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Arch Capital Group Ltd (NASDAQ:ACGL)
Q4 2019 Earnings Call
Feb 12, 2020, 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 Q4 2019 Arch Capital Group Earnings Conference Call. [Operator Instructions]

Before the Company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby.

Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website.

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

Marc Grandisson -- President and Chief Executive Officer

Thank you, Crystal, and good morning to you. Arch completed 2019 on strong footing as the mortgage insurance market remains healthy and our property and casualty operations are well positioned for the pricing improvements taking place in many areas of the market. Our operating income produced an annualized return on common equity of 11.7% for the fourth quarter and 12% for the full year, while book value per share grew 3.2% for the quarter and nearly 23% for the year.

While property and casualty rates are increasing in several lines of business, we believe the market remains in a transitioning phase between soft and harder conditions. Given the uncertainty of current claim trends, we believe our industry needs further rate increases to provide a more clear risk/reward proposition. In this transitional environment, risk selection and thoughtful capital allocation remain critical to generating superior returns.

As we discussed last quarter, strengthening market conditions are evident to us from both the rise in our submission activity and our ability to achieve significant rate increases. Dislocation is ongoing as some industry participants de-risk by tightening underwriting standards and by actively managing down their exposures. We believe that these conditions are likely to continue in the foreseeable future due to the continuing uncertainty regarding losses from the recent soft policy years.

While there are some lines of business where the rise in loss costs can be tied to social inflation, in our view, a large component of the stress on the P&C industry's performance is due to prolonged soft market conditions and optimistic loss picks over the last three to four policy years. While reported capital levels are still high, combined ratios are still below 100. Therefore, the duration of the transition or hardening market is unpredictable.

Within our Insurance Segment, conditions for growth improved throughout the year, as indicated by 29% growth in our fourth quarter 2019 net written premiums. About one-quarter of our premium growth came from recent acquisitions, while 50% was created organically through new opportunities and the rest coming from rate improvements.

Following three years of elevated property losses in both the US and internationally, property rate increases, particularly E&S risks in cat-exposed area in the US, are up more than 25%. We have also seen rate increases ranging from 10% to 20% in large commercial, general liability and public company D&O policies. But as we discussed previously, rates are not rising in all lines, and in some areas, rates are not rising enough.

Switching now to our Reinsurance business. Pricing in that segment tends to follow primary insurance, and we have observed some signs of discipline returning to the reinsurance market. In our facultative reinsurance business, we are seeing increasing submission levels and much improved pricing. Fac reinsurance has been a leading indicator of treaty market conditions historically, and we like the positive signal fac is giving us at this point.

On the treaty side, we are beginning to see modest improvements in terms and conditions, including declines in ceding commissions ranging from 1 percentage point to 3 percentage points. Ceding commissions remain elevated, however, and are 500 bps above the level seen in the last hard market.

Focusing on the January 1 reinsurance renewals for a minute, rate increases in what is primarily a property cat reinsurance renewal period created a few opportunities for our Reinsurance Group, but we remain underweight cat risk. As a reminder, our self-imposed internal risk limitation is 25% of equity capital. At this point, our 1-in-250 year PML stands at only 6% of equity capital.

Turning now to our mortgage insurance segment, Arch MI continued to perform well. As I mentioned earlier, the operating environment is characterized by strong credit quality and a healthy housing environment. In addition, lower interest rates led to strong new mortgage originations in the quarter. Accordingly, our new insurance written at Arch MI US was strong at roughly $24 billion in the quarter. Overall, our US insurance in force was $287 billion at quarter-end, and the underwriting quality of recent originations remained very high.

On a macro basis, lower interest rates and high employment have made housing more affordable. At the same time, demographic forces in the US are creating a tailwind as millennials move into their prime household formation years.

Lower interest rates also led to greater refinancing activity in the quarter, which explains the decline in our persistency rate in the fourth quarter down to 76%. From a historical perspective, this level remains high, and along with good mortgage origination activity, supported growth in our insurance in force in the quarter.

With respect to our investment operations, interest rates have returned to historically low levels. As in our underwriting approach, we have maintained our focus on risk-adjusted total return, which contributed to our growth in book value per share in this quarter and the year.

