 million as of January 1 or 5.9% of tangible common equity which remains well below our internal limit at the single event 1250 year return level. Our peak zone PML is currently in the Northeast U.S. On the capital front, we repurchased approximately 8.7 million common shares at an aggregate cost of $362.1 million in the fourth quarter.
And as Mark mentioned, we repurchased almost 31.5 million shares at an average price of $39.20 in 2021. Our remaining share repurchase authorization currently stands at $1.18 billion. Finally, I wanted to take a quick moment to thank over our over 5,000 colleagues around the globe in what has certainly been a challenging period. Without their ongoing commitment to Arch and its constituents, we certainly won't have been able to generate and report record earnings today as we closed the books on our 20th year. Your efforts and dedication are truly appreciated. With these introductory comments, we are now prepared to take your questions.
Thank you if you have a question at this time, [Operator instructions]. Our first question comes from the line of Elyse Greenspan of Wells Fargo. Your line is open.
Thanks. Good morning. My first question follows up on just some of Francois concluding comments going to capital management. Recognizing where your stock is today, can we just get some updated thoughts at how you guys think about share repurchase at these levels? And if at some point the valuation continues to expand, would you consider the use of a dividend to return capital to shareholders?
Well, as you know, the top of mine and top priority for us, is to put the capital to work in the business. And we're seeing plenty of opportunities to continue in our growth trajectory, so I'd say that remains the key focus. But as you saw last year, you had no question that we've accumulated a bit of capital that we didn't have the options to deploy and put to work, so yeah, we did return a fair amount to shareholders last year. What ends up happening in 2022 is a bit of an unknown. We'll keep looking at our opportunities.
Certainly, if you have the 1.3 times book multiple is something that we've looked at, and we talked about a three-year payback and how we look at share repurchases. But the business is doing very well, so I'd say that the current prices are maybe a little bit above where the three-year payback might come into play. But there's also other things, all other factors we consider and I'd say, that to your final question, like, would we think about a dividend, that's something we discuss with the Board regularly. And right now, as you know, we haven't declared a dividend, but things could change down the road.
And then Mark, I think you said that the earnings mix to allocate investment income between the segments is around [Indiscernible] was around 50-50. Sorry. If you think about them, that can for 2022. Would that sway more in the direction of P&C or mortgage? Or how do you see that earnings mix playing out over the coming year?
Yes, I think it will slightly go towards P&C. I mean, absent cats and everything else, obviously at least, as you know. But overall I would expect to be seen at 50. Maybe a bit more towards the P&C as we go forward. Okay. And then one last one at the [Indiscernible] the process of rolling out some capital changes. And I know we're in the middle of the comment per year, but I wasn't sure if you guys can just share with us just some high level thoughts just on what they put out there at how could potentially impact our Arch. Thank you
Sure.
Yeah. Listen, it's comprehensive. We obviously are studying it pretty deeply. We've got a large team internally that's focused on [Indiscernible] because it touches everything, right? It touches mortgage, it touches cat losses, and it touches reserve risk, so all the risk charges investments. There's a lot of things that are being suggested by S&B as to how they want to move forward and we'll be ready and we'll certainly most likely respond to their RFC in the coming weeks. And we'll see how that plays out. But big picture, I'd say its [Indiscernible] there's pluses and minuses as you'd expect. There are things that we think are [Indiscernible] we've been working with them over the last few years and trying to address, and looks like there are some changes coming through potentially, and some that we, I'd say didn't expect and maybe a bit more punitive and we'll adjust as time goes on. But still a bit of a ways to go before we have finality, and have the clear picture on what this all will mean for everybody.
Thank you.
You are welcome.
Thank you. Our next question comes from Josh Shanker of Bank of America. Please go ahead.
Thank you. I was hoping you might help us think about other going forward. We have summers, we have Coface. What's sort of thoughts can you give us about the run rate goals for that unusual line and even the P&L and what sort of volatility should we expect from it?
