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Arch Capital Group Ltd (NASDAQ:ACGL)
Q4 2020 Earnings Call
Feb 10, 2021, 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 Fourth Quarter 2020 Arch Capital Group Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied.

For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time-to-time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is 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 -- Chief Executive Officer

Thank you, Liz. Good morning, and welcome to our fourth quarter earnings call. Overall, we are pleased with the current market conditions and the opportunities available to Arch, as we close out 2020 and spring into 2021. One of our fundamental principles is that achieving growth and book value per share above the cost of capital over the long run is the best way to create and sustain shareholder value. We believe we delivered on that front in 2020. Our disciplined underwriting and diversified business model enabled Arch to grow its year end book value per share by 5.4% over the third quarter and by 14.7% for the last 12 months. We responded to broadly hardening market conditions and as a result, all three of our segments grew their premium writings in the quarter.

In particular, the hardening markets allowed for significant growth within our P&C units, increasing our net premium written for the P&C by 32% for the full year. On the whole for 2020, we achieved an operating profit of $557 million and grew book value to $30.31 per share. Now, as most of you know, cycle management is core to who we are. Arch leaned strongly into improving markets because history has shown that times like these are when superior risk adjusted returns gradually compound and accelerate book value growth and Arch's position to significantly expand as others derisk, rethink their underwriting strategies or even retrench. As we look at the opportunities ahead for Arch, I'm reminded of a situation in hockey that is exciting for any fan.

In hockey, you get a one player advantage if the other team takes a penalty. It's called a Power Play. When that happens a few things need to be kept in mind as you deploy your specialty Power Play unit to try and improve the odds of scoring. You need to have a clear 5-on-4 strategy. You need to be -- the fact to be savvy enough to not forget to protect your own zone and you need to have a sense of urgency because the clock will tick down and you will soon be back to even strength. These are a few moments that make a difference in a hockey game. The advantageous position we find ourselves in is similar to that hockey Power Play, where the odds are in our favor. I'm proud of how our team performed last year during the challenges of 2020. Now, after spending a good portion of the last several years in a defensive position, we're embracing a more offensive mindset.

Here's what that looked like in the fourth quarter. Let's begin with our Insurance segment. Across our Worldwide Insurance Group renewal rate change has increased approximately 12%, up 200 bps from the prior quarter's rate changes. Our fourth quarter growth occurred in many lines with D&O, Property, Energy and Marine all exhibiting strong advances. E&S Casualty and our Alternative Markets business also grew in this quarter. We believe that rate momentum in these lines is healthy, and we also see it building in other lines, albeit at a slower pace. Increasing margins helped improve our insurance accident year ex-cat loss ratio, which decreased by 4.6 percentage points in the fourth quarter. As you may know, the full effects of increased rate levels can take approximately five quarters to become fully reflected in underwriting margins.

So today, we are earning the higher rates from the past year. In addition, our operating expense ratio has benefited from rising production this past year. We are pleased with the continuing progress achieved by our Insurance Group in the last two years. Turning next to our Reinsurance segment; underwriting results were significantly better than the fourth quarter of 2019, despite the impact of $94 million worth of cat losses. While market conditions are not uniformly strong in the reinsurance sector, dislocation from other carriers that are reducing their positions is creating pockets with hardening rates that Arch is well-positioned to capitalize on. Reinsurance also benefits from the underlying insurance market rate increases through its clients.

For 2020 we grew reinsurance net written premium by 53% with the two main areas of growth being non-cat property and specialty. At the January 2021 renewals, we saw continued rate increases in most areas. However, we agree with the market consensus that property cat pricing moves were more subdued than expected or hoped as capacity for that risk still remain strong. Accordingly, we maintain a cautious approach to this business. Our Mortgage segment delivered good returns in both the fourth quarter and for the entire year despite the economic headwinds. We are confident in the continued earnings strength of this segment and frankly, the uncertainty we were facing during the early stages of COVID has been largely mitigated. COVID premium rates and the credit quality of the new insurance written improved in 2020 and accordingly the return on capital for our new U.S. MI business is essentially back to 2018 level which was a strong year.

Here's why MI has done well this past year; first, housing markets have remained strong despite the difficult economic conditions. Second, the government Forbearance Program achieved largely what it was intended to do, which was to provide financial respite to many homeowners. And third, credit criteria in the mortgage sector tightened in 2020. And as you know, credit quality is a critical factor in determining underwriting profitability. On a side note, just yesterday, the FHFA announced that the forbearance program has been extended an additional three months, which should help further mitigate the risk in our delinquency inventory. The delinquency rate of our portfolio decreased by 50 bps sequentially in the fourth quarter. At year-end, roughly two-thirds of our delinquent loans were in the government sponsored Forbearance Program.