In summary, Arch's position, following years of de-emphasizing the most commoditized and soft business lines, in property casualty market is favorable. We have the human and financial capital to grow, should the market continue its favorable trajectory into 2020.

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

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

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

After-tax operating income for the quarter was $308.4 million, which translates to an annualized 11.7% operating return on average common equity and $0.74 per share. Book value per share grew to $26.42 at December 31, a 3.2% increase from last quarter and a 22.8% 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 $30.4 million or 2.2 combined ratio points compared to 9.7 combined ratio points in the fourth quarter of 2018. These losses impacted both our Insurance and Reins [Phonetic] segments and were primarily due to Typhoon Hagibis and a series of smaller events.

As for prior-period net loss reserve development, we recognized $54.7 million of favorable development in the fourth quarter, net of related adjustments, or 4.0 combined ratio points compared to 6.1 combined ratio points in the fourth quarter of 2018. All three of our segments experienced favorable developments at $2.8 million, $19.1 million and $32.8 million for the Insurance, Reinsurance and Mortgage segments respectively.

We had solid net written premium growth in the Insurance Segment of 28.7% over the same quarter one year ago. The Insurance Segment's accident quarter combined ratio, excluding cats, was 101.6%, higher by 330 basis points from the same period one year ago. Approximately 220 basis points of the difference is due to an elevated level of large attritional claims in the quarter, primarily from our surety unit, which can experience some volatility from quarter to quarter. The balance is primarily due to a higher expense ratio, driven by investments we are making in the business and the integration of our UK regional book and other smaller acquisitions.

Now, moving on to our Reinsurance operations where we had a relatively stable quarter. Net premium growth was at 4.3% from the same quarter one year ago, and the accident quarter combined ratio, excluding cats, stood at 92.3% compared to 96.2% on the same basis one year ago. The difference is mostly attributable to the presence of a large attritional casualty loss arising from the California wildfires in the same quarter one year ago. Our expense ratio remained essentially unchanged at 26.9%.

The Mortgage Segment's accident quarter combined ratio improved by 200 basis points from the fourth quarter of last year as a result of the continued strong underlying performance of the book, particularly within our US primary MI operations. The calendar quarter loss ratio of 0.9% is lower by 120 basis points than the result recorded in the same quarter one year ago, mostly as a result of better-than-expected claim experience. The benefit to the loss ratio from current year favorable development was 510 basis points in addition to the 940 basis points related to prior years. The expense ratio was 20.7%, consistent with the result from the same period one year ago.

Total investment return for the quarter was a positive 107 [Phonetic] basis points on a US dollar basis, as our high quality portfolio continued to perform well. For the 12-month period, our portfolio returned 7.3%, an excellent result driven by particularly strong returns across our fixed income and equity investments. The duration of our investment portfolio at December 31 was down slightly to 3.40 years from 3.64 years at September 30 and was overweight relative to our target allocation as we continued to expect a lower for longer global interest rate environment.

The corporate effective tax rate in the quarter on pre-tax operating income was 6.9% and reflects the geography mix of our pre-tax income and a 30 basis point benefit from discrete tax items in the quarter. The 2019 fourth quarter effective tax rate on operating income includes an adjustment to interim period taxes recorded at an annualized rate. This adjustment increased the Company's after-tax results on pre-tax operating income available to Arch common shareholders by $12.4 million or $0.03 per share. As always, the effective tax rate could vary depending on the level and location of loss or income and varying tax rates in each jurisdiction.

Turning briefly to risk management. With the recent improvements in catastrophe pricing, we have increased our natural cat PML to $612 million as of January 1, which, at slightly more than 6% of tangible common equity on a net basis, remains well below our internal limits at the single event 1-in-250-year return level. This change demonstrates our ability to deploy incrementally more capital in an improving market to opportunities that offer adequate returns on an expected basis.

In our Mortgage Segment, as mentioned on our prior earnings call, we completed our 10th Bellemeade transaction in the fourth quarter with coverage of $577 million. As of year-end 2019, the in-force Bellemeade structures provide aggregate reinsurance coverage of approximately $3.3 billion.

With respect to capital management, we did not repurchase shares this quarter. Our remaining authorization, which expires in December 2021, stood at $1 billion at December 31. Our debt to total capital ratio stood at 13.1% at quarter-end, and debt plus preferred to total capital ratio was 19%, down 350 basis points from year-end 2018.