Well, certainly I'd say, that this quarter maybe the first [Indiscernible] it is the first quarter where we, let's say, there's no I call it noise, right? It's more recurring business as usual for both of them and also premier and all the other smaller investments that we haven't had operating affiliates. We as you know, in the balance sheet, we've got over call it a billion dollars of investments or equity in those vehicles. There's a reason why we made the investments, we think they can generate good returns for us. And that's how I would think about it. On your side, I'd say what kind of ROE should I expect from those businesses over the last [Indiscernible] over the 2022 period, given there's a billion dollars invested? I will let you can make your decisions on that are model it out, but that's how we would suggest maybe you think about it, as an ROE basis given there's a billion dollars or so [Indiscernible].
And Josh you actually have one that's coming from Coface, obviously, was a public company that's helpful to you guys and also in the rear. So you had a good sense of where we're going the next quarter. On the summers, which is the old walk through it I think, it's fair to say that it would track a P&C return. It would tend to stand at this looking like a P&C insurance company. So I will describe those return just to help you give you a sense of the magnitude and the relative magnitude between the two.
And then in a little bit of shrinkage on the mortgage side of things, if you can talk about your rankings, mortgage reinsurance, insurance, share buyback. They're all attractive I know, where are the best returns right now?
I think from a cut-down I would say that mortgage is still just currency, right? Because longer-term they might have different, that's also why I'd explained a couple of quarters back that you maybe positioning yourself in areas where the returns maybe not as high comparatively but there's a longer-term reason for this. For the high level right now, Josh, mortgage is number one, number two, I would say is reinsurance and three is insurance but [Indiscernible] and the investment income potentials in the future improving will again bring up the insurance and reinsurance. But they're not very much different from one another. I mean, there used to be a lot wider difference between them three or four years ago as you know, but now the market the hardening market on the P&C side has made them all very, very favorable and very attractive. On the share repurchase you heard Francois say so, where [Indiscernible] what we bought it at, and what we think of it. So it's still always a possibility and I would say on the capital management, as Francois mentioned, [Indiscernible] only returns specific in [Indiscernible] in terms of returning it, if we don't [Indiscernible] if we can't find anything more interesting to work with, a higher return. But I think right now we have a lot of opportunity.
Thank you very much.
You're welcome.
Our next question comes from Tracy Benguigui with Barclays. Your line is open.
I would like to touch on the expense ratio. Francois, you mentioned increased contingent commission accruals on profitable business. And I'm assuming you mean with MGU maybe you could just walk us through how that structure works. I think there's a multiyear look-back period and where I'm going with it is essential, if there's a lot of in calculating that profit sharing component, should we expect this profit sharing components sticking around for a while to catch up with all the good work you've done on underwriting profitability?
Well, as you can imagine, there is lots of different types of agreements with all our producers, U.S. international. And so going into the specifics would take a lot of time, but I'd say at a high level, no question that if we book a lower loss ratio on business in some situations that does trigger a higher contingent commission and that has to go hand-in-hand and how we accrue it, how we book it in the quarter. As long as the business is performing well and then yes, it gets [Indiscernible] the settlements take place over a period of time with true-ups, etc. But at a higher level, no question that, as long as the business performs well and the loss ratio has remained half the level they are at right now, we would expect commensurate levels of contingent commission to be there in place over time.
Got it. And then, on the same topic. I mean, basically, I'm just curious, what are you writing that cost you more besides maybe travel business? So I was looking at the changes in our business mix, basically something that pops up, maybe it's professional lines in insurance and (Re)insurance, it bounces around more quarter-to-quarter. So if you could just provide more context about the business mix changes that we're really driving at, as well as the direction of ceding commissions.
Yeah, absolutely. It's a very good question. I think that if you look at the structure on [Indiscernible] starting with the insurance group, it's [Indiscernible] similar phenomenon but different reasons on the reinsurance side. On the insurance side, programs is also something that we are growing, we also smolder risk. In the professional lines, we do a lot of private DNO and not-for-profit DNO, for instance, that comes with a much higher expense ratio than you would have normally with a larger commercial enterprises, so that's one example. We also are increasing our footprint in the UK, which also carries a higher acquisition cost. So I would tend to think on the insurance side is a size of risks, the fact that we trapped absent travel.
