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Arch Capital Group Ltd (NASDAQ:ACGL)
Q3 2019 Earnings Call
Oct 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2019 Arch Capital Group Conference Call. [Operator Instructions] Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

As a reminder, this conference call is being recorded. Before the company 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 laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website.

I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin.

Marc Grandisson -- President, Chief Executive Officer

Thank you, Crystal, and good morning to you. Our diversified business model of specialty insurance, reinsurance and mortgage lines of business produced good growth, and acceptable risk adjusted returns for our shareholders in the third quarter. Operating earnings generated an annualized return on common equity of 10% for the third quarter as our book value per share grew 3.9% and more than 21% on a trailing 12-month basis. Before I discuss market conditions in a broader P&C sector, I would like to address the topic that is currently getting a lot of attention, namely the increased claims inflation or loss trend.

In this part of the cycle, we are not surprised to hear about adverse claims development that some in the P&C industry are experiencing. We have discussed our view of loss trends on these calls over the past several years and I'd like to remind our shareholders that at Arch we approach pricing our products and establishing our reserves with a bias toward conservative loss trend estimates. As I have mentioned before history teaches us that on average the P&C industry experiences claim inflation rates about 200 basis points above the CPI, although this can fluctuate over time, it seems to us as the premium rate declines, seen by the industry over the past several years should have led to higher current loss picks, it is important to bear in mind that in many lines of business it takes three to five years before an accurate level of trend can be confirmed.

We believe that this gap between the estimated an actual loss trend has contributed to the uncertainty in reserve development. This uncertainty helps fuel both disruption and dislocation in several areas of insurance, which we have been and are capitalizing on. This location is evident in the rise in our submission activity this year and it is also reflected by the fact that we are achieving higher rate levels on new business than on renewal business in several segments. To give you some sense of the data, our submission activity in the third quarter was up more than 20% in E&S property and 15% each of E&S casualty and professional lines, specifically D&O.

However, to date, we believe that these disruptions are more indicative of a transitional market than a traditional hard market, as we have not yet seen rate increases and hardening across the board. Risk selection is still paramount. Across all lines in our Insurance group renewal rate change is average a positive 3.5% for the quarter, as net premium grew 22% in the third quarter, above the same period in 2018. About 30% of that growth came out of an acquisition we completed earlier this year in the UK small commercial line space. Rate increases contributed a quarter of the overall segments growth, while new business opportunities generated the balance. It is worth reminding you that we expect to close on our acquisition of the Barbican Group in the fourth quarter and we believe that the enhanced presence and scalability of our Lloyd's operation will provide us which further opportunities.

Now turning to the reinsurance market, reinsurance pricing tends to follow with that of the primary insurance industry, but with a few twists. Catastrophe and large attritional losses can disproportionately affect reinsurance results, creating localized opportunities in areas of the reinsurance business. Property fact and marine are examples of improving markets. Over the past several years, we've significantly reduced our net exposure to property CAT risk in response to the declining level of risk adjusted rates. The occurrence of Japanese typhoons in both the third and fourth quarter of this year has impacted global reinsurance industry result and should support the ongoing need for additional rate improvement.

Turning to our mortgage insurance segment, Arch MI continues to perform well and market conditions continue to be characterized by strong credit quality and a healthy housing environment. In terms of new production, our third quarter, new insurance written or NIW grew 18% over the same period a year ago. That production was driven by growth in the mortgage insurance market due to a broad increase in mortgage originations, combined with an increase in the level of mortgage insurance purchased from private mortgage insurance. Overall, insurance in force grew about 2% sequentially in the quarter at our Arch US MI as higher prepayment activity was more than offset by new MI originations. We continue to be pleased with the credit quality of our insurance and force as key risk metrics in our US MI portfolio remain at historically favorable levels.

Notwithstanding the good market conditions in the MI sectors, we continue to mitigate our downside risk from an economic CAT event, through the purchase of insurance linked notes. With respect to our investment operations, we have maintained our focus on total return and continuously reposition the portfolio to adjust to financial markets conditions, which contributed significantly to our growth in book value per share this quarter.

And with that, I'll hand the call over to Francois.

Francois Morin -- Chief Financial Officer

Thank you, Marc, and good morning to all .Before I give you some comments and observations on our results for the third quarter. I wanted to remind you that consistent with prior practice, these comments are on a core basis which corresponds to Arch's financial results, excluding the other segment, i.e. the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford.