Finally, as you know, we closed on the Barbican acquisition in November of last year. The integration of their platform is well under way. For the 2020 calendar year, we expect to incur approximately $65 million of intangible amortization across all acquisitions we have made prior to December 31, 2019.

With these introductory comments, we are now prepared to take your questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Yaron Kinar from Goldman Sachs. Your line is open.

Yaron Kinar -- Goldman Sachs -- Analyst

Hi, good morning. So my first question just goes to growth in the Insurance Segment. If I heard your comments correctly, it sounds like you're so lukewarm in terms of the market opportunities and the rate environment and rate adequacy. And yet, I think even excluding the acquisitions, you grew at a good 20% clip or so. I guess, where are you seeing the opportunities? And if you were to become more constructive on market conditions, where do you see that growth gapping [Phonetic]?

Marc Grandisson -- President and Chief Executive Officer

The first part is -- thanks for the question. The first part is, I think we're lukewarm in the sense of saying it is a full-on hard market. We just want to impress upon everyone that we're in the early stages of rate changes and we don't know how long that's going to last. And I also made comments about the fact that the industry has an all-time capital high and still printing very reasonable combined ratio numbers. So I just want to make the point that it's not across all lines of business. Having said this, the growth that you see us experience or go through for the year and certainly in the fourth quarter is in the areas where markets are coming back to old [Phonetic] pricing level and return expectation. So we had de-emphasized those lines of business for quite a while actually as the softer years were eating into our -- on production.

And I think of late, we've seen a resurgence of submissions, and we're able to hit and get our pricing and return. So in the areas where we're growing, I would say that it is definitely an improving market and improving such that we believe we are clearing some of the loss trend -- or loss cost trend concerns that one may have. So I also want to remind that we had not grown as much as the market would have -- probably could have indicated over the last year. So this is good growth on a lower number. For instance, on the D&O side, we -- our premium written was about half of what it was last year versus five years ago. So you don't need much of an increase to really make a dent in the overall price increase.

And the second question is, we can grow a lot. And as we saw -- you asked, Yaron, whether we can grow based on the conditions. If conditions continue on, and we're seeing right now still getting -- still being very, very good, I think we can still grow a fair amount. I think we have been -- our guys -- our people have been very busy even in those softer years, but I do believe that we have extra capacity and appetite to write more -- quite a bit more if it happens. How much will depend and be dictated by overall rate level in 2020.

Yaron Kinar -- Goldman Sachs -- Analyst

It sounds like that premium growth could accelerate in the right market conditions.

Marc Grandisson -- President and Chief Executive Officer

That is a fair statement.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay. And do you have any sense where your booking the current -- the new business coming on relative to the overall portfolio in Insurance, like with the adequacy of returns there is?

Marc Grandisson -- President and Chief Executive Officer

Yeah. So we haven't changed much of the loss picks. And I want to put things in perspective as well is that the rate changes that have taken place that we're talking about really started to be, we believe, enough above the loss cost trend since the middle of 2019. So it's a bit early and premature to make any changes to your booking your loss ratio. You look at it on an accident year basis. Plus things could develop on historic -- history, all the accident years prior to 2019. So it's premature to make any comment on to loss pick as we speak. Frankly, loss pick, if they are to improve, and we believe everything else being equal, they should improve over the next couple of years. They will take six to seven quarters to really see good tractions and see some movement there.

Yaron Kinar -- Goldman Sachs -- Analyst

Understood. Thank you. And best of luck in the year ahead.

Marc Grandisson -- President and Chief Executive Officer

Thanks Yaron.

Operator

Thank you. And our next question comes from Jimmy Bhullar from J.P. Morgan. Your line is open.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Hi, good morning. First, I just had a question on the tax rate. It improved a lot '18 to '19. And I think it was lower than what you had expected as a result of -- what's driven that? Is it just the geographic makeup of income? And what's your expectation or sort of likely range for 2020?

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

Well, yeah, a couple of points here. I think the -- it was a bit lower than what we had, I guess, given as a range earlier in 2019. There is a couple of discrete items that played out throughout the year, which helped out in terms of publishing the final tax rate. So when I just -- I took some of those, I look back, and without these adjustments, which is really how we think about when we give you a range, the 2018 tax rate was 11.2%. This year was 10.9%, so very close. Ultimately, we had some additional benefits that brought it down to 10.4% for the year. So yeah, as you know, tax rate is very much a -- it's hard to have a lot of precision on the tax rate because we just don't know what the losses are going to be before they happen, so whether there is a cat or a favorable or unfavorable development on prior years etc.

