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Arch Capital Group Ltd (ACGL 0.71%)
Q4Â 2018 Earnings Conference Call
Feb. 13, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Good day, ladies and gentleman, and welcome to the Arch Capital Group Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current 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 also 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.
Marc Grandisson -- President and Chief Executive Officer
Thank you, Shannon, and good morning to you all. Once again this quarter strong earnings from our mortgage segment offset the effects of catastrophe losses in our property casualty segments, as Arch produced an annualized operating return on equity of 8.8% and 10.7% for the 2018 fourth quarter and full year, respectively. Given the level of catastrophe losses across the globe in 2018, our results demonstrate again the value of our core principles of diversification, sound risk selection, underwriting discipline and cycle management. Francois will provide more commentary on our financial results in a moment, but it's worth pausing for a minute to thank all employees at Arch, who are committed to meeting the needs of our clients, while producing superior returns.
Given the notable catastrophe events for the past two years, we will begin our discussion of market conditions with the January 1st renewal market and property cat reinsurance. As you may have heard on other earnings calls, this quarter on average property cat rate increases at Jan 1 were positive, but below expectations, given the record level of insured cat losses that were reported in the past two years. Across the industry, loss affected property accounts saw rate increases of 10% or more, while some property accounts in Europe were flat to down 5%. Hidden within the underlying property cat industry average rate changes, there are some signs of tightening capacity within the retro and facultative markets, but in many case rate levels, relative to risk remain inadequate to deploy additional capital from our perspective.
At Arch, we believe that we enhance our odds of doing better than the industry average by allocating capital dynamically to areas where the better risk reward trade-off and that disciplined underwriting and risk selection will remain at the core of what makes us -- that has made a successful. There is reason to believe that some rate improvement may occur throughout the year as the market absorbs the recent history of large cat losses. However, uncertainty with respect to both the expected amount of capital and the return on capital within the property cat market make it difficult to predict, where cat rates will be by year-end 2019.
In the interest of time, I'm not going to review market conditions line-by-line, as I'm sure you've already heard about that on other calls this quarter, but I will instead address the underwriting environment in general. In our P&C segment -- segments, in some of our insurance lines, rate increases appear to be outpacing claim trends. But as we have discussed in prior quarters, we continue to believe that the risk of claim inflation rising above its long-term trended high and we remain cautious in our allocation of capital and in setting our loss picks. The modest improvements in rates are concentrated primarily in the short-tailed cat-exposed business in the U.S. commercial auto and some areas of casualty. As always, we focus on the absolute level of risk-adjusted returns, not just relative rate changes.
Turning now to our mortgage segment. The underwriting environment remains very attractive, with ongoing growth in our insurance in force producing strong increases in earned premium and will contribute to the future stream of earnings, that is both stable and predictable. For the fourth quarter, our U.S. MI new insurance written or NIW was $16.7 billion, a 16% increase over the same quarter last year and the proportion of single premium business remain low at about 9% of NIW this quarter.
Within our U.S. primary business, the credit quality of loans insured remains excellent and our key risk barometers are still at very healthy levels. To put it this in historical context, our risk indices tell us that the current borrowers' credit characteristics are still substantially higher, in fact by roughly a factor of two relative to the borrower to the late '90s and early 2000s. We have seen mortgages with greater than 95 loan to value grow slightly as a percentage of our NIW to about 16% in the fourth quarter, while credit quality as indicated by FICO score -- scores remained high across our in force book with a weighted average score of 743.
As far as the new mortgage risk transfer programs with the GSEs, the so-named IMAGIN and EPMI facilities, we believe that these programs will continue to grow within our expectations, roughly at a modest 2% of total NIW for the market on an annualized basis. Briefly with respect to our investment operations, higher yield available in the financial markets and growth in invested assets led to a 16% increase in net investment income in the fourth quarter over the same period a year ago. We remain underweight credit in interest rate reflecting our cautious outlook.
Moving to capital management, despite our exposure to property cat in 2018, we were able to deploy some of our capital toward expanding our distribution capabilities, deleveraging our debt and repurchasing our shares. As you know, we recently closed on acquisitions in the U.S. and the U.K. that are expected to expand our distribution base. Volatility in the equity markets also gave us opportunity to repurchase approximately $100 million of our common shares in the quarters at attractive prices. As in all of our capital allocation processes, we employ a rigorous and disciplined assessment of available opportunities to deploy capital in order to generate long-term returns for our shareholders across all phases of the cycle.
Turning now briefly to risk management, for the past few years and continuing into 2019, our property cat exposures remain at historically low levels, with our 1-in-250 year peak zone at above(ph)4.5% of tangible common equity at January 1st. We have the ability and the capacity to deploy more capital to this sector if available returns improve to acceptable levels this year. For Arch clients and investors, our ability to increase our support in times of need is a significant benefit to the marketplace and a source we believe of long-term value creation for our shareholders.