After tax operating income for the quarter was $261 million, which translates to an annualized 10.3% operating return on average common equity and $0.63 per share. Book value per share grew to $25.61 at September 30th, a 3.9% increase from last quarter and a 21.1% increase from one year ago. This result reflects the effect of strong contributions from both our underwriting and investment operations. Starting with underwriting results, losses from 2019 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $68 million or 5.2 combined ratio points. These losses impacted both our Insurance and Reinsurance segments and were primarily due to Hurricane Dorian and typhoon Faxai.

As for prior period net loss reserve development, we recognized approximately $51.7 million of favorable development in the third quarter, net of related adjustments, 3.9 combined ratio points compared to 6.7 combined ratio points in the third quarter of 2018. All three of our segments experienced favorable development at $3.9 million, $14.7 million and $33 million for the insurance, reinsurance and mortgage segments respectively. We had solid net written premium growth in the insurance segment, 22% over the same quarter one year ago, while approximately 30% of that growth comes from the UK regional book of business we acquired earlier this year. We also had a strong quarter of new business and an improving renewal rate environment in most of our lines of business. The insurance segment's accident quarter combined ratio, excluding cats was a 100.3% essentially unchanged from the same period one year ago.

Some of the pricing and underwriting actions we have taken over the last several years have begun to filter through the loss ratio, while our expense ratio remains slightly elevated primarily as a result of investments that we are making in the business. In particular, as discussed on prior calls, the integration of our UK regional book and other smaller acquisitions is ongoing and increase in the overall insurance segment expense ratio this quarter by approximately 130 basis points. Investments in our underwriting, claims, and IT operations explain most of the remainder of the increase in the expense ratio. We continue to expect that the expense ratio for the segment will remain higher than the long-term run rate, until the growth in net written premium we achieved over the last few quarters, both organically and from acquired businesses is full earned.

Now moving to on to our reinsurance operations, where we also had solid growth this quarter, with net written premium up 40% over the same quarter one year ago. Over 60% of the growth came from the casualty segment, where we were able to write select new opportunities in distressed sectors of the market, including a multi-year treaty that represented approximately 65% of the growth for this line of business. As we have said in the past, some of these opportunities can be lumpy and distort quarter-over-quarter comparisons. Property excluding property cat and property cat make up most of the rest of the increase in net written premium. The reinsurance segment's accident quarter combined ratio, excluding cats stood at 92.8%, compared to 92.5% on the same basis one year ago. Part of the large attritional loss activity we experienced this quarter includes some exposure to the Thomas Cook collapse.

Our expense ratio remained satisfactory at 26%, down 140 basis points since the same quarter one year ago. The mortgage segments accident quarter combined ratio improved by 290 basis points from the third quarter of last year, as a result of the continued strong underlying performance of the book, particularly within our US primary MI operations. The calendar quarter loss ratio of 3.8% is higher by 60 basis points then the result observed in the same quarter one year ago, although last year's loss ratio benefited from favorable prior year development that was approximately 320 basis points higher than what was observed this quarter.

The expense ratio was 20.8% lower by 60 basis points then in the same period one year ago. Total investment return for the quarter was a positive 100 basis points on a US dollar basis, as our high quality portfolio continue to perform well. Our investment portfolio duration is over rate relative to our target allocation, up slightly to 3.64 years at quarter end, as we continue to expect a continued slowdown in economic growth and a lower for a longer global interest rate environment.

The corporate effective tax rate in the quarter on pre-tax operating income was 11.7% and reflects the geographic mix of our pre-tax income and a 40 basis point benefit from discrete tax items in the quarter. Excluding this benefit, the effective tax rate on pre-tax operating income was 12.1% this quarter.

At this time, we believe it still reasonable to expect that the effective tax rate on operating income will be in the range of 11% to 14% for the full year. 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.

Turning briefly to risk management. Despite the recent increases in catastrophe pricing, our natural cat exposures on a net basis remain at the historically low levels at October 1st, with the Northeast still representing our peak zone at slightly more than 4% of tangible common equity at the 1-year and 2.50-year return level. We remain committed to deploying more capacity in the segments if rates and expected returns on catastrophe-exposed accounts continue to improve over time. In our mortgage segment, we recently completed our 10th Bellamy transaction earlier this month, with coverage of $577 million.