So looking at 2020, I'd say, we're very comfortable saying that we're going to probably be in the same range. Maybe -- if you want to expand it, maybe to try to make sure we're in the range, maybe 10% to 14% -- in the years past -- last year, we said 11% to 14%. So maybe there is -- potentially it could be a bit lower. But I think it's a bit early, again. We're in the early days of 2020. And hopefully, that's enough for you to update the models.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Okay. And then on the MI business, obviously, your overall margins have been very strong, and same goes for peers as well. And a lot of that's just the strong results on the legacy block. But if you look at new business ROEs, are those in the sort of double-digit range? Or is it more sort of a single-digit ROE type business in terms of new sales? And I realize it will take a while for your overall [Indecipherable] shift toward new business ROE.

Marc Grandisson -- President and Chief Executive Officer

I almost choked out. Now, we're solidly well in the double-digit returns still in the market. It's still very good quality. I would even argue that the risk of the later -- last half of the year actually improved somewhat for the industry, not only for us. And I think that had to do with Fannie and Freddie sort of putting a bit more constraints on the risk layering in the business. So no, still very, very healthy returns, very healthy.

Jimmy Bhullar -- J.P. Morgan -- Analyst

And then, just lastly on -- any comments on 1/1 renewals, and specifically were they better, worse than your expectations? And anything -- any sort of views on the sort of upcoming 4/1 renewals in midyears?

Marc Grandisson -- President and Chief Executive Officer

The 1/1 renewals were in continuation. While you had some rate increase in the third quarter broadly in industry, fourth quarter was a bit better. The first quarter lined up to be better yet. So yes, better rate environment at 1/1 clearly for the first quarter. We don't know what it means for 4/1. I am done prognosticating what the future will hold. It's a -- the law of supply and demand and perception of relative risk is a market-based thing. So sometimes I think market should go up and it doesn't, and sometimes it goes down, and it's all over the place. So it's too early to tell where 4/1 and 7/1 will end up. But clearly, if the momentum at 1/1 continues, it's going to be -- it's an improving market clearly.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Thank you.

Operator

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

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi, thanks. Good morning.

Marc Grandisson -- President and Chief Executive Officer

Hello, good morning.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

My first question is, I guess, on 1/1 a little bit. We've heard about the retrocessional market being pretty strong this year. Has Arch written more of that business? And just how did you observe what went on in the retro market at 1/1? And is that a sign of potentially better things to come? Or would you think it would be for some of the 4/1 and 6/1 renewals?

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Certainly on the -- you see that a little bit in our cat PML. They went up, a large portion, because of additional retro business that we wrote that, I would say, was very much opportunistic. So whether that sticks and whether that means -- tells us something about 4/1s or 6/1s, we just don't know. But for sure, we saw some definite -- some good opportunities in the -- specifically in the retro space at 1/1 that we were happy to have the capital to be able to deploy and take advantage of the opportunities.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay. And then, with the insurance book, I know you guys in the past have talked [Phonetic] about that expense ratio being elevated just due to the accounting and the earn-in from some of the more recent deals you guys have done. I'm assuming that there was still somewhat of an impact on that in the four quarter. And can you just kind of give us a sense to think about -- if you have Barbican coming on, how we should think about the expense ratio within the insurance book in 2020?

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. So, as I said in my remarks, I think the expense ratio was -- roughly, call it, 130 bps or so was -- in this quarter was the result of the -- effectively bringing online the UK regional book. So we're now a year into it. So everything else being equal, 2020, we should see the premium being earned out and the expense ratio coming down. The new twist is Barbican. And as you know, the Lloyd's market in particular has a slightly higher elevated expense ratio, which we think is -- there is an offsetting benefit on the loss ratio. But to give you a bit of -- directionally, a bit where we think the 2020 expense ratio is going to be for Insurance, we think it should be right around where it was for 2019. It's not going to improve materially. I don't think it's going to get worse because we're going to see some benefits. But I think it should be about at the same level.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay, that's helpful. And then lastly, on the insurance pricing, Marc, you seem to be pretty positive, especially relative to where your comments have been for most of 2019. And it's a developing market. And I guess, every market seems to be different and capital, obviously, a lot more robust than if went back to past upturns. Is there any market -- if you think back to Arch's history, does this compare to the early 2000s, does this compare to kind of 2013? Is there a market that this feel similar to when we can kind of think about pricing improvement? Or does it feel, because of the social inflation issue, maybe different than any of these past markets?