We currently estimate that 89% of delinquent borrowers in our portfolio at year-end have at least 10% equity in their homes and as we have discussed on prior calls, the amount of equity in a home is a single most important factor in determining MI losses as it plays a significant role in mitigating claim activity. We are cautiously optimistic that delinquencies will continue to cure as vaccines enable the economies to reopen. Importantly, record home purchases in the U.S. in 2020 supported a 5% price appreciation nationwide while historically low interest rates accelerated housing and refinance demand. This enabled Arch U.S. to report record NIW of $38 billion in the fourth quarter of 2020, up nearly 60% from the same period in 2019. Our outlook for continued growth in 2021 remains positive. Turning back to the current phase of the P&C cycle, there are three conditions that we believe will persist and help sustain the improved underwriting environment. One, social inflation and reserving problems are now starting to apply pressure for companies that haven't been prudent enough. Two, anemic investment yields require a sharper focus on underwriting profit.

And three, a return to a post-COVID world should accelerate economic activity and increase the demand for Insurance. Each of these conditions will put pressure on results for the industry, our conservative approach to reserving over the past several years means that we are well-positioned to drive results in P&C going forward since we expect our future returns to better reflect current and forward pricing. Finally, with better visibility into the overall economic conditions, and with more clarity on the mortgage and P&C prospects, along with our strong capital generation, we see a compelling opportunity to invest in our shares at very attractive returns.

Francois will talk to it in a moment. This recent share repurchase is a testament to our capital strategy and designed to enhance shareholder value over the long term. We still have ample resources to deploy toward new growth and feel confident in our team's ability to be creative in order to capitalize on the opportunities before us. This is a time in the game where our cycle management strategy allows us to play offense and deploy capital dynamically to generate above average returns.

And now, I will turn the game commentary over to Francois.

Francois Morin -- Chief Financial Officer and Treasurer

Thank you, Mark, and good morning to all. We at Arch hope that you are in good health and that 2021 is off to a good start. On to the fourth quarter results; as a reminder and consistent with prior practice the following 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 $230.4 million, which translates to an annualized 7.7% operating return on average common equity and $0.56 per share. For the year, our operating return on average common equity stood at 4.8% while the return on average common equity stood at 11.8%.

Book value per share increased to $30.31 at December 31, up 5.4% from last quarter and 14.7% from one year ago; again, an excellent result despite the strong headwinds from catastrophe losses this year, which is a testament to the resilience of our operations and our superior diversification strategy. Losses from 2020 catastrophic events in the quarter including COVID-19 net of reinsurance recoverables and reinstatement premiums stood at $156.4 million or 9.4 combined ratio points compared to 2.2 combined ratio points in the fourth quarter of 2019. The losses impacted both our Insurance and Reinsurance segments, primarily as a result of a series of natural catastrophes in the quarter, including Hurricane Delta and Zeta and other smaller events as well as adjustments to our estimates for events that occurred earlier in 2020.

Our best estimate of ultimate losses for COVID-19 for occurrences through December 31 remained essentially unchanged from prior estimates. As of December 31, the vast majority of our COVID-19 claims are yet to be settled or paid with approximately two-thirds of the inception to-date incurred loss amount recorded as incurred, but not reported IBNR reserves or as additional case reserves within our Insurance and Reinsurance segments. As regards the potential impact of COVID-19 on our mortgage segment, as Mark alluded to the delinquency rate at the end of the quarter was 4.19%, down from 4.69% at September 30. We are encouraged with the downward trend in delinquency rates over the last few quarters, which continue to come in significantly better than our earlier forecast.

Our latest assessment of the situation assumes a progressively improving economy in 2021, which should bode well for the housing sector and the performance of our book as we move forward. In the Insurance segment net written premium grew 21.6% over the same quarter one year ago, 29.6% if we exclude the impact of the pandemic on our travel, accident and health unit. The insurance segment's accident quarter combined ratio excluding cats was 93.6%, lower by 800 basis points over the same period one year ago. Approximately 360 basis points of the difference is due to our lower expense ratio, primarily from the growth in the premium base from one year ago and continued lower levels of travel and entertainment expenses. The lower ex-cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business.

Prior period net loss reserve development net of related adjustments was favorable at $1.2 million. As for our reinsurance operations, we had strong growth of 44.9% in net written premiums on a year-over-year basis, which was observed across most of our lines and includes a combination of new business opportunities, rate increases and the integration of the Barbican Reinsurance business. The segment's accident quarter combined ratio, excluding cats stood at 82.1% compared to 92.3% on the same basis one year ago. The year-over-year movement is primarily driven by rate change activity over the last 12 months in a more normal level of large attritional losses compared to a year ago. Most of the remaining difference is explained by operating expense ratio improvements primarily resulting from the growth in earned premium.

Favorable prior period net loss reserve development net of related adjustments was $40.5 million or 6.9 combined ratio points compared to 4.9 combined ratio points in the fourth quarter of 2019. The development was mostly in short tail lines. The mortgage industry had a second consecutive record breaking quarter in terms of mortgage originations, which allowed Arch MI to produce $38 billion of NIW in the fourth quarter, a full 15.9% higher than our prior high watermark. With refinance activity leveling off from prior peaks we our insurance in-force increase by 2.5% across the Mortgage segment. The combined ratio was 45.1% reflecting the lower level of new delinquencies reporting during the quarter. The expense ratio was slightly lower over the same quarter over one year ago and prior period net loss reserve development was favorable at $8.2 million this quarter mostly from our second lien run off portfolios.