There is risk that we write some cyber as well, primarily small risks that's also carrying [Indiscernible] because it's primary and small accounts will have a higher acquisition expense ratio. So the size of the risk is what makes it on the insurance on the insurance side, accident, travel, which is also a small risk to be fair. On the reinsurance side, Tracy, as you know, it's a lot, a quota share is a big, big difference. You could have an expense ratio and acquisition ratio on the excess of loss, which is 10 to 15. It could be 30, 33 on the quota share basis. So that really will [Indiscernible] we've been growing both on the insurance side for the small risks and on the reinsurance side on our quarter share participation. So that is just the price of getting access to the business that we have to pay for.
So we're on the [Indiscernible] commission?
Say it again?
And if you could comment on the ceding commission.
The ceding commissions are [Indiscernible] have been stable to slightly up on the reinsurance but not significantly. They are a bit more stable for the last year and a half than they have been in other harder markets, that's one thing that's really intriguing, but I guess it makes sense in terms of the economic returns in the pricing that's coming through on the primary side. But the increase itself in ceding commission is not what's driving the acquisition expense ratio, it's truly the type of business in the mix that we are writing.
Thank you.
Thank you
Our next question comes from Mike Zaremski of Wolfe Research. Please go ahead.
Hey, great. Thanks. A follow-up on the maybe I'm reading too much into this, but on the increase in the expense ratio specifically, I believe probably the acquisition expense ratio, but maybe also the other portion of the expense ratio in the primary insurance segment. So I believe you said some of it was due to increased profitability or contingent commissions, but I guess if I'm looking at the overall combined ratio for that segment for the year, it was 96 and changed. And for the quarter was 93, I thought we were shooting for overall profitably being better than that in other years, or maybe even this year. So I didn't think profitability was much better than expected. Any thoughts there?
Well, obviously, you got a slice it down by the lines and by line of business. So the agreements, they're not on the overall profitability. So sometimes we have [Indiscernible] we do have some books of business that are doing extremely well and commissions go up with that. The other thing that I mentioned and I think is not insignificant, is the fact that we are retaining a bit more in some lines of business, and that moves the economics, I'd say, right? So you're going to get a bit less sitting commissions that are maybe higher in some places. And you retain more net than that at a better loss ratio going forward. So that's something to [Indiscernible] that also impacts the overall acquisition. I'd say at a high level, there's no question that there's a bit of noise this quarter, but it's not something that has us extremely worried at this point. I think it's very much a quarterly kind of a bit of noise.
There's a bit of again, recovery from COVID like last year, quarter-over-quarter, we are still in the [Indiscernible] very deep into the COVID crisis with no travel, etc. So there's other reasons that impact all the our expense ratio in total, I'd say at a high level, we think it's a bit elevated this quarter, but not really a costs are concerned. And like you're quoting numbers that include cat events like actual cat events. If you do it ex-cat, which is probably a better reflection on the unloading margins, it's really going down from 95 to 91 for the year. So we are getting improved margin. One could argue whether it's will be more or less, but it's pretty much an improvement that we saw the last 12 months. So it's [Indiscernible] your numbers was cute somewhat with a cat events, I believe.
No. You're right. I probably should have quoted maybe ex-cat too, but although the cats matter, but and also good point on the [Indiscernible] your net to gross is keeping.
Yeah.
Okay. And that's helpful. And maybe just switching gears to capital and inorganic growth, I guess one of the MIs hit the tape that they are potentially exploring a sale. If another MI buys another mortgage insurer is one plus one still less than two, or have come dynamics you think maybe changed over recent years?
It's a good question because our understanding was that the GSEs and it's really [Indiscernible] you know, we have to talk to the people in Washington and Virginia to understand what they think about this, was that there was a preference to have more [Indiscernible] no, not lesser amount that they might provide us more diversification, so we'll see what happens. There's not much gain and benefit and scale in combining two MI companies, I mean, you still [Indiscernible] all the capital models and whatnot are linear. So there's not really a saving of capital.