Marc Grandisson -- President and Chief Executive Officer

Well, it's different in terms of the health of the industry and the combined ratio, as I mentioned. That's for sure. So that makes it a very unique opportunity. But I do believe we have major players pulling capacity out. So even though it's printed capacity, effectively used capacity is definitely lower in the overall market, specifically in the large risk. You know some of the players, and we've talked about them, Lloyd's being clearly one of them. I think I would tend to think it looks and feels a bit more like 2005 after Katrina, Rita and Wilma because capital was still plenty. People paid their claims. A couple of companies had some issues. But by and large, the pricing went up, and it was largely as a result of perceived risk. And I think this is what's going on. I think people -- as an industry, this uncertainty about -- around social inflation is creating a lot of uneasiness and pushes us to want to charge more to make sure we cover as much of the eventuality as we can. So that's sort of what I would say the perceived -- the heightened risk perceived is higher. It's not a bankruptcy-driven, reinsurance-driven necessarily market turn. So it's a blend of a few of those. It's hard. Every market -- I guess you live and learn and experience new things as you go. But, yeah, that's what I would summarize it to be.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay, thank you so much. I appreciate the color.

Marc Grandisson -- President and Chief Executive Officer

Thanks Elyse.

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

Thank you. And our next question comes from Mike Zaremski from Credit Suisse. Your line is open.

Mike Zaremski -- Credit Suisse -- Analyst

Hey, good morning. First question on US MI. One of your competitors this morning spoke to a decline in -- expected decline in premium yields in 2020. Any color there, whether you expect a similar dynamic, given pricing on new business might be a little tighter versus using risk-based pricing?

Marc Grandisson -- President and Chief Executive Officer

I think that we -- the phenomenon that's going on as a result of refinancing clearly points you to a lower price, a lower premium rate, and that's because the risk is lessened, right? A lot of the refinancing we saw in last two quarters and accelerated in the third -- in the fourth quarter is people sort of refinancing because the interest rates are just that much better and it makes sense for them to refinance. By doing so, the LTV that was originally put in our book of business two, three years ago is actually lower, which is lowering the risk. And everything else being equal, it also has a knock-on effect on the DTI, right, on the debt to service -- to income servicing. It improves them as well. So that risk that you -- it's the same people, same house, same environment, but -- and there was also some house price appreciation. So you get all these things going on. This is not as risky a proposition now that it was two, three years ago. So it would lend itself to say that the pricing should be -- indicate a lower pricing because of all these various moving parts. But it doesn't mean the returns have changed. And that's really the key that we want to share with you guys is, top line in MI is really, really hard to pin down. They're single, there's cancellations, and it's very hard to see how it all evolves. But in the end, what we care about and what we've seen is that the return characteristics of the things that were refinanced, which one could say is -- underlying this somewhat decrease in price and premium rate is actually just a top line phenomenon. It's not a return phenomenon. The returns are still very healthy. And that's what we are actually focusing on.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, that's helpful. Next, just kind of broad question about the Reinsurance Segment. If I kind of look at the combined ratio over the last couple of years, it's been in the mid-90s. I think that translates into a single-digit ROE. But you can please correct me if that's not right. And I guess, catastrophe levels don't appear to have been materially higher than expected either. So just kind of thinking about the future, is that largely reflective of just simply the competitive operating environment? And I guess, hopefully, there is continued momentum in 2020 to improve the ROE profile of the segment.

Marc Grandisson -- President and Chief Executive Officer

So first, you're wrong, it's not in the single-digits. So let's make sure we're clear here.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, great.

