Arch Capital Group Ltd (ACGLN) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 Arch Capital Group earnings conference call. My name is Kathy and I will be your operator for today.

At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Before the Company gets started with its update, management wants first to remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal security 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 the 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 reports on Form 8K, 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 turn the call over to the hosts for today, Mr. Dinos Iordanou and Mark Lyons.

Thank you, Kathy, and good morning, everyone, and thank you for joining us today. Over all these years I thought I was the guy with the beautiful accent, but I think Kathy has put me to shame today (laughter), you know?

We had a good first quarter as earnings were driven by excellent reporter underwriting and investment results. Our gross written premium grew by 1.3% in the quarter, while our net written premium shrunk by 8.8% as growth in our insurance and mortgage businesses was offset by a decline in our reinsurance writings.

Changes in foreign exchange rates reduced our net written premiums on a US-dollar basis by approximately $32 million or 3.4% of our volume in the quarter.

On an operating basis we earned $1.17 per share, which produced an annualized return on equity of 10.2% for the 2015 first quarter versus a 12.1% return in the first quarter of last year.

On a net income basis Arch earned $2.16 per share this quarter, which corresponds to a 15.8% return on equity on a 12-month trailing basis. Return on equity based on net income has averaged approximately 400 basis points higher than operating ROE over the past four years. Of course, net income movements can be more volatile as these earnings are influenced by changes in foreign-exchange rates, and gains and losses in our investment portfolio. These effects have been more noticeable as we have increased our exposure to alternative asset classes and have remained focused on a total-return strategy, where some components of total return are classified below the line in our results.

Our reporter underwriting results were excellent, as reflected by a combined ratio of 87.5% and were aided by a low level of catastrophe losses and continued favorable loss-reserve development. Net investment income per share was flattish for the quarter at $0.55 per share, which is down $0.01 sequentially from the fourth quarter of last year.

Our operating cash flow was $16 million in the quarter as compared to $197 million in the same period last year, and Mark will elaborate further on these components in a few minutes.

Our investment portfolio performed well with a 205 basis point gain on a local-currency basis, and -- because of FX movements -- 111 basis points when measured in US dollars.

Our book value per common share at March 31, 2015, was $47.80 per share, an increase of 4.9% sequentially, while book value per share grew by 15.1% from March 31, 2014.

With respect to capital management we continue to have capital in excess of our targeted levels, and in the first quarter we repurchased 2.7 million shares for an aggregate purchase price of $163 million.

We increased M&A activity in the sector. We continue to evaluate opportunities such as acquisitions of other business units, people and renewal rights transaction. As you know we prefer to deploy our excess capital back into our business, but as of today these efforts have not come into fruition.

Currently, competitive conditions make profitable growth in our traditional lines of insurance and reinsurance, difficult to achieve. The insurance-segment gross written premium grew by 5% in the quarter over the same period of last year, primarily as the result of the renewal rights agreement entered into last year in our alternative markets lines and modest growth in our excess and surplus casualty lines associated with our contra binding business.

Net written premium in our insurance segment was essentially flat in comparison with the same period a year ago, as reductions in our professional lines, energy and marine lines, and the termination of one of our programs offset our growth in all other lines. In the primary markets in which our insurance group participates we continue to obtain rate increases in most lines of business at approximately the same level as we observed last quarter. Competitive conditions in the property sector have negatively affected primary property rates and accordingly are US premium volume in those lines.

In our reinsurance segment, softening pricing and continued pressure on terms and conditions led us to reduce reinsurance writings on 6% gross written premium or 1.7% decline if it was expressed in local currency. The decline, though, in net written premium of 21.5% was influenced by cessions to Watford Re which formed in the last days of the first quarter of 2014, but also reflects increased purchases of retrocession of protection in an opportunistic way.

Our mortgage segment includes primary mortgage insurance written through Arch MI in the US, reinsurance treaties, covering mortgage risk written globally, as well as other risk-sharing transactions, mostly in the US. Gross written premium in the mortgage segment was $60.5 million for the first quarter of 2015 or a 26% increase compared to the first quarter of 2014, while net written premiums grew by nearly 20% over the same period, to $51.9 million.

Our US mortgage operations, acquired in late January of 2014, produced a little more than half of the segment's net written premium in the first quarter, with $24 million of net premium written emanating in the credit union channel, while the bank channel produced $4 million in premium written for the quarter.

As of March 31, 2015, we have approved more than 644 master policy obligations from banks and more than 190 of these banks have submitted loans for our approval. Of these master policies, 37% represent national accounts, and the balance is consisting of regional banks. Of the top mortgage originators for conforming mortgages sold to the GSEs, which mortgage insurance is usually bought, we now have approved master policies with each of the top 15 lenders and 21 of the top 25, and continue to make progress with the rest of the banking groups.