In our mortgage segment, our issuance of insurance linked notes known as Bellemeade Securities, have significantly reduced our shareholders' exposure to the tail effects on our business from economic recessions and have paved the way for a significant reduction into our risk profile despite growth in our insurance in-force. With regards to PMIERs as of December 2018, Arch MI's sufficiency ratio was 141% of the GSE capital requirements known as PMIERs, that I mentioned. It also exceeds the proposed GSE revisions under PMIERs 2.0, which is to be effective on March 31st, 2019.
With that I will turn it over to Francois. Francois?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Thank you, Marc, and good morning to all. I'd like to give you some comments and observations on our results for the fourth quarter. Consistent with prior practice, these comments are on a core basis, which corresponds to Arch's financial results excluding the other segment, i.e., the operations of Watford Re. In our filings, the term consolidated includes Watford Re.
After-tax operating income for the quarter was $189.2 million, which translates to an annualized 8.8% operating return on average common equity and $0.46 per share. For the full year, our operating ROE stands at 10.7%, a solid result in light of the elevated catastrophe activity in the second half of 2018 and the pricing environment in the P&C sector that remains competitive. Book value per share was $21.52 at December 31st, a 1.7% increase from last quarter and a 6% increase from one year ago, despite the impact of higher interest rates on total returns for the quarter and the year.
Moving on to underwriting results, losses from 2018 catastrophic events in the fourth quarter, net of reinsurance recoverables and reinstatement premiums were $118.2 million or 9.7 combined ratio points. These losses were predominantly the result of Hurricane Michael hitting the Florida Panhandle and the California wildfires, but we also felt the impact of other minor events across the globe. As for prior period, net losses or development, we recognized approximately $74.4 million of favorable developments in the fourth quarter, net of related adjustments or 6.1 combined ratio points compared to 4.6 combined ratio points in the fourth quarter of 2017.
All segments were favorable, led by the reinsurance segment with approximately $33 million favorable, the mortgage segment also at $33 million favorable and the insurance segment contributing $8 million. This level is consistent with the third quarter 2018 results as we continue to benefit from significant favorable development in our first lien portfolio in the mortgage segment, where cure rates this year continue to be materially higher than long-term averages and expectations. The insurance segment's accident quarter combined ratio, excluding cats was 98.3%, slightly lower than for the same period one year ago.
Most of the improvements came from lower levels of attritional losses and acquisition expenses. The reinsurance segment accident quarter combined ratio excluding cats stood at 96.2% compared to 103.2% on the same basis one year ago. As we mentioned on prior calls, we tend to look at trailing 12-month analysis in order to assess the ongoing performance of our segments, given the inherent volatility in the business that can emerge from quarter-to-quarter. The year-over-year comparison for the reinsurance segment is affected by a few notable items.
First, as we mentioned on the previous call, our acquisition expense ratio last year reflected the federal excise taxes associated with a large internal loss portfolio transfer. Second, our loss experience this quarter was impacted by a large attritional casualty loss arising from the California wildfires. And third, we had a noticeable amount of reinstatement premiums and payment adjustments this quarter that benefited our combined ratio. Once we adjust for these variations, the underlying performance of our reinsurance segment remained strong this quarter.
The mortgage segment's accident quarter combined ratio improved by 1,410 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 2.1% in the fourth quarter of 2018 compares favorably to the 17.8% in the same quarter of 2017, due to substantially lower delinquency rates. Part of the difference is attributable to increased favorable prior development, which was approximately 320 basis points higher than last year. In addition, there was approximately $13 million or 410 basis points of favorable development on 2018 delinquencies, due to very strong cure activity in the period. The expense ratio was 20.5% lower by 160 basis points, than in the same period one year ago, as a result of expense savings achieved.
I'd like to remind everyone that due to the nuances of purchase accounting, the amortization of our debt asset should continue to increase in 2019 by an amount that is approximately $8 million higher on an annual basis, than 2018 levels, increasing acquisition expenses. These results highlight the contribution to our pre-tax underwriting income from the mortgage segment, which remains strong this quarter. After allocating corporate items, such as investment income, interest expense and income taxes to each segment, the mortgage segment's contribution to our 2018 net income decreases to approximately 75% of the total, after normalizing our results for catastrophic activity.
Total investment return for the quarter was a positive 51 basis points on a U.S. dollar basis and a positive 83 basis points on a local currency basis. These returns highlight the defensive high-quality position of our fixed-income portfolio and solid result in our alternatives portfolio, in light of a volatile quarter across global financial markets. During the quarter, we continued to move away from municipal bonds and into corporate and government bonds due to relative valuations. The repositioning of our portfolio during 2018 combined with the reinvestment of shorter maturity bonds and others swap activity at higher yield, generated higher investment income year-over-year. We extended the duration of our investment portfolio in the quarter to 3.38 years, up from 2.94 for years on a sequential basis as a global economies weakened.