Marc Grandisson -- President and Chief Executive Officer

Yeah, I think it's much better than this. I think our Reinsurance portfolio is not a -- is a different one. And then, there's been mix shift over the last two, three years. We were a lot more property cat probably 10, 12 years ago. So there's still -- there's always moving parts in the Reinsurance platform. And I would say that our play, for instance, in motor in Europe will by definition lead us to a higher combined ratio but returns are still pretty -- very well in excess -- or well in the range of where we would want them to be to write that business. So I think the combined ratio in Reinsurance is just a reflection of this constant culling, pulling, pushing through, realigning capital within the various lines of business. And I think what you're seeing is a combined ratio that is just reflective of what we see in terms of opportunities. In terms of returns, I can tell you for certain that our Reinsurance Group has a very, very ambitious return on equity expectations when we write the business. And that's what every underwriting decision is based on, not on combined ratio.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, got it. So I was wrong that there's -- your portfolio holds probably less capital than I was assuming than -- versus your peers. Thank you.

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

But the one thing I'll add to that, Mike, just quickly on the returns, that really is all about our cycle management where our premium volumes went down quite a lot over the last number of years on the Reinsurance Segment. If the market gets healthier, which it's showing some signs of that, I think -- I don't think our returns will necessarily get that much better, but I think we'll be able to have a bit more growth on the top line, expand the platform and see more opportunities.

Mike Zaremski -- Credit Suisse -- Analyst

Thank you.

Operator

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

Brian Meredith -- UBS -- Analyst

Yes, thanks. Couple of questions here. First, just on the Insurance Segment, I know you talked about how Barbican is going to impact your expense ratio. Will it, if any, impact your underlying loss ratio? And I guess just to add on to that, is it going to prevent you from maybe achieving an underlying combined ratio below 100% in that -- the insurance area in 2020?

Marc Grandisson -- President and Chief Executive Officer

Well, Barbican is -- in the big picture, doesn't really move the needle. It brings a lot of nice traits with it. It has some fee businesses that we like. It has -- also gives us -- makes us more relevant in London. But the one thing that you should be aware of is, a lot of the capacity that Barbican is deploying is actually third-party capital. So that doesn't stick to our ribs in terms of the combined ratio. Yes, we'll have some benefits on the fees and etc. But big picture, Barbican, on a net basis, wrote about $125 million of premium last year in 2019, split roughly 50-50 between insurance and reinsurance. Whether that business -- we're certainly going to shut down some lines. We're going to do some reunderwriting along the way. So once you do a bit of math on it, you'll quickly hopefully appreciate that for the Insurance Segment on its own, Barbican is not going to be a big factor in how 2020 plays out in terms of the combined ratio. So on that note, to add to Francois' point, realistically, Brian, we need to focus on, and as we are right now, growing and seizing the opportunities that are presented into our Insurance Segment. And if anything that will bring us to the combined ratio that will lead us to 12-ish return on equity, I think, is going to come through the current opportunities that we see and our ability to seize upon it, which is plenty.

Brian Meredith -- UBS -- Analyst

So I guess what you're saying is, it could be -- the underlying combined ratio kind of dropping below 100% and getting to those returns, we may not see it here in 2020, but it's 2021 or whatever as the opportunities continue to come in?

Marc Grandisson -- President and Chief Executive Officer

That's right. If you look, Brian, the rates really moved starting middle of last year. And a lot of stuff has been renewed still in the new "rate environment". So we have to write the business first. You have to earn it. So 2020 and '21 -- you're exactly right. You exactly where we are. That's why it takes a while to see the good deeds being reflected. The same way, it takes a long time for bad deeds to get reflected, may I add.

Brian Meredith -- UBS -- Analyst

Got you. And then, under the Reinsurance -- Marc, I'm just curious -- I know a lot of the business that you write is quota share type business. How much of your Reinsurance business is, call it, exposed to areas where you're seeing a significant amount of price increase, be it E&S, certain property lines? And then you might see a good benefit from the subject premium pricing coming through.

Marc Grandisson -- President and Chief Executive Officer

I think the beautiful thing about our friends in the Reinsurance Group is that they're a go-anywhere kind of a company. They can do anything, go anywhere, do anything. So in general, they have access and are able to see the deals that are E&S, casualty property, whatever. So there, we have a -- we've been around for 18 years. We've written a lot of reinsurance. We're still $1.5 billion plus. We're not a small -- we're smaller in the grand scheme of things, but we still have a lot of selling points in London and Zurich, in the US and Bermuda. So we're able to grow if the growth opportunities are there. There's no issue there whatsoever.