Currently, the in-force Bellamy structures provide aggregate reinsurance coverage of over $3.7 billion. With respect to capital management, we did not repurchase any shares this quarter. Our remaining authorization, which expires in December 2019, stood at $161 million on September 30th, 2019. Our debt to total capital ratio stood at 13.5% at quarter end and debt was preferred to total capital ratio was 19.5%, down 300 basis points from year-end 2018. In terms of fourth quarter activity, we expect to use resources on hand to fund the Barbican acquisition at closing, once we receive regulatory approvals. With these introductory comments, we are now prepared to take your questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Mike Zaremski from Credit Suisse. Your line is open.

Mike Zaremski -- Credit Suisse -- Analyst

Hey, good morning. In the prepared remarks, I think you talked about some stress in the marketplace. And it's my understanding that in the primary insurance space, I could be wrong and it is reinsurance too, it feels like the greatest dislocations in the mega-sized accounts space, where capacity is very constrained. Just curious, is that an opportunity Arch can gravitate to or that's not your sandbox? Maybe you could talk to where you see the greatest dislocations in the marketplace and which could benefit you?

Marc Grandisson -- President, Chief Executive Officer

I think your assessment is right on. I think that you will hear on other calls and from the marketplace that larger that carried more limits are going through more dislocation, because competitors are reevaluating their risk appetite and this is where most of the capacity deployment was, shall I say, overextended in the last several years. This is where most remediation is taking place, and you will find that mostly in the E&S and the large commercial risk and this is where we have seen most of the increase in submission activity. We had been historically, being who we are, on the defensive for those risks and we are very well positioned to take advantage of that. I think we are on the receiving end of looking at more of those opportunities as we speak, and this is where we are able to flex more of our muscle.

Mike Zaremski -- Credit Suisse -- Analyst

Okay. So, just want to confirm, you obviously have a great rating from the rating agencies and you have a relatively large balance sheet, but the primary insurance balance sheet is smaller. In terms of the counterparties and the brokers, do they see you as -- like they look at the total Arch entity balance sheet, when assessing whether you guys can take a big piece of the large account space?

Marc Grandisson -- President, Chief Executive Officer

Yes, they are, and I think they're also looking at us from a perspective commercial. Some commercial anecdotes for you, that we are one of the few that said, we have no heightened appetite for risks that are price appropriately and I think the broker community and client community is very open to that and very willing to engage with us.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, that's helpful. And switching gears to mortgage insurance, there was a recent agreement with the FHA and Department of Justice earlier this week. And, there has been some talk about shifts mortgage insurance volumes banks coming back, to the FHA and maybe out of the private marketplace. I don't know if you have any thoughts there, if I am barking up, something that could take place?

Marc Grandisson -- President, Chief Executive Officer

I always have thoughts about everything, so my initial comment to you, Mike, is that it's very early. Right, it was announced last week, it's not only this week. And I think it's an attempt to decriminalize FHA, as a result of the banking system sector being reluctant to provide FHA product to its channel. But, we'll see how that goes and where it ends up. There's also uncertainty as to whether a different administration would have a different view. And it's really an agreement to -- like you said and had us to how it will be treated. It's too early I will tell you. In general, what we hear in Washington though is that the private sector is still the most favored area where the government wants mortgage insurance risk to be deployed. We have seen this for many years. We'll see where that takes us, but we're watching it and we'll have a more sensible way it goes and can take a long time over the next several years.

Mike Zaremski -- Credit Suisse -- Analyst

And just one last on the mortgage insurance volumes. I believe in past quarters you've alluded to giving back some market share, as competitors all have their own proprietary systems, it feels like probably didn't give up market share this quarter, but it's too early to tell. Is your view still, you might, over the next year or so, move down a little bit of market share? Still strong obviously, an absolute basis.

Marc Grandisson -- President, Chief Executive Officer

We don't manage the company on the market share basis. As you know, we just put out there our pricing and see what the market gives us at the quarter, but you're quite right with the new black box in environment. It's a lot harder to see where everything falls out and I think we're not the only ones. Most of our competitors will feel the same way and we're still in the early innings of how they deploy their pricing modules, how the client reacted there versus ours. I would just say that we put our pricing up there with our return. And it's so happens that we received and we're able to write the amount of business that we wrote in this quarter. I would not describe any market share target from where we sit.