Operating cash flow on a core basis was a strong $384 million in the quarter, reflecting the solid performance of our units. The corporate effective tax rate in the quarter on pre-tax operating income was 16.8% and reflects the benefit of the lower U.S. tax rate, the geographic mix of our pre-tax income and a 210 basis point expense from discrete tax items in the quarter. As a result, the effects -- the effective tax rate on pre-tax operating income, excluding discrete items was 14.7% this quarter, higher than the 9.9% rate last quarter.
The difference from this rate to the numbers noted in our recent pre-release is primarily attributable to discrete items in a higher level of U.S. based income, which triggered a true-up of tax accruals for the first three quarters of the year. As we look ahead to 2019, we currently believe it's reasonable to expect that the effective tax rate on operating income will be in the range of 11% to 14%. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction.
With respect to capital management, we paid down the remaining $125 million of our revolving credit facility during the quarter and we also repurchased 3.6 million shares at an average price of $27.11 per share in an aggregate cost of $98.2 million under our Rule 10b5 plan that we implemented during this quarter's closed window period. Our remaining authorization which expires in December 2019 stood at $164 million at December 31st, 2018. Our debt to total capital ratio stood at 15.5% at year-end and debt plus preferred to total capital ratio was 22.5%, down 390 basis points from year-end 2017 and 620 basis points from year-end 2016, when we closed the UGC acquisition.
Finally, I would like to bring to your attention a change we are introducing in 2019 regarding our incentive compensation practices. As you know, equity grants made to employees had historically been awarded in May of each year, starting this year, equity grants are expected to be awarded in the first quarter subject to Board approval. As a result, we would expect a small distortion in the timing of our operating expenses. The impact of this change based on 2018 equity grants is an expected shift of approximately $11 million to $13 million in operating expenses from the second quarter to the first quarter of 2019. Two-thirds of that expense is expected to be reflected within our operating segments, with the remainder in corporate expenses and investment expenses.
With these introductory comments, we are now prepared to take your questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from Kai Pan with Morgan Stanley.
Kai Pan -- Morgan Stanley -- Analyst
Thank you. Good morning. The MI segments continue to show very strong results. Is the 16% the underlying loss ratio a good run rate going forward or you see continuing improvements from there?
Marc Grandisson -- President and Chief Executive Officer
The loss ratio has been very good and actually better than we had anticipated probably a year, year and a half ago. So we have ongoing improvement notice of default and curing rates. So right now, everything we're pointing to is much less than the long-term average, which would be 20%, I would think overall cycle. So, yes, you could pick your number, Kai, it's very hard to predict the future, but certainly we are in a very benign loss environment.
Kai Pan -- Morgan Stanley -- Analyst
That's great. But if you take out -- I mean, the large amount of reserve releases, the reported loss ratio at below 10%, had it been around 10% or less for the last several years. At what points the regulator would you say the results is too good? And would you be more focused on either pricing or competition could have started to come in?
Marc Grandisson -- President and Chief Executive Officer
Well, I think -- I don't -- I'm not sure whether regulators would do -- but from our perspective, this is still a risky insurance product, like everything else, is out there. And what matters is really about the return and I would argue that even if you have a little bit higher than average return in the current environment, that probably more than makes up for some of the bad years that have occurred to the industry. So, we're not losing sleep over this. There's no commentary to the effect that the loss ratio is too high or too low. In fact, I would even argue that the new capital framework from the GSEs are leading us to a directive -- in a direction of still appropriate level of capital and return in the industry to make sure it is solid framework for housing finance.
Kai Pan -- Morgan Stanley -- Analyst
That's great. Hope, the industry have a lot of memory.
Marc Grandisson -- President and Chief Executive Officer
Yeah.
Kai Pan -- Morgan Stanley -- Analyst
So, on the reinsurance side, the top line growth is very strong, even without these -- the reinstatement premiums for the quarter. Could you talk a little bit about what do you see growth opportunity and what kind of return are you getting from those businesses? Are they higher than your existing business?
Marc Grandisson -- President and Chief Executive Officer
Yeah, so the growth year-on-year is a little bit distorted. If you look at the last four quarters, it's more consistent. The growth that we've seen over the last 12 months is -- continues to be an area that we've talked about before, international motor quota share. Some -- actually, some commercial auto, we have some opportunities in there and some worker's comp opportunities of all things. So, there's a lot -- and some property specific -- property cat related exposure in the reinsurance group as well. So the growth where that we're seeing in reinsurance is consistent with our fishing and looking around in the world for good returns, better risk adjusted return if we can. No way from the -- probably the more traditional commoditized reinsurance business. So it's a little bit more bespoke than the rest of the things you would hear about in the marketplace.
Kai Pan -- Morgan Stanley -- Analyst
Okay. Last one if I may, on California. You have losses both from the property side as well as the liability side. So how do you think the market going forward in terms of pricing, in terms of like any sort of -- like your risk appetite in the market, on both the property side as well as liability side for the utilities?
Marc Grandisson -- President and Chief Executive Officer
Yes. So on the liabilities side, it's a little bit easier to answer because these things are most -- there's a lot of question mark in the industry as to whether these are insurable and at what level and at what price. And as you know, it's not a big market, so -- and currently, the player that's been tagged or have been identified as being liable for that loss is going through a lot of difficult times. So we'll see how that develops. So it's currently developing as we speak.