Brian Meredith -- UBS -- Analyst

Got you. But what about your subject premium bases [Phonetic] already on the books. Are you seeing kind of growth there?

Marc Grandisson -- President and Chief Executive Officer

I think, by virtue of the improvement -- for 2020, we don't give guidance, obviously, as you know.

Brian Meredith -- UBS -- Analyst

Right.

Marc Grandisson -- President and Chief Executive Officer

Nice try. If rates keep on increasing and keep at the level they are, at the healthy positive rate, and if it keeps into 2020, 2021, we will have more premium, clearly. I'm not sure it's what you're asking. I'm trying not to answer the right question, so I'm trying to give the right picture.

Brian Meredith -- UBS -- Analyst

Okay. I think I'm just -- what I'm trying to get at is that I get the premium growth situation, right, and it's more -- the underlying, obviously, business is actually seeing improved price too, right, and rates, just like you're seeing in your own business. And just what impact that could potentially have on your reinsurance margins?

Marc Grandisson -- President and Chief Executive Officer

Yes, of course. Yes, you're right. We are seeing it through the quota share. The relatively newer phenomenon, it's anecdotal, it seems to be starting, even the excess of loss pricing now is picking up in speed, so that's also encouraging. So we may have some -- to your point, you're right, we're not a huge excess of loss, at least in the traditional general liability lines and professional lines. You're right. And we are benefiting from our quota share participants and companies. Yes, we are.

Brian Meredith -- UBS -- Analyst

Great, thank you.

Marc Grandisson -- President and Chief Executive Officer

Thank you, Brian.

Operator

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

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Thanks. I had a couple of small questions to start off with. First, are there any plans to change the amount of mortgage insurance that's retained on US paper versus ceded to Bermuda in 2020 versus 2019?

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

No plans at this point. As you know, it's all about -- we try to have as much capital as we can in offshore just because it's a better domicile, gives us more flexibility. But at this point -- and as you know, there's tax implications. We don't want to trip the BTAX issue. So at this point, no, no plans to change anything.

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Okay, perfect. Second, I know in the past, you've talked about capital deployment opportunities that ended up at Barbican and in the UK. I was wondering if you could give a sense as to what you're seeing now in the pipeline in terms of other potential opportunities?

Marc Grandisson -- President and Chief Executive Officer

I think we're seeing a bit less -- I think people are busy more looking at their stuff and trying to improve their book of business. I think that's really more of an inward focus. I think M&A, we have -- we see all of them, or we believe we see most of the transactions that are being talked about. I think we were a bit more open and we were able to strike some transactions over the last year because the pricing was right and the opportunities was there. But, yeah, no, we don't see acceleration or somewhat of a decreased activity, but I think it's just as a result of the -- this current marketplace being a bit more dislocated. That's really what I would say.

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Okay. And then, that brings me to the third question. I'm wondering whether -- you talked about how combined ratio are still being reported profitable, but there's also the soft market impact, which at least I would interpret as suggesting that maybe the real combined ratios aren't as good. Does that delta look any different now than it is before past hard or hardening market?

Marc Grandisson -- President and Chief Executive Officer

That's a really good question, Meyer. I don't know the answer to this. I haven't looked at the numbers at the end of '99, 2000. It doesn't seem -- I'll tell you my gut feeling, by now [Phonetic], it doesn't feel to be as much of a delta. And also in terms of what impact it could have on a capital market that we were more levered as an industry in '99, 2000, we were running at 1.3, 1.4 premium to surplus. Now, we're at 0.7, 0.65, 0.8, whatever, so lot less leverage. So it's probably more absorbable. But at the same time, there's less investment income. So if you look at -- if you think that the market changed as a result of being cash flow negative or having to -- not having recurring income, then I think that it's -- we're probably in a similar position, meaning that the losses or -- if you combine the underwriting income with the -- which was negative at the end of '99, with the investment income, which was very positive, I think we're probably in a combination and in a similar place, but we have higher capital, so more cushion to absorb it.

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Okay, that's very helpful. Thank you so much.

Marc Grandisson -- President and Chief Executive Officer

Okay, great. Thanks Meyer.