Mike Zaremski -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Elyse Greenspan from Wells Fargo. Your line is open.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, good morning. My first question. Hey Marc, how are you? My first question is on your pricing commentary. So in insurance, you said 3.5% price in the quarter. And so I'm trying to get a sense, I know there is a lot going on within that book and some new business as well as your acquisition. But how do you guys view loss trend. I guess if you're getting 3.5 points of price, I would assume trend in aggregate is probably in excess of that. And can you just kind of help us think through that a little bit better?

Marc Grandisson -- President, Chief Executive Officer

Yeah, 3.5% for our portfolio as you're pointing out rightfully is that it's a very, very diverse book of business. Some lines of business are still --as I said, it's not across the board hardening markets, some lines of business are flattish and some are actually getting way in excess of a 10%, 12% rate increase and some new business are getting in a quite a bit above even a 5% or 6% even if in the middle of the road. So I would just --as you're thinking about and the starting point is also pretty important. So it's not --the 3.5% is one number that attempt to encapsulates everything and it works well, when you have a very monolithic marketplace or very monolithic book of business, but as you pointed our market, our business is very diverse. So I think that where you see growth is either because we're seeing good opportunities in terms of good return, healthy returns, regardless of the rate change. And if we have a rate change in a growing opportunities because then the rate changes is clearly beating the loss trend, we always look for margin of safety. We are looking at rate change and claims-loss trend and it's not a game of decimal.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then a lot of new business, I think you guys said three quarters of the insurance growth with some new business this quarter. So I guess, as we think about, you're getting good price on that you said, better than renewal. But I would assume you're probably setting the loss picks a little bit higher than where the legacy Arch business would be. So how do we think about kind of the ongoing margin profile of the insurance book, right and like bringing on this new business and the goal, I think to get down toward that mid-90s underlying margin?

Marc Grandisson -- President, Chief Executive Officer

Yeah, I think if we, if you look at the way we react to the marketplace acquiring business that gives us good return and a good margin, because and it doesn't have to be because of rate change, it may just be because of wanting to find a new home because of risk appetite of other players, are such that business point to our balance sheet. This has one aspect or whether the rate is going up. I think that we have a very, very straightforward actuarial method to look at where we were assuming the loss trend and the rate change and we booked that appropriately and I would argue conservatively, so that we don't have surprises or we actually have enough room to maneuver going forward, but broadly speaking, margin is expanding as we speak on business that we write in this segment in this time, this point in time.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful. And then my last just numbers question. I think it's the last time you guys updated us mortgage earnings were about within the ballpark. I think like 75%, is that still kind of about the right level or maybe it's gone a little bit higher this year?

Marc Grandisson -- President, Chief Executive Officer

Well, yes, it's definitely higher this year because mortgage has done phenomenally well and we've got some cash on the P&C side, we're -- as the P&C market I think is improving slightly over the last few quarters, and hopefully there is more room to grow, we'd like to think that the P&C earnings are going to start growing as a proportion of the total and mortgage will be a bit less, less, so. I mean mortgage we still think as a lot of runway in it as well, but just I think we can see more earnings coming through the P&C segments and that should help balance it a little bit more.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, thanks for the color.

Operator

Thank you. Our next question comes from Josh Shanker from Deutsche Bank. Your line is open.

Josh Shanker -- Deutsche Bank -- Analyst

Good morning, everybody. Two questions, one P&C related and one mortgage-related, on the P&C side, obviously the growth is very strong in the quarter. Can we foresee and when can we foresee it a reduction in the expense ratio based on amortizing a larger premium base across a similarly sized cost structure?

Marc Grandisson -- President, Chief Executive Officer

Yeah, Josh. I think we don't like to have make forecast, but I think it's realistic to see or think that sometime in 2020 as we earn some of the premium that we've, again the UK regional book that will filter in and second half of 2020 like to think that maybe we should see some improvement. Everything else being equal, I think that's kind of what we're thinking about, you guys have heard it, we said before, we are still -- we still have a target to achieve a 95 combined ratio that we're not committed to win, whether that's a year or two years, five years down the road, we're making the right improvements along the way, but we certainly at least in the interim and that over the next 12 to 15, 18 months like to think we're going to see some improvement coming through on the combined ratio.