Improving investor sentiment enabled Arch to issue two Bellemeade transactions during the fourth quarter at terms that are getting closer to pre-pandemic levels. You will recall that we discussed our 2020-3 transaction on the last call and on the one deal covering our production from June through August of 2020. Our latest transaction, Bellemeade 2020-4 provides additional protection on mortgages we insured in the second half of 2019 and already covered by our 2020-1 Bellemeade transaction by effectively reducing the original retention from 7.5% to 1.85% of the risk in-force. At year end the Bellemeade structures provided approximately $4 billion of aggregate reinsurance coverage. Total investment return for the quarter was positive 246 basis points on a U.S. dollar basis.

And we ended the year with our investment portfolio producing a 7.77% total return. While our fixed income portfolio generated an excellent return of 188 bps in the quarter, contributions from our equity and alternative investments were also significant and represented approximately 40% of the total return for the quarter. The duration of our investment portfolio decreased modestly to 3.01 years at year end, reflecting our ongoing positioning of the portfolio toward shorter-term maturities. The effective tax rate on pre-tax operating income was 6.8% in the quarter reflecting changes in the full year estimated tax rate, the geographic mix of our pre-tax income and a benefit from discrete tax items in the quarter. We currently estimate the full year tax rate to be in the 10% to 12% range for 2021.

Turning briefly to risk management, our natural cat PML on a net basis decreased slightly to $860 million as of January 1, which at approximately 7.4% of tangible common equity remains well below our internal limits at the single event 1 in 250-year return level. The decrease in our peak zone PMLs this quarter is mostly attributable to our E&S property unit within the Insurance segment where we reduced property aggregate in the Florida Tri-County peak zone and made selective additions to our reinsurance purchases.

Our balance sheet remains strong and our debt-to-plus preferred leverage ratio stood at 22.1% at year-end, well within a reasonable range. Finally, on the capital front, we repurchased approximately 251,000 shares at an aggregate cost of $8 million in the fourth quarter of 2020. It is worth noting that we have since repurchased an additional 2.6 million shares at an aggregate cost of $83.6 million in the first quarter of 2021 under a Rule 10b-5 plan that we implemented during this quarter's closed window period. Our remaining share purchase authorization currently stands at $833 million.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Elyse Greenspan with Wells Fargo.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi, thanks. Good morning. My first question is on -- related to your returns on -- Marc, I think in the prepared remarks you associated with mortgage business going back to return on capital levels from 2018 and I'm hoping just for all three businesses, insurance, reinsurance and mortgage, can you give us a sense of return profile of the business you are writing today versus what you would have said, if I had asked the same question 12 months ago?

Marc Grandisson -- Chief Executive Officer

Yeah, I think the -- well, nice talking to you, Elyse. I think the high level of 2018 sort of long-term expected return on the MI was roughly in the mid teens. So we are not going back to that level, which is really good place for us to be. On the Insurance, I think that we had a bit of a decrease in expected returns even though the combined ratio did not get much better for the industry. But right now, if you factor in all the rate changes and everything we think we're in the double-digit in insurance return. And we think that reinsurance is a little bit in between those two. So we have a really, really different risk return -- risk adjusted return profile in our portfolio. It has improved and largely as a result of the price increase not solely as a result of the investment return, as you know Elyse.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Yeah. And then my second question on, I think you alluded to this a little bit in your prepared remarks Marc, when you were mentioning on a few issues that would help from the pricing momentum side like persisting from here. A big question that I get is does this momentum persist through 2021 and perhaps beyond? Can you obviously, different dynamics in the insurance and reinsurance P&C markets, but can you just give us a sense based on what you know today, do you think that the pricing momentum can persist through 2021 in insurance and also reinsurance?

Marc Grandisson -- Chief Executive Officer

We expect it to be the case Elyse because of all the factors I mentioned, the social inflation, there's a lot of uncertainty in terms of loss ratio pick for years, specifically 2015 through '19 as we all know. It sort of makes for correcting some of the ongoing pricing, so that's definitely sustainable. We do not have as much protection from the investment returns. So that puts a lot of pressure on the returns for the industry and uncertainty and lack of -- fewer coverage. We also had a fair amount of cat losses in the last three or four years. So there's a lot going on, lot more risk out there. So I think overall collectively as an industry we all collectively think and know and believe that we need to get better rate and better pricing because the risk is not being rewarded accordingly.

As in every hardening market the [Indecipherable] column is a piece of string, but I think that there a hardening market does not only last four of five quarters. I think that you have this initial stages of the initial reaction of rate increases. Then you get momentum building in the underwriters' mentality, the brokers are sort of accepting as being sort of a new way to deal and do the business. And eventually, that builds upon itself. I would fully expect to be lasting till 2021 and into 2022. This is what we believe at this point in time.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay and one last numbers question. You guys mentioned the PML going up a little bit, but in terms of your cat load, I think in the past Arch used to talk to like a $40 million of quarterly cats. Obviously, we've seen growth in cat reinsurance, and in other property-related lines like you mentioned. How should we think the about cat load from here?