Mortgage reinsurance premiums written declined in the quarter as a new transaction agreed upon during the first quarter should begin to contribute to premiums written towards the end of next quarter. On the other hand, net earned premium rose 13% over the same period a year ago, as earned premium on quarter quota-share agreements written in prior periods usually produces a stream over a six- to seven-year period.

We also continue to see opportunities in GSE risk-sharing transactions which were primarily responsible for the $7.7 million of Other Underwriting Income for the 2015 first quarter, versus $800,000 in the same period of a year ago.

Arch participated in $490 million of insured limits via Freddie Mac's [docker] transactions in the first quarter of 2015. No premium is reported for these transactions, as current accounting treatment requires us to use derivative accounting. We expect risk-sharing transaction issued by Freddie Mac to receive insurance accounting treatment on a prospective basis for all in-force and also new transactions, in the near future.

While some of our business lines are seeing very competitive pricing conditions, Arch diversified mix of business and our willingness to exercise underwriting discipline should allow us to generate acceptable returns in the current competitive environment. Groupwide, on an expected basis, we believe the ROE on the business we underwrote this quarter will produce an underwriting year return on equity in the range of 10% to 12%.

Before I turn it over to Mark, I would like to discuss our PMLs. As usual I would like to point out that our CAT PML aggregates reflect business bound through April 1, while the premium numbers included in our financial statements are through March 31, and that the PMLs are reflected net of all reinsurance and retrocessions.

As of April 1, 2015, our largest 250-[year] PML for a single event was essentially flat, and it was in the Northeast at $550 million or 9% of common shareholders equity. Our Gulf of Mexico PML decreased to $495 million at April 1, and our Florida Tri-County PML decreased to $396 million.

I will now turn it over to Mark to comment further on our financial results, and after his comments we will be happy to take your questions.

So with that, Mark, you have the floor, my friend.

Great. Thank you, Dinos, and good morning, all.

As was true on last quarter's call, my comments that follow today are on a pure Arch basis which includes the other segments, excludes the other segments, that being Watford Re, unless otherwise noted. Furthermore, since the accounting definition of the word consolidated includes the results of Watford, I will not be using that term but instead will be using the word core to refer to our combined segments of insurance, reinsurance and mortgage. This permits an apples to apples comparison of Arch's current results with prior periods. Okay.

That being said, the core combined ratio for the quarter was 87.5%, with 0.6 points of current accident-year CAT-related events, net of reinsurance and reinstatement premiums, compared to the 2014 first-quarter combined ratio of 84.6%, which also reflected 0.6 points of CAT-related events.

Losses recorded in the first quarter from 2015 events, net of recoverables and reinstatement premiums totaled $4.6 million, primarily emanating from our insurance exposures in Australia. The 2015 first-quarter combined ratio reflected 7.8 points of prior-year net favorable development, net of reinsurance and related acquisition expenses, compared to 9.5 points of prior-period favorable development on the same basis in the 2014 first quarter.

This results in a current core accident quarter combined ratio, excluding CATs, for the first quarter of 2015 of 94.7% compared to 93.5% for the comparable quarter in 2014. In the insurance segment, the 2015 accident quarter combined ratio, excluding CATs, was 95.1% compared to an accident-quarter combined ratio of 94.9% a year ago.

The reinsurance segments, similar accident-quarter combined ratio excluding CATs, was 94% even, compared to 92.6% in the comparable quarter last year. As noted in prior quarters, the reinsurance segment results reflect changes in the mix of premiums earned, including a lower contribution from property catastrophe and other property businesses. The proportion of the reinsurance segments net written premiums -- that is property- or property-CAT-related -- dropped from 33.2% to 30.2% quarter over quarter, but falls further to 24.7% when Gulf Re premiums are removed.

As you may recall, Arch assumed a UPR and loss-portfolio transfer and accepted 90% quota-share treaty last quarter, which resulted in the explicit recording of business from Gulf Re through our income statement. Previously, Gulf's underwriting results were recorded in Other Income under our 50% joint venture arrangement.

Our expectation is that regulatory authorities will approve this acquisition in the second quarter of this year.

The mortgage segment 2015 accident quarter combined ratio was 94.1% compared to 84.3% in the comparable quarter last year. This increase is predominantly driven by the substantial change in mix resulting from the January 2014 acquisition of our US primary mortgage operations.