This is still a very small market, right in the broader scheme of things. As far as the property is concerned, it's really uncertain. As I said in my opening remarks, the capital supply is still plentiful. There were talks at the beginning, Kai, maybe that's what you alluded to, to the fact that there might be some changes to the modeling of California wildfires. But it's still very early, people are still trying to figure out what they have and what it means in their modeling. And as you know, it's a more -- it's a little bit isolated in fact, right? It's isolated to one area, the country and people have a way to manage the portfolio and deploy capital in other areas. So it's a very -- it's a very hard question to answer because we don't know what the supply of capital is going to be by mid-year. But logic would dictate, it should go up to some extent, but we'll see what happens.
That's great. Well, thank you so much and good luck.
Thanks, Kai.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Thank you.
Operator
Our next question comes from Geoffrey Dunn with Dowling & Partners. Your line is open.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Thanks. Good morning.
Marc Grandisson -- President and Chief Executive Officer
Hey, Geoff.
Geoffrey Dunn -- Dowling & Partners -- Analyst
I was hoping you could comment a little on the ILN market. Now that all the -- just about all the MIs are using that market in indicating that they plan to use it on a non-recurring basis. Are you seeing any change in terms, conditions, appetite or is it as steady as it was over the last few years?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
No. I -- what we've seen, there's actually no indication that it's weakening. We see tremendous investor appetite for the product. As you know that the GCs really started, that we were in there as well as the sole MI that was accessing that market in the last year, most of the others have jumped into on that -- I'd call it, on the bandwagon. And it just makes it for -- I mean, investors now have the ability to -- when they do the research, they do the analysis, they feel it's something that's repeatable. They can access that type of product, not only through us, but also through some of our competitors.
So as far as we can tell, there's still tremendous appetite for the product. It's expanding a little bit, getting some of our instruments rated, there is also a help, but we see that as something that -- there's nothing on the horizon that suggests that we will be able to execute on it.
Marc Grandisson -- President and Chief Executive Officer
And to add to this, Geoff, I would also argue that the spreads are not widening. We don't see any indications of spreads widening. So this appears to be a stability of pricing expectations in the product as well.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Yeah --
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Recognizing there's volatility here and there, but in the long term, we think yes, the spreads have been very stable. Yeah.
Geoffrey Dunn -- Dowling & Partners -- Analyst
It looks like you took another dividend this quarter. Should we take that to assume that the regulators are also comfortable with this market and view it as true capital relief?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Absolutely. I mean, we argue it's even better than traditional reinsurance, because we have the cash on hand, so it's collateralized and from that point of view they -- if they were to accept it, then they should be happier than just other forms of capital. I mean aside from just the traditional equity.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Okay. And then a follow-up on new notice development. Is the company's book reaching at an inflection point where even though the newer vintages are of very high quality and outperforming, but the book size is obviously -- and the seasoning, it's going to drive decent new notice levels. Are the more recent vintages now exiting the benefit of the runoff of the '08, meaning that we should see on average, new notice growth going forward?
Marc Grandisson -- President and Chief Executive Officer
I think we will at some point. I'm not sure that we've crossed it yet, it's very hard for us to see and to predict that. But you're right, over time we would expect as the '09 and prior -- with the '08 and prior is rolling off. Yes, we would expect that and I'm not sure that we are there yet.
Geoffrey Dunn -- Dowling & Partners -- Analyst
Okay. Great. Thank you.
Marc Grandisson -- President and Chief Executive Officer
Thanks, Geoff.
Operator
Our next question comes from Josh Shanker with Deutsche Bank.
Joshua Shanker -- Deutsche Bank -- Analyst
Good morning, everybody.
Marc Grandisson -- President and Chief Executive Officer
Good morning.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Good morning.
Joshua Shanker -- Deutsche Bank -- Analyst
So I was noticing the trend and it's not so surprising that the proportion of new policies being written on the mortgage segments that are coming from refis, gets smaller and smaller all the time, now down to 5%. Is there any difference ultimately you think in the quality of a refi mortgage versus a new mortgage? I guess, you know the refi mortgages better, at least the market knows them better. How should we think about that?
Marc Grandisson -- President and Chief Executive Officer
Yes. Clearly, there tends to be at the margin better quality for the refinance market. But, it's clearly not a target market for the MI market, right? So broadly you are right, but in terms of what pertains to the MI market, our penetration for origination of MI of mortgages in the refinance is 5% or 6%, so it's very, very small. The market that we are targeting, that is really our bread-and-butter if you will is, the purchase market, and that's still pretty healthy and that's really what we've been focusing on. So having said all this, if you look at it historically at the blend of the cycle, the blend of the DTI, it's been fairly consistent and I think that -- that speaks to -- there's not that much of a difference between the credit requirements, whether you refinance or whether you purchase.