Marc Grandisson -- Chief Executive Officer

Yeah, I mean, no question that we've written a lot more property premium in the last, I want to say, four to six quarters we've really ramped up our property exposures. I mean, there is a lot of -- in different areas as you know, in different lines of business, U.S., international, etc. Yeah, so that the cat load, I think on a quarterly basis has definitely gone up from what we were in the old days, thinking about like $40 million a quarter. It's still evolving. But I'd say it's probably more in the $60 million to $70 million range right now.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay, that's helpful. Thanks for the color.

Marc Grandisson -- Chief Executive Officer

Thanks Elyse.

Francois Morin -- Chief Financial Officer and Treasurer

You're welcome.

Operator

Our next question comes from Mike Zaremski with Credit Suisse.

Michael Zaremski -- Credit Suisse -- Analyst

Hey, good morning. Follow-up on mortgage insurance and a Elyse's question -- if you're talking about kind of be encouraged about the downward delinquency rates and assuming the economy progressively improves and you -- I think you mentioned mortgage which can draw returns similar to 2018 levels. So are you saying kind of directionally we should be thinking about a combined ratio that continues to move south to kind of toward 2018 levels or have the capital assumptions changed since then?

Francois Morin -- Chief Financial Officer and Treasurer

Well, Mike, in terms of combined ratio to capital is a different story because it's a bit of a lagging indicator based on the delinquencies we have. But if you look at the combined ratio, yeah, we think that we're turning to go toward more to the run rate that we had in 2018. I would just caveat that there was some prior development, favorable development in 2018. So, we'll probably adjust for that, but certainly the long-term range of 35% to 45% is not something that is out of the realm of real possibility if you look at 2018. And I think depending on what, how the economy recovers, they could be in the lower end of that and if a couple of things still develop in a different direction, it might be on the higher side. But you're right. It should be getting closer to where we were in 2018 in terms of combined ratio.

Michael Zaremski -- Credit Suisse -- Analyst

That's helpful. Switching gears to the non-MI insurance segments. You've been -- the expense ratio has been better than expected for a number of quarters. I know you guys have called out some items, maybe you can kind of remind us and talk to kind of what you think is kind of cyclical and what's kind of structural in terms of the expense ratio improvements?

Francois Morin -- Chief Financial Officer and Treasurer

Yeah, I think this is more structural, I would say, because right now, you have to factor in the fact that our platform grew both sides both in the sense of growing the top line for -- in our organic lines of business and we also have the acquisition in London and really push to be much more relevant, much more bigger in London. So our international operations also gained scale. So if you now look at the overall structure -- the company has laid out in terms of top line and the way the expense is constructed between the unit, I think it's much more of a structural change.

I would say that it's probably 50-50, but the growth is certainly something that's really important in terms of helping that growth. So that could also get presumably a bit better over time, but I would also tell you that the growth in our operating expense on the insurance side has lagged the growth in our top line, which is what we should expect, right, because a lot of the increase is not more work, even though we are writing more business. A lot of the increase in premium is just rate in and of itself. So I think that the company is flexing itself in terms of top line growth and expense deployment very, very nicely. So a bit more structural than I would have told you probably two years ago.

Michael Zaremski -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question comes from Yaron Kinar with Goldman Sachs.

Yaron Kinar -- Goldman Sachs -- Analyst

Hi, good morning everybody.

Marc Grandisson -- Chief Executive Officer

Good morning.

Yaron Kinar -- Goldman Sachs -- Analyst

I guess my first question revolves around MI. Do you have any comments or thoughts around the potential changes FHA fees and its potential and for their potential impact on the MI business?

Marc Grandisson -- Chief Executive Officer

Yeah, I can -- and it's still early on as the new administration change, there's a couple of things going on all over the place, Washington, I'm sure they're very busy right now trying to changing things. We hear the same things that you guys hear about the 25 bps potential price [Indecipherable] put in there. And as a reminder for everyone, if you take a step back, the FHA was a large market share provider of MI insurance in the years where the PMI, the private mortgage insurers were not in that great of a shape and frankly that was needed to fill the gap and fill the board, if you will, of the need for the homeowners and the mortgage providers. So this has changed. I think that the FHA also ultimate role -- core role is to provide mortgage insurance for the ones, those are probably could be perceived a bit more risky for the private sector.

And so, we've done the analysis, which means that if you look at our portfolio around -- high FICO, very high quality. Most of our, the borrowers that we have on our portfolio, do not really need to consider FHA. So from our perspective, we'll react obviously to whatever is out there, but we believe that this -- if it come to fruition at 25 bps rate cut and FHA will help in the lower FICO and higher LTV borrower, which is really not the ones effecting and the one that we are currently having success with because our pricing is actually better if you compare pricing versus the FHA in that sector. Our pricing is better and execution is cheaper for the borrower. So we're not losing sleep over that.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. That's helpful. And then my second question, you previously talked I think about shifting capital deployment from MI more into P&C. I think last call you used more of a basketball analogy that was easier for me to follow than -- but thank you for explaining. But I guess as market conditions kind of your views on market conditions change a bit, it seems like reinsurance may be a little less exciting than maybe a quarter or two -- the outlook was a quarter or two ago and MI maybe a little better than the outlook was a quarter or two ago. Does your appetite for capital deployment between the three segments, has that shifted or will it shift into 2021?