The insurance segment accounts for roughly 13% of the total net favorable development this quarter and was primarily driven by short-tailed lines from the 2010-2013 accident years. The reinsurance segment accounts for approximately 84% of the total net favorable development this quarter, also excluding associated impacts on acquisition expenses, with approximately two-thirds of that due to net favorable development on short-tailed lines concentrated in the more recent underwriting years, and the balance due to net favorable development emanating from all years but primarily from the 2003-to-2010 underwriting years.

Similar to prior quarters, approximately 67% of our core $7.2 billion of total net reserves for loss and loss-adjustment expenses are IBNR and additional case reserves, which remains fairly consistent across both the reinsurance and insurance segments.

The core expense ratio for the first quarter of this year was 34.5% versus the prior year's comparative quarter expense ratio of 33.9% -- driven by an increase in the operating-expense ratio of 2.2 points, partially offset by a decrease in the net acquisition expense ratio of 1.6 points. This increase in the operating expense ratio component reflects mostly a decrease in net earned premiums and also continues to reflect the addition of our US mortgage insurance operation, which is operating at a higher expense ratio until that business reaches steady state.

Moving to the segments, the Insurance segment improved to a 32.1% expense ratio for the quarter, compared to 33.1% a year ago, primarily reflecting a lower net acquisition ratio driven mostly by improved ceding commissions on quota-share contracts ceded.

The Reinsurance segment expense ratio increased from 32.1% in the first quarter of 2014, to 33.8% this quarter, primarily due to a lower level of net earned premiums.

The mortgage segments expense ratio will continue to be high until proper scale-up is attained, as I mentioned previously.

The ratio of net premium to gross premium for our core operations in the quarter was 71.9% versus 79.7% a year ago. The Insurance segment [had a] 70.7 ratio this quarter compared to 74.7% a year earlier. This lower ratio, which implies increased reinsurance ceded, stems primarily from the second quarter of 2014's Sparta renewal rates transaction that brought more alternative markets' captive business on the books.

Absent this impact, the net-to-gross ratios are roughly flat, quarter over quarter, for the insurance group.

In the Reinsurance segment, the net-to-gross ratio was 71.8% this quarter compared to 85.9% a year earlier, primarily reflecting increased property and property-CAT retrocessions, and increased cessions to Watford as a reinsurer.

Shifting gears, our US insurance operations achieved a 2% even effective renewal rate increase this quarter net of reinsurance. As commented on last quarter, the pricing environment is quite different for short-tailed versus longer-tailed lines. Our short-tailed lines of business had an effective 4.5% renewal rate decrease for the quarter, compared to a 3.5% effective renewal rate increase for the longer-tailed lines, both on a net-of-reinsurance basis.

Rates -- rate increases on these longer-tailed lines continued to be above our view of weighted-loss cost trends.

Looking more deeply, some lines incurred rate reductions, such as an 8.5% rate reduction in property lines and 3% in our high-capacity D&O lines, while others enjoyed healthy increases (technical difficulty) agents businesses, an 8% increase in our lower-capacity D&O lines, 7% in accident and health, and 6% in our high access workers compensation business.

Also, certain lines continued their achievement of strong cumulative rate increases. For example, our lower capacity D&O lines have now achieved 15 consecutive quarters of rate increases, and have in fact secured double-digit increases for two-thirds of those 15 consecutive quarters.

The mortgage segment posted an 88.5% combined ratio for the calendar quarter. The expense ratio is expected, continues to be high on the operating ratio related to our US primary operation, and will remain elevated until that pre-mentioned proper scale is achieved.

The net written premium of $51.9 million in the quarter is driven by the $27.9 million from our US primary operation, and $24 million even of net written premium from our reinsurance mortgage operations, as Dinos mentioned, which also includes the 100% assumed quota share of PMI's 2009-2011 underwriting year, as part of the acquisition of the CMG Companies and the PMI platform.

As Dinos also has mentioned, this segment had $7.7 million of Other Underwriting Income for the quarter, versus approximately $800,000 in the first quarter of 2014. This change was primarily due to an increase in the risk-sharing transactions which were treated as derivatives and marked-to-market each period. This quarter included approximately $3.5 million of catch-up income as a consequence of the timings of when GSEs incept the insurance product versus the corresponding capital market security.

At March 31, 2015, our risk in force of $10.6 billion includes $5.7 billion from our US mortgage insurance operations, $4.2 billion through worldwide reinsurance operations, and $619 million through risk-sharing transactions.

Our primary US mortgage insurance operation, down $1.8 billion of new insurance written during the quarter, which represents the aggregate of original principal balances of all loans receiving new coverage during the quarter. The weighted average FICO score for the US primary portfolio remains strong at 734, and the weighted average loan-to-value ratio held steady at 93.3%. No-stage risk-in-force represents more than 10% of the portfolio, and our US primary mortgage-insurance companies operating at an estimated 9.3-to-1 risk-to-capital ratio as of the end of the quarter.