Joshua Shanker -- Deutsche Bank -- Analyst
And not to delay, but too much on the refi, but typically, if you are -- when you're writing the MI on a refi-end mortgage, were you the MI on the mortgage that's replacing?
Marc Grandisson -- President and Chief Executive Officer
Not necessarily, because it could be refinancing with a different financial institutions and at the end, that institution may have a different agreement with a different MI, not necessarily.
Joshua Shanker -- Deutsche Bank -- Analyst
Okay. And switching gears, on the wildfire liability -- look -- obviously that was a difficult loss two years in a row, but the price might have been adequate to take that. A lot of times though in certain markets, the market really isn't a big enough to give you a payback, no matter how good the pricing is. Do you think you'll get a chance to write wildfire liability this year? And is the market sizable and attractive enough to make it a worthwhile business to write on a multi-year basis?
Marc Grandisson -- President and Chief Executive Officer
Yes. The answer is yes to all of those. I think in general, we don't think of either being in the market or not, based on size. I think what it means to us is we would put in relation to the market size, our commitment to that marketplace. And you have to -- the interesting in reinsurance, Josh, is you have to forget last year and look forward, because if you look back to what the losses you have, you don't have to make the money the way you lost it, that's clearly one thing that we always live and -- live by every day. But certainly, every time a proposition come to us, provided we have the right information and the right perspective on the loss, if it's a profitable thing, we would do it regardless of the size of the market. The only thing that we would do is, rightsize our commitment to that specific market based on its size relative to the broad capital base of the company.
Joshua Shanker -- Deutsche Bank -- Analyst
And is that a mid-year renewal?
Marc Grandisson -- President and Chief Executive Officer
I believe so, I believe so.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Well that one is a multi-year bond.
Marc Grandisson -- President and Chief Executive Officer
Yes, that one is pretty much a multi-year. Yes. Correct. Sorry. Yes.
Joshua Shanker -- Deutsche Bank -- Analyst
Okay. Thank you.
Marc Grandisson -- President and Chief Executive Officer
Thanks, Josh.
Operator
Our next question comes from Mike Zaremski with Credit Suisse. Your line is open.
Michael Zaremski -- Credit Suisse -- Analyst
Hey, good morning.
Marc Grandisson -- President and Chief Executive Officer
Good morning.
Michael Zaremski -- Credit Suisse -- Analyst
First off, Francois, in the prepared remarks, you made comments about the actions you have taken on the expense side to improve the ratio and the trend has been an improvement over the last year. So, this quarter came in -- I think better than expected. Is there any one-time items in there or is that improvement somewhat sustainable?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Well, are you referring specifically to mortgage?
Michael Zaremski -- Credit Suisse -- Analyst
Yes. Yes.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Yes, well mortgage, right, we acknowledge internally that it's been two years since the acquisition and we're basically complete with integration. And we told -- hopefully we -- you guys all remember that we told you it'd be a journey, it will take a couple of years to fully integrate the two operations and we're at this stage now when you compare, obviously, year-over-year Q4 '17 to Q4 '18, we just realized more savings in technology, in people et cetera. So I think we're kind of there. There's also a bit of seasonality that comes into play, but we're truly in a good spot in terms of where we want to -- where we think our expense base and -- especially operating expenses will be going forward.
Michael Zaremski -- Credit Suisse -- Analyst
Okay, got it. And sticking with the mortgage segment, Marc, you made an interesting stat you made in the prepared remarks about mortgage credit quality being approximately -- I think you said two times better than crisis levels. Maybe you can further elaborate on what's behind that viewpoint?
Marc Grandisson -- President and Chief Executive Officer
We have internal proprietary credit analysis evaluation and you can also look at some things that are published by us at the Urban Institute, and you will look at the relatively credit quality based on an index looking at the '90s -- late '90s, early 2000, factoring income credit score and all these various aspects of the credit worthiness of a borrower. And when you run it through the grinder if you will and you come up with a number at the end, that number is half of what -- half of what it was back in the late '90s and 2000. So, at least to me on a comparable basis, long spend(ph)to be as apples-to-apples that can be.
Michael Zaremski -- Credit Suisse -- Analyst
Okay. It's interesting because, yes, we know qualitatively, there's other reasons why credit quality is most likely better, so it's interesting that you're trying to quantify it and it's helpful.
Marc Grandisson -- President and Chief Executive Officer
Yes. Very, very much, so. Yes.
Michael Zaremski -- Credit Suisse -- Analyst
And, so I guess follow-up on that and maybe I'm missing this on the supplement, I can get it offline, but at what percentage of the mortgage insurance portfolio has reinsurance protection and what's the average duration of that reinsurance protection?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
That's a good question. I mean, I don't have the numbers right in front of me. But it's --
Marc Grandisson -- President and Chief Executive Officer
There are a couple of things, about 50% quarter share with AIG in years '14 through '16. Then you have Bellemeade, we have about $1.1 billion of outstanding limits on the Bellemeade that covers --
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
About two-thirds.