Operator

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

Ryan Tunis -- Autonomous Research -- Analyst

Hey, thanks. I just had a couple. I guess, first one, thinking about 2020 as a potential year, given what's happening from a pricing standpoint for margin improvement for the industry, I understand why that could be a challenging -- while it could be challenging for some, but I think when I look at Arch relative to competitors, there is more of a short tail mix, whether it's in primary insurance also facultative re. I guess, if you could just comment on why isn't there a more constructive near-term outlook for margin improvement, given you're clearly getting rates, in some cases, rate on rate in some of these property lines where there does seem to be kind of a layup argument for margin expansion?

Marc Grandisson -- President and Chief Executive Officer

So let me correct you quickly, Ryan. On the Insurance side, we are 70%, 75% liability in terms the premium written. So that would sort of dampen, if you will, the acceleration or the recognition of the improvement in terms and conditions, so it makes us a bit more cautious. So that's something you need to bear in mind. This is on the Insurance Segment. And again, on the Insurance Segment, even speaking to the short tail, it still does take a while to get through. Again like I said, significant improvement in rates took place starting middle of -- middle-ish of 2019. So it does still take a while to recognize and really see the earnings coming through. The earned premium is a combination, as you know, for other underwriting years.

On the Reinsurance side -- I'm trying to think of it. I think it's also -- there is a fair amount of liability as well in there, right, Francois? And there's also a fair amount of property, although property, as we mentioned, is also deleverage on the property cat. We did increase the other property. We're running a lot more on the non-cat XL. This is more opportunistic. And that -- you're right, we should probably see whether we were -- what margin expansion there was. And we believe it's there. We should see it. But again, it was written last third, fourth quarter. So it will come, again, over the next 12 months. So it takes a while. It takes a while. You have to be patient. Patience is a virtue in our industry.

Ryan Tunis -- Autonomous Research -- Analyst

Understood. And then my second one is just around -- I think we've -- it seems that we've heard less from the reinsurers about the casualty environment and losses coming in. And maybe you could just talk about the extent to which you're -- what are you seeing on the reinsurance book in terms of claims activity on the casualty side versus primary? Is there a real lag? Have the claims started to happen? Or is that probably still on the comp [Phonetic]? Any theory as to when and how we might see more paid losses, I guess, on the reinsurance side?

Marc Grandisson -- President and Chief Executive Officer

It's a very, very good question. I think when we -- we do have a tale of two cities here. I think that our insurance are seeing the claims. Of course, we have the advantage or the luxury to have an insurance company that's on top of claims and know and participate in the marketplace. When we look at what information our reinsurance folks are getting, there is clearly a lag. I'm not saying it's misinformed or whatnot, but there is clearly a lag, and it's been there forever. This is not a new phenomenon, Ryan. This has been going on for years. And for as long as we've been -- as I've been in the business, it's been there, and it was there before my time. So there's always information symmetry and information delay. By the time it gets to the insurance company, they have to look at this, evaluate, book the reserve and not book the reserve, and then, they in turn inform their reinsurance partners. On the quota share, it's a little bit easier because you're able to do more claims review and be on top -- be side by side with them. You can also compare whether we have other of our clients on similar risks and whatnot. On excess of loss, as you could expect, it's a little bit more difficult. There's a further lag on that one as well. So we clearly have a lag in recognition. And our reinsurance company has been really, really adamant and proactive in trying to recognize some of the losses that may not be enough reported. And that's also what made us be a bit more careful in our current writings or lack thereof in the liability space. But there's clearly a lag on the Reinsurance side.

Ryan Tunis -- Autonomous Research -- Analyst

That's helpful. Thanks.

Marc Grandisson -- President and Chief Executive Officer

Thanks Ryan.

Operator

Thank you. And I am 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 and Chief Executive Officer

Thank you, everyone. Happy Valentine's Day. Make it a Happy Valentine's weekend if you have a chance. Talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Marc Grandisson -- President and Chief Executive Officer

Francois Morin -- Executive Vice President, Chief Financial Officer and Treasurer

Yaron Kinar -- Goldman Sachs -- Analyst

Jimmy Bhullar -- J.P. Morgan -- Analyst

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Mike Zaremski -- Credit Suisse -- Analyst

Brian Meredith -- UBS -- Analyst

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Ryan Tunis -- Autonomous Research -- Analyst

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