Josh Shanker -- Deutsche Bank -- Analyst

Great, thank you. And then moving to [Phonetic] expense ratio, obviously the loss ratios up to the underwriting of course.

Marc Grandisson -- President, Chief Executive Officer

Correct.

Josh Shanker -- Deutsche Bank -- Analyst

Then on the mortgage side, obviously a lot of new insurance written in the quarter, but a very high proportion came from refi and our contracts with LTV lower than 85%. Can you talk a little bit new business whether it have persistency to it, whether a little housing appreciation somebody takes that business off your books. How should we think about the growth in the core specifically and how it differs from prior quarters?

Marc Grandisson -- President, Chief Executive Officer

Well, the growth -- the overall market is getting better and you're quite right. The purchasing is actually growing, despite the, if you look projecting for the NBA, fall over the next couple of years. The growth in mortgage origination is still there in the purchase market. The refinancing was not a surprise, but it's a reaction to the drop in mortgage rate by about 110 bps over the last 12 months and that's to be expected. So we have this -- I wouldn't say flurry, but we had this heightened activity of refinancing that is occurring. And the reason that the refinancing is still a big, I would say like a bigger proportion with MI attached to it, a lot of it was originated recently and they still haven't crossed the LTV below 80%. So, it allows us actually to go back again to the same client and reup our mortgage insurance offering to them. That's it.

Josh Shanker -- Deutsche Bank -- Analyst

Is that refi business more profitable on a risk adjusted basis, because it's closer to getting to a point where there's a lower risk that needs MI or is it lower risk because it has a lower persistency because it's close to getting below 80%. I mean how should we think about that business versus the rest of the [indecipherable].

Marc Grandisson -- President, Chief Executive Officer

So risk-wise is, it's a little bit, it's about the same risk. It's a same goes to the same process of evaluating. I think there is pricing, it's a little bit less pricing and a lot of it has to do with, it sort of rolling forward the same book of business, it's like a renewal book of business. So I would say it's slightly less. But I think risk adjusted is very, very similar, after you factor everything else.

Josh Shanker -- Deutsche Bank -- Analyst

Are these customers likely the same customers you had before or because of your procurement of skills or is the mix change that depends on who picks it up -- the crapshoot you get that refi from a previous customer?

Marc Grandisson -- President, Chief Executive Officer

I think you can make some action points to try and protect our book of business, but the latter is more likely, if you don't do anything, as I think you just go, through it back, is thrown back into the pool, it may be refinanced by a different mortgage originator to begin with. So that will have different relationships going along with them.

Josh Shanker -- Deutsche Bank -- Analyst

Okay, thank you for all the answers. Appreciate it.

Operator

Thank you. Our next question comes from Geoff Dunn from Dowling & Partners. Your line is open.

Geoff Dunn -- Dowling & Partners -- Analyst

First, could you provide the net ILM cost in the results this quarter.

Marc Grandisson -- President, Chief Executive Officer

Well, the way we look at it, it varies, obviously by layer or some of the old Bellamy's of amortized but big picture Goeff, I mean you should think about roughly 3% of the outstanding balance, as the cost. So we told you -- about $3.7 billion of outstanding Bellamy limits in place, 3% and I'll let you do the rest of the math.

Geoff Dunn -- Dowling & Partners -- Analyst

Okay. And then can you talk about the trend this year in terms of detachment points. It looks like the new business deals we've seen this year have moved beyond just being mezz cover and now we're now, we're really looking at mezz plus CAT cover, can you talk about the decision to do that. The market reception for continuing to that going forward and how you weigh the risk benefit versus cost?

Marc Grandisson -- President, Chief Executive Officer

Right. Well, certainly, initially the attach and detach structure is very much focused on PMI or coverage and capital requirements. I want to say in the last year we've moved a little bit like you said, beyond that there is a bit more of a focus with rating agencies that have slightly different views on capital requirements. So we're always interested in the trade-off and making sure that, yes, maybe we can get some additional protection at a rate or at a cost that is efficient for us, and that's part of our capital management decisions. So it's --that's how we look at it and I think part of your question there is tremendous appetite in the investment community for these types of products as you know, and the fact that we're expanding the program is a little bit and going up a bit more into the -like you said past the mezzanine layers a risk, we've had tremendous success in placing those instruments. And we think --hopefully there for us down the road.