Marc Grandisson -- President and Chief Executive Officer
Two-thirds? Two-thirds of our portfolio has reinsurance against it. Thank you.
Michael Zaremski -- Credit Suisse -- Analyst
Okay. And the duration of the Bellemeade transactions, roughly?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Well (Technical Difficulty) they're 10-year transactions right. So they -- they're all a bit different, some have features, where we try to have the coverage be enforced for a bit longer, but I would say about five years is probably something where we -- that we -- and -- as we keep rolling off, we're adding new ones, so I think that should remain pretty stable as we move forward.
Michael Zaremski -- Credit Suisse -- Analyst
Okay. Thank you very much.
Marc Grandisson -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Elyse Greenspan -- Wells Fargo -- Analyst
Hi, it's my first question. So, you guys said, if you normalize for cat that your C mortgage, I think you said about 75% of earnings. I guess, what do you guys view as your normal cat load, since your P&Ls have come down right, but were coming off of two years of pretty high cat losses?
Marc Grandisson -- President and Chief Executive Officer
Well, the cat load roughly is about $30 million a quarter, $30 million to $35 million a quarter, that's kind of where we've been -- what we've been running at the last couple of years. And these numbers that I quoted really, all we do is replace effectively the actual cats with the expected or the cat load. So that's -- hopefully that answers your question.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. And then so when you gave us the tax rate guidance for the coming year, you're also assuming that cats fall within that normal level, correct?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Correct. Yes, that's fully -- full year forecast with an expected cat year, which -- as you know is usually not the case, it's either lower or high, but, yes.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. And then on reinsurance, you guys seemed kind of be cautious and balanced in terms of what might happen at the mid-year renewals. Marc, how much would you say you need rates to go up for Arch to want to materially write more cat business if you want to talk separately about what you might want to see in April 1 versus 6/1 and 7/1 in Florida?
Marc Grandisson -- President and Chief Executive Officer
I guess, I can tell you a lot more, but that's not going to get what you want. So, I think if you look back Elyse at one of my comments about six quarters ago. Looking back at the characteristics of the -- at that time the numbers were 35% to 40% to really start getting us to do risk-adjusted return that we believe is appropriate. We've had since maybe 10% to 12% of rate increase, so that tells you, we're probably 25% to 30% still short of rate change to really get there. And again, I want to caution everyone that listening to this saying that, that 20%, 25% is not going to come across the board all at once. There are some pockets that need a bit more than this, some that need a little bit less than this. But that gives you a flavor for how much more we believe we need to get us to start, going the path of deploying more capital.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. Thank you. That's helpful. And then on the mortgage side of other -- as some of your competitors have adopted risk-based pricing models as well. Have you seen -- started to observe a broader impact on the market, kind of anything changing there?
Marc Grandisson -- President and Chief Executive Officer
Nothing yet. It's still very, very early. So we'll have to wait and see how it is rolled out. How it's actually developing in the marketplace. And I would say that to -- for everybody's benefit that our risk-based pricing was created back in 2011. This is our UG -- well, now our U.S. MI operation and there's a lot of things that need to happen to have a run rate. So we're going to have most likely some bumps along the way. Our competitors are going to be trying things and figure out -- figuring out things that work and don't work out as well. So, we're bracing for it, but the key thing from our perspective is we're keeping steady in our grid and our risk-based pricing and we're going to take whatever market, however they react we'll be the beneficiary or we'll lose some business because it's mispriced based on our own. But it's too early to tell, Elyse. It's going to take a while.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay, great. And then, there are some concerns on the outside in terms of recession and impact on credit, and how that might play out late this year maybe into the 2020. As you guys, obviously alluded to credit being really strong relative to past cycles, but what would you be paying attention to see the potential turn in the credit cycle?
Marc Grandisson -- President and Chief Executive Officer
Right now, I think if you look historically what went wrong, it really did not -- I mean, surely the credit quality, the credit worthiness of the borrower is extremely important, right? But what happened historically that really created the issue is the product development. If the products like the low DAC, no DAC (inaudible) all these stuff comes back to the market. This is what we'd be worrying -- would be worried about. Of course, the other macro thing that could impact everything is the housing price depreciation across the economy.
So one thing that we're now worried about -- the reason why we're not so worried about right now is because there is a shortfall on housing supply, and it's been there for quite a while. So everybody is predicting smaller price increase in house prices, but still positive for the next two to three years. So a recession could probably put a bump on this. So, if you look at historically on some recessions in the past, we had times when house price increased by 1%. The only time it went down guys for your benefit and that's actually very useful to know is only in the '07-'08 crisis. For the last 45 years, it never -- the house price index despite having gone through five, I think different recessions, only came down once. The pricing index came down once. So the product is really the problem, Elyse and we don't see anything yet.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay. Thank you very much. I appreciate all the color.
Marc Grandisson -- President and Chief Executive Officer
Welcome. Thank you, Elyse.
Operator
Thank you. Our next question comes from Meyer Shields with KBW. Your line is open.