I think there will probably be some net loss on a market share. I think we saw ourselves some of it from the [Indiscernible] when we acquired UG. So it's not one plus one is not equal to 1.5, but it was a little bit of a loss on the market share. So that's probably not 1 plus 1 equals 2 or plus. So I don't know what's going to happen. I don't know what people have in mind. I think to me, our core principle about MI and the way we've operated stays which is it's always better in a multi-line diversified platform, and that's not going away. I would say that some of the S&P new modeling is appreciating and recognizing that. So that's my view, at least. I think the more sensible thing would be for these MI to find another home somewhere else outside of the MI arena. But I'm not a predictor of this, Mike.
So that's helping. So you mentioned the S&P capital model will the diversification get an increased benefits? So [Indiscernible]
In general only MI, in general there's better diversity and credit, the more diversified you are, which again speaks to our model, which makes sense to us.
Thank you.
Thanks.
Thank you. Our next question comes from Mark Dwelle of RBC. Your line is open.
Yeah. Good morning. Couple of questions related to MI. First in the quarter, it looked like the average paid claim [Indiscernible] average paid cost per claim was around 51,000, it's been lying more in the 30s. Is there anything in particular that accounts for the uptick, maybe some large claims or something. It's a one-off really, it's a settlement with a servicer that took place this quarter that was for pre -crisis claims. So definitely a one-off here. And then a second question related to MI, just really a clarification. The reserve releases that you did in the quarter are we don't understand that those related to the reserves set up when COVID began, or maybe where these reserves related to other time periods or other classes of reserve?
We made the point in the past that we have a hard time to some extent isolating COVID from non-COVID claims, but still more than half is for reserves that we had set up before COVID. So I mean, the vast majority or the majority is if you want to go and just appear as a when they were set up is pre first-quarter 2020.
Okay thank you. And the last question I had was really more of a general market kind of question. Maybe for Mark. Are you seeing any signs in the insurance or Reinsurance businesses of competitors taking more aggressive pricing stances? I mean, basically getting at is the insurance clock getting towards 12 o'clock or are we still firmly at 11 o'clock?
Probably like the longest 11 o'clock that we'll see in our lifetime. I think that if you look at the risks that are ahead of us, you still have climate to deal with, you still have inflation concerns, which I guess leads to reserve, potential reserve questioning or analysis, cyber risk, and COVID reopening. There's a lot of stuff going on right now that sort of leads the whole market to be a lot more careful and thoughtful. So the market is always competitive, right? There's always competition out there. But right now what we are, it's a very disciplined market and we're not seeing anything. We haven't seen anything and we're not seeing anything percolating that would indicate that this would change for 2022.
Thank you. That's all my questions.
Your next question comes from Meyer Shields of KBW. Your line is open.
Thanks. If I go back to the contingent commission question, I guess it's clear that underlying profitability is getting better? So we expect that smoother recognition of contingent commission accruals in 2022?
Not necessarily, because Meyer, the release of profit commission or contingent commissions is dependent on loss fix, so we tend to take our beautiful time to make sure we have all the data available to make those contingent commission so can be spotty. But we can make a decision to look at two or three underwriting years and have that adjustment made. And we accrue for some of it, but we don't always accrue to the full extent of the ultimate. The losses actually drive these contingent commissions. So this is [Indiscernible] so it's really spotty, it's very hard to predict.
Okay. So that's fair. I just want to understand the process. Second question, I think Francois had talked about maybe reducing the sessions on some quota share contracts in insurance, so less of an offset. Does that outpace or trail the loss ratio improvements that you should anticipate from keeping that business?
Let me [Indiscernible] I make sure, so, are you saying that? Repeat your question differently, I'm not sure I got exactly where you want to get to Meyer. I apologize.
Okay. Let me try again. So [Indiscernible] is going up because you're ceding less business that has high ceding commissions.
Yeah.
Just hoping that you can frame that relative to the last ratio improvements that we should expect because you're keeping more profitable business.
Yes. So if we're keeping more profitable business, the loss ratio would [Indiscernible] everything else being equal go down.