Geoff Dunn -- Dowling & Partners -- Analyst

Okay. And then just quick last follow-up. The other IIF was basically flat sequentially or is that just lapse rate experience, or you seeing any change in the attractiveness of the GSE CRT market?

Marc Grandisson -- President, Chief Executive Officer

It's just a normal roll off Goeff as you know, we've been -- since 2014. So you would have a sort of a seasoning and so getting sort of a run rate in terms of appetite and having frankly our allocation being more stabilizing with the last two, three years.

Geoff Dunn -- Dowling & Partners -- Analyst

Okay, thanks.

Operator

Thank you. And our next question comes from Yaron Kinar from Goldman Sachs. Your line is open.

Yaron Kinar -- Goldman Sachs -- Analyst

Good morning, everybody. I guess my main question is just around the premium growth in insurance and reinsurance, seeing some growth in longer-tail lines. And I think you even explicitly talked about a multi-year program that you signed and multi-year treaty signed in casualty reinsurance. Just given the loss trends that we're hearing about and just kind of increased concerns around deterioration thereof. Can you maybe tell us or talk us through how you gain comfort and growing those lines here?

Marc Grandisson -- President, Chief Executive Officer

Yeah, that transaction is very unusual. And I would call, I would put it in a camp of a bit more opportunistic in nature. Not that we don't want to renew it for the foreseeable future. But this is -- this came to us with a lot of deep changes through the pricing, the attachment point and whatnot. So it's not that you renew the same structure necessarily you are on. So there's a lot of moving parts to that transaction, that one would be squarely the camp of tremendous distress, which you said in your comments Francois and definitely at a heightened level of return, that we believe more than covers any of the range of outcome or potential outcome on the loss trend going forward. So it's about margin of safety here.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay. And that's specific transaction and then more broadly --other growth and programs construction, surplus casualty?

Marc Grandisson -- President, Chief Executive Officer

Very similar. I mean the construction in national accounts would have more bit more workers comp. So we have a bit more view in the loss trend in there. So that helps pick in our loss picks , on the E&S casualty, I think you would have a very similar phenomenon, not to the same sort of distressed level that I've just mentioned in the reinsurance transaction. But certainly, you have similar overtones of distress being pushed in, to with the different marketplace and having to be repriced and at price level that we believe far make up for any uncertainty, we may have in terms of loss trend.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. And then maybe more broadly as you are looking at deploying capital into insurance or reinsurance, when you think of quota share reinsurance here, getting the benefit of improving underlying conditions. And then maybe additional improvement on the reinsurance side, does that start to become more attractive than the insurance book?

Marc Grandisson -- President, Chief Executive Officer

I think the reinsurance playbook is a little bit different. I think you have, you can buy Steckler pen, embarked on a significant partnership with a ceding company under reinsurance that really move the needle quickly as we saw in that transaction. I just mentioned, on the insurance is a slower build, but I think if you look back at our 2002, 2003 history. The reinsurance team is a lot quicker because that has the ability to be much quicker and get access to business that's going through a rate change and improvement rather much quicker than our Insurance Group but the Insurance Group is not far behind as you saw in the numbers this quarter. So that's more of a same playbook, Yaron.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay, thank you so much.

Operator

Thank you. Our next question comes from Brian Meredith from UBS. Your line is open.

Brian Meredith -- UBS -- Analyst

Hi, thanks. A couple of questions here. First, I'm just curious on the big reinsurance transaction, did it distort any of the ratios and also was there any unearned premium portfolio that came with it, which would have maybe played the earned premium?

Marc Grandisson -- President, Chief Executive Officer

No, it's early. So, there is no LPT, there is no incoming port in. So, it's a grade-up multi-year deal and then, distorted ratio is not really, there is normal level of its loss ratio, expense ratio, it's been -- not a whole lot of been earned as it is. So, with it, really in the big picture for the segment, there is no impact at this point.

Brian Meredith -- UBS -- Analyst

Great, thanks. And then, just curious, in the insurance segment, some of the investments that you're making, that you highlighted claims [Phonetic], etc. How long are those expected to continue here for? And maybe another way to think about it is, if I look at your other underwriting expenses growth that you're seeing. How much of that is due to the acquisition versus just investments you are making?