Marc Grandisson -- Chief Executive Officer

I wouldn't say it shifts in any major way. I think we see all three segments with very good opportunities in front of them and maybe we'd argue somewhere overdue, especially on the P&C side. So we're bullish there. Mortgage has always been -- in basketball, a seven foot six guy down low and ready for dunks and that hasn't really changed in our view. So yeah, I mean we got certainly have more visibility into what the ultimate or what the current market conditions are especially in mortgage given what we -- the second half of the year, how things progressed. And that's good. I mean, that's something that we take -- I think it works in our favor. So, but in a big picture, we don't see major changes in how we deploy capital.

Francois Morin -- Chief Financial Officer and Treasurer

Then Yaron, one thing I would mention to you that have -- it's always, it's hard for people not to see us being a Bermuda, being a property cat writer on the reinsurance side, but I would argue that yes, property cat side is not as good. And you've heard it from other people, and we certainly agree with that. But we're still growing in areas that are non-property cat, right, exposed. So we are seeing a lot of other lines, to be honest, between United [Phonetic] are actually better now or the prospects that we own better than they were in 2020. It's just that, if we're not growing necessarily in the one that get the better headline, if you will, from your perspective. But by and large, I think that our prospects is very, very well on the reinsurance side, very much so.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. Thank you and thanks for translating hockey into basketball for me.

Francois Morin -- Chief Financial Officer and Treasurer

You're welcome.

Marc Grandisson -- Chief Executive Officer

Thanks.

Operator

Our next question comes from Jimmy Bhullar with J.P. Morgan.

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

Hi, good morning. I had a couple of questions; first, if you could just talk about your sort of comfort level with your BI reserves given the developments in the U.S. seem to be favoring the industry for the most part. So do you feel like you're overly conservative on your reserves and obviously internationally things haven't gone as well? And then I had another one as well.

Marc Grandisson -- Chief Executive Officer

Yeah, I think we're -- we never would say that we're overly conservative. We want to be prudent and conservative for sure in how we set reserves. I'd say starting again with international which may be has gotten a bit more headlight -- made the headlines a bit more. Our position hasn't changed in the UK, again the book we have is a small regional book. We are well protected by reinsurance protection. So we feel that the reserves we have there even after the call it slightly adverse ruling from the courts in the UK were -- aren't going to affect our bottom line. So we're -- no changes from our point of view there.

And in the U.S. for the most part, as you said, all the rulings have kind of been in favor of the industry. Couple of places where there is maybe some that didn't go as expected but on those our view is that the policies that were being challenged were manuscript policy, so not the standard ISO form that we typically use without necessarily the strong wording around virus exclusions and property damage that trigger coverage. So on both those fronts we got, as we said before, vast majority of our policies well north of 90% across the book that has these -- both of these call it, protection. So we're very confident that our results and our reserves at this point won't develop adversely and we will keep working at it, but it's -- we're in a good spot.

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

And I think you said about two-thirds or three-fourths were IBNR as of last quarter. What's that number now?

Marc Grandisson -- Chief Executive Officer

Two-thirds. It went down a little bit. So we sit roughly from 75 to 67 roughly and it hasn't changed much. And it's -- so and some of that is around -- as you can expect mostly on the reinsurance side, right, where we -- a lot of our reserves are still on the reinsurance side with significant IBNR and ACRs on that book.

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

And then on buyback, you did a decent amount in -- you've done a lot of this year. So what's driving your sort of action there? Is it the stock price? Is it -- I'm assuming there is decent opportunity to deploy capital in your businesses given pricing, but what drove the big uptick in buybacks versus what you've done the last few quarters?

Marc Grandisson -- Chief Executive Officer

Yeah, it's certainly more visibility, right? I think that we said that from the start, we -- at the end of the first quarter last year, we said, listen, we're going to take a little bit of a pause, because we need to know where things are going to -- how things are going to play out and mortgage being a major driver in that performance. You've seen the results, so we were a lot more confident where the economy is going, vaccines are rolling out. So there is a lot of things that, yes, will take some time, but as we look forward, I think that gives us a lot more comfort that the worst is behind us and that gives us more clarity on how do we deploy capital. We're still -- in our mind we're fully capable of doing both. We want to grow the book and also buy back shares. There is no reason why they have to be exclusive. We think our growth is still very strong. We expect to keep growing in '21 and across the book. But we also see a good opportunity at the current level of pricing levels for the stock to buy back at this point.

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

Thank you.

Marc Grandisson -- Chief Executive Officer

You're welcome. So before we go to the next one, I think I have to stop the broadcast. I think I believe we have a breaking news that has hit the wire. So I think we have to go to Francois for some commentary that you want to share with us. Francois?