Meyer Shields -- KBW -- Analyst
Great, thanks. Marc in your introductory comments, you noted not just that loss trends to get worse, but they could resume sort of above-average levels. So I was hoping you could sort of clarify why that is a concern right now?
Marc Grandisson -- President and Chief Executive Officer
Because we're seeing some changes in some of our submissions and some of our data, it's still very early signs and it's really anecdotal, sometimes anecdotal, sometimes it's actually real. So we're seeing price -- seeing loss trend picking up in certain areas and it's -- we believe it's only a matter of time before it starts spreading to other lines of business.
And Meyer, as you know, we're students as well of the industry, and the CPI is about 1.8%, 1.7%, that as I've mentioned that in prior calls. The inflation -- or the insurance inflation is typically running ahead of it by 1.50% to 2.50%. So I would expect the trend that could be recapturing, having a very vibrant economy exposure growth and more friction in the marketplace, we would expect those to generate more losses. And the reason then we're putting that out, Meyer, is because I want to put that into perspective of the price increase that we talk about on average, being 200 bps or 250 bps or 300 bps. It just doesn't make for a lot of margin of safety as you go about in analyzing how you allocate capital between lines of business. And as you know, more probably than I do is when you write a business an insurance policy, it takes years for you to really find out how bad or how good it's going to be. So we tend to take a more cautious approach to it.
Meyer Shields -- KBW -- Analyst
Okay. That's very helpful and thank you. A quick modeling question, with the recent U.S. and UK acquisitions, are those going to produce any appreciable change in the expense ratio?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Short term.
Marc Grandisson -- President and Chief Executive Officer
Well, I mean both acquisitions were in the important segments. So I would say that the expense ratio, yes, no question that in one of our acquisitions in the UK, maybe a bit of integration expenses that will have -- that will be reflected. But all-in-all, that you've given that the U.S. one was something that we -- it's a partner, it's a business that we've done business with for many, many years. That should not really impact the expense ratio. And the final thing, which you'll see in the 10-K is that we'll certainly trigger a bit slightly higher intangible amortization expenses that start coming through in 2019.
Meyer Shields -- KBW -- Analyst
Okay. And that's segment or corporate?
Marc Grandisson -- President and Chief Executive Officer
Well the intangibles is all one number altogether. So -- when we finish up our analysis and we publish our 10-K in a couple of weeks, you'll see that the slight changes in -- from what we published a year-ago which was primarily UGC related.
Meyer Shields -- KBW -- Analyst
Okay. Fantastic. Thank you.
Marc Grandisson -- President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Brian Meredith with UBS. Your line is open.
Seth Rosenberg -- UBS -- Analyst
Hey, guys. Seth Rosenberg here for Brian, thanks for taking my questions, I've got one for you. So if you look at the Insurance segment, large losses improved versus last year, but if you look back at last year, I think you had called out 2.2 points, which was elevated at that time. So if you kind of just take this quarter in a vacuum and not the comparison, will you say that large losses were better or worse in line with expectations and as because so many companies are calling at a higher frequency and severity of large losses? So just trying to get a feel if there is something in loss cost there that concerns you?
Marc Grandisson -- President and Chief Executive Officer
Right. So our insurance group had some lumpiness to it, right? Not as much as reinsurance for obvious reasons, but there's still some quarters that are above average or below average. This quarter was sort of an average quarter for us in terms of a large risk loss or non-attritional loss, as they call it. We have a hard time for everybody's benefit, slicing and dicing the losses in so many different sections. And at the end of the day, we are providing insurance coverage for all kinds of losses. So this -- what you're seeing right now is sort of what is our loss pick inclusive of all the things that could happen in our portfolio.
Seth Rosenberg -- UBS -- Analyst
Got it. So nothing particular to construction cost or labor that really stuck out in terms of severity?
Marc Grandisson -- President and Chief Executive Officer
No. If anything would have happened there, it would be already factored in our loss ratio pick.
Seth Rosenberg -- UBS -- Analyst
Got it. Thank you. And then switching over to mortgage, last year the delinquency rate kind of spiked up due to the storms in the third quarter. No reason to believe that it would be a similar dynamic in the first quarter from Michael and the wildfires?
Marc Grandisson -- President and Chief Executive Officer
No. We looked at this and we also thought about the government shutdown, which was on the horizon, but there's certainly GSE rulings that prevent us from these potential delinquencies developing into claims. And going back to the hurricanes, 2017 was slightly different in the sense that both -- in particular Harvey, where flooding was persistent for a number of weeks and it was more damaging than Michael that came in through and didin't really have an elongated time frame to the event. So at this time, we don't think there will be any spike in our delinquency there from the cats.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Right. First of all -- as far as the government shutdown, Trump signed up something at the end of January, just releasing backpays. So that should be a long way to alleviate any of our concerns there.
Seth Rosenberg -- UBS -- Analyst
Great. That makes a lot of sense. Thanks guys.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
You're welcome.
Operator
Our next question comes from Amit Kumar with Buckingham Research. Your line is open.