Marc Grandisson -- President, Chief Executive Officer

I'd say, roughly speaking, there is probably a good, I mean, more than half, maybe two-thirds is from the acquisition that we've made. So, we brought on the fair amount of people with the acquisition. And, as we said before, the earned premium has to earn and we think that by early 2020, that portfolio will have been fully with us for a full year. And then on top of that, there is still a few more adjustments or investments we've made in terms of the staff, we brought in some other underwriters that help supplement some of the lines of business where we are seeing opportunities and other small areas, like I had mentioned claims [Phonetic] in IT, where there's still investments we're making that are appropriate and at the right time for us to make them. I don't think those will keep growing as much. So, once the premium that we're putting on the books now earns out or earns over the next 12 months, it should stabilize and then level out and maybe it can go down a little bit.

Brian Meredith -- UBS -- Analyst

Great. And then another question, if I look at some of the growth that you are putting on, excluding this big multi-year kind of -- a lot of it is heading more toward property, property cut businesses that tend to be a little bit more volatile. Is that something we should expect perhaps going forward, a little more volatility in the results, but maybe lower underlying combined ratio as a shift mix of business?

Marc Grandisson -- President, Chief Executive Officer

The property that we are growing in leaps and bounds is actually not necessarily -- some of it cat exposed on the insurance side, but there is a cat cover and reinsurance protections against volatility of the results. On the reinsurance side, I think most of the property growth is actually not necessarily cat exposed. So, it's a bit of a different growth. Some of the cat exposed, you've seen some cat and the premium written growing, although we would say we are relatively on the way, very small compared to what you would expect [indecipherable] our side. So no, we don't expect much more volatility as a result of that.

Brian Meredith -- UBS -- Analyst

Great. And then my last question, I'm just curious. As we look at this terrific growth you guys are putting on in the insurance and the reinsurance area. I'm just curious how fungible was the capital between your mortgage insurance business and your insurance and reinsurance business? Is it easy to take money out of the MI operations, maybe fund growth in the insurance or reinsurance, how does that all work?

Marc Grandisson -- President, Chief Executive Officer

Well, it's not 100% fungible, but maybe you noticed in our numbers this quarter, the PMIERs ratio went down in the third quarter, as a result of a fairly substantial dividend that was upstream from the U.S. MI operations to the group. That is money that is available to fund growth in both the insurance and all our other lines of business or segments. So, how easy is it to do? It's a process, certainly, you can't do it on a whim or just overnight, but once we get the regulatory approvals and we sit down with them and show them scenarios and stress scenarios and forecast and certainly figuring out also contingency reserves. There is a lot of statutory rules we have to abide with, but big picture, we have the ability to use some of that capital and move it around, then use it in other areas.

Brian Meredith -- UBS -- Analyst

Great. Really helpful. Thank you.

Operator

Thank you. Our next question comes from Meyer Shields from KBW. Your line is open.

Meyer Shields -- KBW -- Analyst

Great, thanks. I only had one question. Marc, hoping you can help us understand how to think about the expenses associated with the submission flow uptick in P&C?

Marc Grandisson -- President, Chief Executive Officer

Yes, it's more expensive and I think that one of the investments that we talk about is to get much more efficient in dealing with those submissions and then, with more proactives, using tools such as [indecipherable] to really get to the one that we have a higher chance of hitting. So, this is certainly part of, yes, absolutely to the point that that we're investing to be able to augment the throughput on the platform. That's one of them.

Meyer Shields -- KBW -- Analyst

Okay. In general, I'm trying to find the best way to ask this. As a percentage, are more of the submissions price adequately now or is there enough disruption in the marketplace that you're seeing, that agents are pitching, that it just doesn't make sense to you, to Arch right now?

Marc Grandisson -- President, Chief Executive Officer

Right now we're seeing more submissions coming to us. Our hit ratio is not -- it's still in its early stages of finding its footing. It's also reactive to the market place price. But clearly, we are finding in the new business a similar and possibly in a growing mode and more of our liking as to what's being proposed in the marketplace. By virtue of the fact that that business is not put out in the US market for pricing, or for consideration, tells you that it will be most likely repriced. The problem that we have with this as you could appreciate it, it doesn't mean it's repriced, it's priced adequately, right. You could come out of a place where it needs probably a 30% increase to get to the CNS thrown into the marketplace, and only command at 10.15 or go for 10.15. That's not enough for us to do. It's still very important to be selective in what we do and maintain, as we have, our underwriting discipline.