Francois Morin -- Chief Financial Officer and Treasurer

Yeah, and it's long overdue Marc, but just wanted to take advantage of the opportunity to fill everybody on the call on the latest developments with our proposed acquisition of a 29.5% ownership stake in Coface, the global trade credit insurer. To confirm what some of you may have seen across the Business Wire over the last few minutes, if they weren't paying attention to what we were saying, but we closed on this transaction with Natixis earlier today, and the reason for the timing is that we have to wait for their markets to close, which they have. So the consideration paid by Arch was EUR9.95 per share for an aggregate EUR453 million in aggregate, including related fees.

In connection with our minority stake in the company Arch now has four representatives on the Coface Board of Directors. As we stated before, we continue to view this transaction as an investment and we currently do not intend to increase our ownership position in Coface. From a financial reporting perspective, you should all expect us to include our proportionate share of Coface's results in our financials, starting next quarter. We intend to report the contribution in a new separate line titled Equity Method Earnings from Operating Affiliates, which will be included in our definition of operating earnings. This line will also include the contributions from other non-consolidated affiliates such as Premia Holdings. So that's the breaking news Marc.

Marc Grandisson -- Chief Executive Officer

Thank you Francois for the update. And Liz, if we can go back to Mr. Dunn who is waiting in line I believe.

Operator

Geoff Dunn with Dowling & Partners, your line is now open.

Geoff Dunn -- Dowling & Partners Securities LLC -- Analyst

Thanks, good morning. A couple of questions on the MI; first of all, what was the incidence assumption for the current period provision, as well as the average severity factor this quarter?

Francois Morin -- Chief Financial Officer and Treasurer

Yeah. So 9.4% for the new annuities in the quarter and the average reserve for DQ was a little bit over 5,000 pretty much in line with the third quarter Geoff, because the risk that came in was a little bit less coverage in this quarter. So that would explain the average being a bit lower or bit more in line.

Geoff Dunn -- Dowling & Partners Securities LLC -- Analyst

Okay. And so as you think about '20 or the first part of '21 there to my knowledge, they extended the forbearance period out 15 months. But you can't enter new forbearance activity. So what did you or provision for non-forbearance loans or your incidents assumptions for non-forbearance loans look like in the fourth quarter?

Francois Morin -- Chief Financial Officer and Treasurer

Yeah, I don't think we -- we did not, the way we reserve, we sort of trying to make an overall all encompassing assessment and put that in that number. So I think that's what you might have said might have thought in the past. Our number could have been a bit higher. So we think that we have enough in the reserving in totality, the factors we've used.

Geoff Dunn -- Dowling & Partners Securities LLC -- Analyst

Okay. But with forbearance options going away, is it fair to assume that that incidence assumption will probably climb in the first half?

Francois Morin -- Chief Financial Officer and Treasurer

Yeah. Geoff, we might, but we'll have to evaluate when we get there. I think you're right, I mean, you have to till February 28 to actually as for this -- be under the forbearance program. So we'll see how that develops. We had a surge in a couple of weeks of people asking for forbearance that might help again more, we'll have to readjust Geoff as we see the end of the quarter. We'll have another month of non-forbearance effective new, not new forbearance, we will have to reevaluate when we get there.

Geoff Dunn -- Dowling & Partners Securities LLC -- Analyst

Okay. And then within the P&L can you talk a little bit about what drove the pretty notable sequential drop in earned premium as well as some of the movement on both the expense lines? Was there any reallocation on the expense there?

Marc Grandisson -- Chief Executive Officer

Specific to any segment or I mean?

Francois Morin -- Chief Financial Officer and Treasurer

All in MI, right, Geoff.

Geoff Dunn -- Dowling & Partners Securities LLC -- Analyst

All MI; I think premium line was down $50 million sequentially. And then you had some just -- looks like a little bit of an abnormal movement, particularly in the acquisition expense line relative to the third quarter, but just a little bit more volatility than we tend to see.

Marc Grandisson -- Chief Executive Officer

Yeah, the first one, I'd say, a, was a call it an accounting catch up or true up on our Australian business, how we -- on the written side. So that -- I'd say that's more of a one-off kind of a blip that we had to adjust for or was actually was present last quarter and wasn't this quarter. So that's how we -- that explains that movement. On the acquisition there is, we entered into a quota share agreement starting last -- at the middle of the year covering our U.S. MI book and that actually gives us a benefit in terms of the acquisition. It's a reduction to the acquisition to the ceding commission. So that that is what is starting to flow through in our numbers.

Geoff Dunn -- Dowling & Partners Securities LLC -- Analyst

Yeah. All right, great. Thank you.

Marc Grandisson -- Chief Executive Officer

Sure. You're welcome.

Operator

Our next question comes from Phil Stefano with Deutsche Bank.