Amit Kumar -- Buckingham Research -- Analyst
Thanks and good morning. Just two quick follow-ups if I may. The first question goes back to the discussion on wildfire casualty losses. I just wanted to understand a bit better, if the utilities numbers change or if there is any other development, does your current number remains static or how was that reserve, maybe just help me just explain that a bit more?
Marc Grandisson -- President and Chief Executive Officer
Well, from our point of view it was a -- it's fully reserved. So there's no adverse development that we can see on this particular claim. Yes, it might with bankruptcy court and things could change, but if they change, we think they'll be in our favor. They'll reduce the number. But we've taken the most conservative view that we can think of at this point and we'll see how things play out.
Amit Kumar -- Buckingham Research -- Analyst
And what is the size of this book for you in terms of percentages? Or any way to sort of think about it?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Well, it's really a one-off, right? It's not a book per se. We have a small unit that focuses on these kind of bespoke transactions. Typically, there's a lot of them that are property type deals. This one was a casualty deal as well. And as you know, these deals come to the market infrequently that you don't know when they're coming. You look at the opportunity, you assess the risk, you make a decision on the pricing and if the risk adjusted returns are there, we try to participate. So at this point, I mean it's really not -- it's not really a book in itself. It's an amalgamation of policies that we write down in ad-hoc basis.
Marc Grandisson -- President and Chief Executive Officer
And Amit, the one thing that's interesting with this one because it's such in a high price to get out of breath. You don't hear about the 98 others that are actually -- that worked out to our favor, but let's leave it at that.
Amit Kumar -- Buckingham Research -- Analyst
That's a very fair point. I guess the only other question I had was going back to the discussion on buyback and I think in your opening remarks you talked about the volatility in the market is going to giving you an opportunity. The buyback, obviously, was higher than my numbers and discrete numbers. In the past, we used to talk about a matrix and in -- there used to be a matrix on your website, which I was having trouble finding. Has that -- are we still utilizing that payback matrix? Or how should we think about the future buybacks?
Marc Grandisson -- President and Chief Executive Officer
Well, yes. The matrix that you're referring to is still the starting point of our analysis. And the question that comes up often from many -- many of you on the phone is, is with the growth in the mortgage segment, does that matrix or that view change? And the answer is, it does, but it's not black and white. What we like and we told everyone before about the mortgage segment is that we like the visibility and the predictability of the earning stream that it gives us.
So the three-year payback that we've targeted in the past, we have a view that yes, maybe we'd be willing to extend it to four years to five years, who knows. But that's always considering all the options that are available to us. We talk about acquisitions, we talk about reducing our leverage. So there's all these aspects of capital management when they come into play and yes, I mean, so hopefully that answers your question. So that the grid is still there, but it had -- we have some flexibility around it.
Amit Kumar -- Buckingham Research -- Analyst
Got it. That's what I was looking for. That's all I have. Well, thanks for the answers and good luck for the future.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Thanks Amit, appreciate it. Thank you.
Operator
Our next question comes from Yaron Kinar with Goldman Sachs. Your line is open.
Yaron Kinar -- Goldman Sachs -- Analyst
Hi, good morning. Just one quick one. Can you recap the cat losses by event?
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Well, we typically haven't done that. So that's -- the number you have in front of you is both for wildfires and Michael, predominantly with a few and small others all in as well.
Yaron Kinar -- Goldman Sachs -- Analyst
Okay. And maybe one follow-up and as you look at the market into 2019, would you expect opportunistically to grow the property cat book and the property cat exposure?
Marc Grandisson -- President and Chief Executive Officer
Like I said, if we get the rates that we think are warranting an increase, we will increase. And we have increased some property exposure in the last quarter. So there were some opportunities to do it. As we said, it's just not a broad-based market opportunity, but we are always in a look out for specific transactions or relationships to really take advantage of that. So we have a -- we're present on front street, we're open for business as you know, and we will do it, if it's there.
Yaron Kinar -- Goldman Sachs -- Analyst
Okay. Thank you very much.
Marc Grandisson -- President and Chief Executive Officer
Thanks, Yaron.
Operator
I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.
Marc Grandisson -- President and Chief Executive Officer
Thank you very much everyone. It was a good year, appreciate your time and a Happy Valentines to all of you guys.
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Love you all.
Marc Grandisson -- President and Chief Executive Officer
Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
Duration: 51 minutes
Call participants:
Marc Grandisson -- President and Chief Executive Officer
Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer
Kai Pan -- Morgan Stanley -- Analyst
Geoffrey Dunn -- Dowling & Partners -- Analyst
Joshua Shanker -- Deutsche Bank -- Analyst
Michael Zaremski -- Credit Suisse -- Analyst
Elyse Greenspan -- Wells Fargo -- Analyst
Meyer Shields -- KBW -- Analyst
Seth Rosenberg -- UBS -- Analyst
Amit Kumar -- Buckingham Research -- Analyst
Yaron Kinar -- Goldman Sachs -- Analyst
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