Right. By more than the increase in acquisition expense.
Possibly. It's hard to say right [Indiscernible]
Okay.
[Indiscernible] from the get-go. I think we made these economic decisions, it's kind of a hard one to pin down. Sometimes the [Indiscernible] what you see that's capital, capital with return, that's different than the pure combined ratio. So there's a lot of things going on. It's more [Indiscernible] it's not only about the pure combined ratio. The return is improving, that's what matters to us.
Directionally, I think we're [Indiscernible] we don't disagree with what you're saying. I think the precision or the timing at which everything happens is less [Indiscernible] it's not precise, I would say [Indiscernible] I would assume. Directionally, I think its right, yeah.
Better return.
Okay. I completely understand. And one big picture question if I can. Anything [Indiscernible] everything that you're saying Mark about the cycle lasting longer. Because of concerns on the loss trend side. I guess why rates are going up. Why do you think rates are still going up more than loss trends?
Well, that's definitely question Meyer. That's one that we should probably have the BARDA corn and all kidding aside, I think that it's probably a recognition that this uncertainty is what creates the need for more margin safety. I think that when you're faced with uncertain pick-up in inflation, I mean, we had a 7% roughly inflation print this morning. When you have a high number that comes like this, it comes as the shocker. So I think that people are being preempting, preempting in making sure that they cover as much of the base as they can. I think the insurance industry for what it's worth has been very disciplined and is acting in a very profitable way and I think over the last 2 years, it recognizes that the risk is building up and need to price better, price higher because there's more risk of sliding a bit slide sideways. So I think it's an appropriate and very welcome change. A very [Indiscernible] if this is in the market is pretty good from that perspective.
Thanks [Indiscernible].
Sure.
Thank you. Our next question comes from Brian Meredith of UBS. Please go ahead.
Yes. Thanks. I got two questions for you guys. First one, I'm just curious, I know there was a block of stock of [Indiscernible] to trade and you all didn't bite. Was there any regulatory reasons you couldn't do it? Or is that just a capital allocation decision that, you don't want to own the whole thing?
Well, not at all. I think the existing shareholder wanted to sell and very much [Indiscernible] very [Indiscernible] much easier for them to do it the way they did it. Then, to come to us and at which point, yes, we would've had to go to the regulators and that would take them weeks if not months. And the whole approval process would have maybe dragged on. So I think they wanted speed over maybe better execution and that's what they got deal in doing it the way they did.
So is that profit state less strategic for you than going forward?
Not at all. To be candid, I mean, they even come to us offering it up to, I mean, they just went ahead on their own instead of coming to us and saying, would you be interested in buying the 10% or 12% we want to get rid of or we don't want anymore. They just went through their own process because again, they knew that we trip the requirements that we'd have to do a tender and all of that, which would have taken again longer. So that was their decision and we respect it. But going forward strategically, I mean, we still look at profiles and it's been very good to us so far, and we keep thinking about how we, if and when, or how we do things differently going forward.
Great. And then, first of all, let me just clarify one comment you made earlier in talking about kind of repurchasing your stock and I understand that you want that 3 year payback period, which is the other considerations and I understand that. But does that mean that with your stock trading just a little over one for book value right now, that you would not be buying back stock right now? It's your return profile doesn't fit that.
Well. It's never black and white but I'd say that the forward-looking returns that we see for how we think about the business and better profitability over three years, it's higher than 10%, right? So you could kind of stretch it a bit more than 1.3 times book. And so it's [Indiscernible] I'll stop here. I'd say we could consider going above 1.3 times book, very much as a function of how we think about the business and what kind of profitability we see coming our way.
I think Brian, I would say, you know this as well, right. I mean, there are a couple of things happening for instance, on the MI side that might change that what we perceive to be the real book value of the company. So these are also considerations that could be way outside of the return possibility going forward. That's one exemplary.
Got you. Thank you.
Thank you.
I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.
Well, thank you everyone want to thank our employees, as Francois mentioned as well, and sometimes they run the corners so make sure you take care of your loved one this weekend. On to the next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.