Phil Stefano -- Deutsche Bank Securities -- Analyst

Yeah, thanks. Just continuing the MI questions I guess. So you had mentioned that roughly two-thirds of the defaults are in forbearance. I was hoping you could give us a flavor for how many people are nearing the end of their forbearance window and how many people in forbearance, does it feel like are current on their mortgages?

Francois Morin -- Chief Financial Officer and Treasurer

Yeah. So yeah, the numbers we report to you are, those are in forbearance and delinquent -- have skipped two payments, at least. So we have a few more. As you could appreciate that are in forbearance -- still current. The figure is coming in very, very haphazardly. So it's very -- I wish -- we are constantly asking and plotting for that kind of information. I think that most of the forbearance, that are still there are lower in the year, most of the forbearance that were declared early in April, May, June, the vast majority of them have are cured by now. So it seems to be the pattern of getting to forbearance and sort of staying in their four, five months and then eventually things get back to normalcy. So that's what we would expect it to be the case going forward. Yeah, go ahead.

Phil Stefano -- Deutsche Bank Securities -- Analyst

No, no, no, no. So I think the one question that we're trying to get to and I get a lot of questions about as you had mentioned 80% of the delinquencies have at least 10% in equity in the home. And you had talked about the visibility allowing you to repurchase shares, at what point do we get visibility that maybe the MI reserves are a little more redundant and we can start to see a release there? I mean how do we think about what you're looking for in the visibility to adjust that?

Francois Morin -- Chief Financial Officer and Treasurer

So, from your lips to God's ear I hope you're right that it's going to be redundant. We'll see -- only time will tell for us. I think the way we look at reserve Phil is very simple, is just we have to wait till we get the data that we feel confident, that we're going to get there. And as you know, you've seen us do the reserving on MI and P&C for a long time. You tell me when a forbearance program is done and when the unemployment rate goes down to 3 or 4 and the economy picks up again, then I'll have a better sense for what it is. So we hope, but having said all this, I hope that by the summer after the vaccines have been rolled out that we'll have much, much, much better visibility as to what, if any, the reserve needs to be released or is not necessary to pay claims.

Phil Stefano -- Deutsche Bank Securities -- Analyst

Understood. Okay. And switching gears on the reinsurance business. I appreciate the remarks you made in response to an earlier question, I mean is there any way you can help frame for us what the opportunity is for premium volume? So maybe -- how that one-one's go versus last year or how should we be thinking about the growth potential in 2021?

Francois Morin -- Chief Financial Officer and Treasurer

I think the growth in 2021 should be more in line, at least with what we've seen last year. I think the opportunities on the reinsurance side -- oh, you have an echo. I think the reinsurance opportunities are still very, very solid, very strong. They're not necessarily, as I mentioned earlier in a traditional property cat arena. But we're definitely, definitely looking at a lot of transactions and a lot of them will have to do with what you would expect a reinsurance company to be providing, which is capital as we get into harder market, right? A lot of people are -- some of our clients are looking for capital, at least looking for validation of their plan going forward and want to make sure that they reunderwrite and rerepurpose their book of business that we're there to help them and we're able in that case to help them get through that transition period.

So the opportunity in reinsurance was great last year and I think it's actually very, very good. Again, as we go this year one interesting fact for everyone that one of the key leading indicator to us, to me at least personally based on my history as to what is a leading indicator of the treaty reinsurance conditions are, the facultative industry is still really, really strong and it's typically -- you typically have a hard market or a hardening market for as long as the fact market goes, you'll have a treaty market staying strong well beyond that -- a year, two years beyond that. So we expect that to be yet again a strong leading indicator. And we -- our facultative team is telling us that is a really good market for them at this point in time, which is encouraging.

Phil Stefano -- Deutsche Bank Securities -- Analyst

Great, thank you.

Francois Morin -- Chief Financial Officer and Treasurer

Sure.

Operator

Our next question comes from Meyer Shields with KBW.

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

Great, thanks. So, two questions on the P&C side. First Arch's confidence in the pricing cycle has clearly borne itself out. But is it safe to say that maybe this is as good as it gets on the property cat side because there is this level of capital available so that cycle will play out along historical lines?

Francois Morin -- Chief Financial Officer and Treasurer

Yeah. All I will tell you Meyer is my experience. We do a lot of property cat writing in '01, '02. And if you remember at Arch, we were not heavily focused on property cat excel at the time. We were more on the liability side and the market was going down in '04 and well into '05 and we thought we had seen the last of the hard market for a little while and Katrina, Rita, and Wilma happen, and it changed the whole thing. So my question to you is, my answer to you is I don't know, I don't know is the short answer. I think that there is clearly a lot of capital that's again found its way over the last four, five years. And once capital find its way into a niche, it gets sticky. It wants to stay there for a while and will sort of justify itself for a while longer to have been insured.

But I think we're always -- hopefully it doesn't happen but we could be one major event away from changing the perception of risk in that area. And that I think will mean actually probably a much harder market that you would expect Meyer because the volatility and the knee-jerk reaction, it would be like an elastic, right, when this happens. I think you'll have a -- you may have a massive excess of capital out of the door and that might create more opportunities for us. I'm not saying it will happen, Meyer, but I could see scenario where your premise does that -- does not actually hold true. So there's always a chance.