Meyer Shields -- KBW -- Analyst

Okay, fantastic. Thank you so much.

Operator

Thank you. Our next question comes from Ron Bobman from Capital Returns. Your line is open.

Ron Bobman -- Capital Returns -- Analyst

Hi, thanks a lot. I had a question about Watford. It's obviously trading at a huge discount to book. It indicates a disbelief, from my view, a disbelief in either the underwriting quality, or the investment portfolio, or strategy, and not that I subscribe to it, but at least the market seem to subscribe to one of those two justifications. What are the Arch's thoughts about where it sits stock price-wise and the plan and maybe the use of capital at Arch, to remedy if you're self-motivated? Obviously, there has been some personal investment sizable, the last few months by Arch executives. But beyond that, would you comment, please?

Marc Grandisson -- President, Chief Executive Officer

Yes, I'll start and I'm sure Mark will chime in. I think at a high level, certainly, there is only so much we can say, but we're still very committed to the Watford platform. It's been good for us. I think it gives us the ability to access business in a different way that we wouldn't be able to do just with Arch. In terms of stock price, who knows what the market is thinking. I would argue that maybe there is overreaction, based on some of the other hedge fund reinsurers and how they perform. So, I wouldn't speculate or think where it's going to go, but my personal belief is, there is probably some overreaction going on. So, Marc, anything you want to add?

Francois Morin -- Chief Financial Officer

I think, one thing I would add wrong to this is, I'm still in and I feel like the company's perspective, and I would even argue that is even better at this point in time. I think that the marketplace is getting better. And, Watford is uniquely positioned side by side with us and as we underwrite and help them write good business on the book. So, I'm actually more positive, if anything, today than I was six months ago, which I was already positive to begin with. There you go.

Meyer Shields -- KBW -- Analyst

All right, thanks, gentlemen.

Operator

Thank you. Our next question comes from Ryan Tunis from Autonomous Research. Your line is open.

Ryan Tunis -- Autonomous Research -- Analyst

Hi, this is actually Crystal Lu [Phonetic] in for Ryan Tunis. One question I had was just on the elevated large losses on reinsurance. I think you mentioned there is some impact from Thomas Cook collapsing. Could you maybe give a breakdown of how much of an impact the large losses had on the underlying results there?

Marc Grandisson -- President, Chief Executive Officer

I mean, it's not major, I think I just made the point to have you guys think about it so that it can happen. These things happen, this quarter was Thomas Cook, it could have been something else, it's been other things in the past, and we've had property losses. It's not out of norm, right now I think it's around a 3% impact on the loss ratio this quarter. That's what we're in the business of doing, we insure, I mean we are in the risk business and we're not making excuses. We'll let you know, it's very consistent what we've seen in the past and highlighting it. So, that's all I want to say now.

Ryan Tunis -- Autonomous Research -- Analyst

Okay. That's helpful. And then one more question on getting the insurance profitability down to your 95% target eventually, how is the changing pricing environment changed your view on your internal timeline and strategy in terms of business mix there?

Marc Grandisson -- President, Chief Executive Officer

I think it's not changing where we're going. I think that the market is most likely helping us getting there quicker, sooner. That's what I would tell you.

Ryan Tunis -- Autonomous Research -- Analyst

Okay, thank you so much.

Operator

Thank you. And I'm showing no further questions from our phone lines, and I'd like to turn the conference back over to Marc Grandisson for any closing remarks.

Marc Grandisson -- President, Chief Executive Officer

To everyone there Happy Halloween. Thank you and see you next quarter.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Marc Grandisson -- President, Chief Executive Officer

Francois Morin -- Chief Financial Officer

Mike Zaremski -- Credit Suisse -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

Josh Shanker -- Deutsche Bank -- Analyst

Geoff Dunn -- Dowling & Partners -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

Brian Meredith -- UBS -- Analyst

Meyer Shields -- KBW -- Analyst

Ron Bobman -- Capital Returns -- Analyst

Ryan Tunis -- Autonomous Research -- Analyst

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