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

Okay. No, I just wanted to understand what you're thinking. Second, you talked, I think on the Insurance segment about market dislocation. And I think maybe the sense out there that, that has been a major factor or was a major factor in 2020 but now most companies are kind of settling down and are comfortable with their books of business. Are you still seeing like today that level of market dislocation?

Francois Morin -- Chief Financial Officer and Treasurer

Dislocation is, you're right, there is some real realignment, there's a couple of people going back to the market. This is truly happening, but it's not across the board, and there are still we believe, bad news that needs to come -- find their way through the system that that might make somewhat of a difference as we go forward. But again, if you had a 20% rate increase on one transaction on the insurance side this year and you had -- this is on top of a 10% last year, if you can read on rate on rate perhaps three times, it's not a bad place to be. And plus, I think what we hear Meyer for what it's worth, and this is actually not insignificant, we're hearing in terms and conditions finally changing and moving in the right direction so rates will move first and terms and conditions sort of follow right behind them. And we are hearing that this is what's happening in marketplace. So even though we may not have a headline going as high in terms of rate change as much as it was over the last two, three years. I think the underlying conditions in the policies could actually help improve it we beyond the number that we see on that as the headline number.

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

Okay, understood. Thank you so much.

Francois Morin -- Chief Financial Officer and Treasurer

You're welcome.

Operator

Our next question comes from Brian Meredith with UBS.

Brian Meredith -- UBS -- Analyst

Hey, thanks. A couple of them for you here. The first one Marc or Francois, I wonder if you could just confirm, it used to be that your determination on whether you buy back your stock or not is that if you could actually recouped the premium you paid relative to book value over a three-year period; is that still the case and if it is, does that basically mean that you could just continue to be pretty aggressive with your share buyback given where your stock is trading right now?

Marc Grandisson -- Chief Executive Officer

Yeah, I think that rule of thumb is still is still in place. I mean, obviously it's not a black and white. I mean, there is always factors we consider around deploying whether there is business opportunities and etc. But yeah, we still think in those terms of the buyback. The premium we make and that we want to earn it back over -- no more than three years. And you're right, I mean I think the fact that the price -- that the stock price is not as -- is below that level suggest that maybe we'll be out there buying more stock as we go through the year. We'll assess -- obviously, as we every day, every quarter we will look at what's in front of us, but for the time being, I think we're certainly something we're considering and we probably will do more of.

Brian Meredith -- UBS -- Analyst

Got you. And then just on the topic. So just maybe a little bit on uses of capital or cash kind of here going forward the next 12 months. It sounds like you've got $453 million that's going out here. We've got Watford that I think is you have to close. Is that is all going to be constraining to your ability to actually buy back stock, given you also have -- capital you need to fund your growth in your business and particularly Marc just said, in the reinsurance business is going to be very capital kind of generated type transactions?

Marc Grandisson -- Chief Executive Officer

No, because we, I mean, we raised $1 billion of capital as you know last summer. We didn't deploy fully until -- it was all part of that kind of one-one. Looking ahead, as the one-ones would do. We know these transactions were on the horizon and we have a lot of faith in our ability to generate earnings moving forward on our own. I mean by self funding the growth I think is something that is part of the plan and we don't really have a whole lot of constraints other than that.

Francois Morin -- Chief Financial Officer and Treasurer

And Brian, both these acquisitions, as you mentioned, will actually be accretive and grow book value for us. So they're capital positive for us.

Brian Meredith -- UBS -- Analyst

Got you. That makes sense. And then last question, I just now that it's closed, Coface, maybe you can give us a little bit of color on what the title insurance market looks like -- in Europe kind of return profile. What should we expect here?

Marc Grandisson -- Chief Executive Officer

You know it's been about what 20 minutes that we announced this. So you're going to have to give me a couple more quarters. [Speech Overlap] You know we have it but listen, we got to think it through what we got, we have going to have directors on there are going to be working very close and hand in hand with Coface. We're very excited as you know, Brian. I think there is more that meets the eye and this one I think strategically it's going to be a very, very valuable thing for us, way beyond just the initial investment. I think I'd say it's a formidable established company across so many countries with so many client contacts. We're really excited about that.

Brian Meredith -- UBS -- Analyst

Great, thank you.

Marc Grandisson -- Chief Executive Officer

Thanks, Brian.

Operator

I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.

Marc Grandisson -- Chief Executive Officer

Thank you very much everyone. Have a nice several months ahead for the first quarter returns. It's an exciting time to be at Arch and we're very pleased that you are there with us to enjoy.

Francois Morin -- Chief Financial Officer and Treasurer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Marc Grandisson -- Chief Executive Officer

Francois Morin -- Chief Financial Officer and Treasurer

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Michael Zaremski -- Credit Suisse -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

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

Geoff Dunn -- Dowling & Partners Securities LLC -- Analyst

Phil Stefano -- Deutsche Bank Securities -- Analyst

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

Brian Meredith -- UBS -- Analyst

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