The other segment -- i.e., Watford Re -- reported a 100.3% combined ratio for the quarter on nearly $125 million of net written premium and $72 million of net earned premiums. As a reminder, these premiums reflect 100% of the business assumed, rather than simply Arch's approximate 11% common share interest.

The total return on our investment portfolio was a reported positive 111 bps in the first quarter, primarily reflecting positive returns at our equity and noninvestment-grade fixed-income sectors, partially offset by the strength in the US dollar on most of our foreign-denominated investments. Excluding foreign exchange, total return was a positive 205 bps for the quarter.

Approximately 90% of invested assets are in US dollar-denominated investments as of 3/31/2015. As Dinos mentioned, the impact of the strengthening US dollar on our net written premiums was a reduction of approximately $32 million, which was split $23 million affecting our reinsurance segment and $9 million affecting our insurance operations.

The foreign-exchange impact on other components of underwriting income is not material.

Our embedded pretax book yield before expenses was 2.21% as of the end of the quarter, compared to 2.18% as of the year end, while the duration of the portfolio remained virtually flat at 3.35 years. The current duration continues to reflect our conservative position on interest rates in this current yield environment.

Reported net investment income in this quarter was $70.3 million or $0.55 per share, versus $72.6 million or $0.56 per share last quarter, and $67 million or $0.49 per share in the corresponding first quarter of 2014. As always, we evaluate investment performance on a total-return basis and not merely by the geography of net investment income.

Cash flow from operations on a consolidated basis, including the Other segment, was materially lower than prior quarters -- as Dinos mentioned -- specifically, 57% lower than the corresponding first quarter of 2014. This was caused by several factors, the most significant of which are -- one, reduced premium inflows net of commissions; two -- increased reinsurance cessions and the ceding commissions, where appropriate; an increase in the cash outflow associated with net paid losses which includes payments on deductible and captive losses as well as some unusual large claims; and fourth, an increase in the operating expenses including bonuses, US mortgage expenses, and some nonrecurring expenses associated with certain business opportunities.

This quarter's level of operating cash flow, however, should not be viewed as a new run rate due to the timing issues and nonrecurring impacts.

Our effective tax rate on pretax operating income available to Arch shareholders for the first quarter of this year was an expense of 3.9% compared to an expense of 1.7% in the first quarter of 2014. Fluctuations in the effective tax rate could result from variability and the relative mix of income or loss projected by jurisdiction.

Our total capital was $7.19 billion at the end of the quarter, up 2.3% relative to the prior year end. During this quarter we purchased 2.7 million in shares at an aggregate cost of $163 million. These repurchases represent a multiple of 1.28X of the quarter's average book value and had the effect of reducing quarter-ending book value per share by $0.26. On the other hand, the effective foreign-exchange on book value was a gain of approximately $0.25 per share, as the benefit of restating insurance and reinsurance liabilities outstripped the decline in non-US-denominated investments.

Our debt-to-capital ratio remains low at 12.5%, and debt plus hybrids represents only 7% even, of our total capital, which continues to give us significant financial flexibility.

As Dinos mentioned, we continue to estimate having excess capital above our targeted position, and additionally $724 million remains under our existing buyback authorization as of the end of the quarter.

Book value per share is now $47.80 at the end of the quarter, up 4.9% from year end and 15.1% relative to a year ago, and this change in book value per share this quarter primarily reflects the continued strong underwriting performance and investment returns.

So, with these introductory comments, we are now pleased to take your call -- or take your questions.

Ladies and gentlemen (multiple speakers) --.

Kathy, we are ready for their questions, please.

(Operator Instructions)

Michael Nannizzi, Goldman Sachs.

Thank you, thanks for that. Just one question -- a couple questions I had. One was on the decline in CAT premiums in the Reinsurance segment. You know, I was a little surprised that the underlying didn't change more, just given I expect that business probably booked at a lower loss ratio. Were there other --? I'm sure there are other mix issues that are impacting the underlying measures, so I just wanted to get some context on that if I could. Thanks.

Well, first, our approach to the CAT business was to maintain as much of that business with our client base. So in essence we committed to the client base repurchases, and then we looked at the risk characteristics of that portfolio, and where we felt it was advantageous for us to buy retrocessional cover to protect our book, we chose to do so. So that was the approach for the quarter.

We believe that some segments of the CAT business is still, depending on what part of the curve you're on, is profitable at very good levels -- meaning midteens ROE. And then on some other parts of the curve, they might be in the mid-single digits,, which in our view, we don't want to end the right CAT business with an expected return of mid-single digits.

So, that's in essence been our approach. You know, Mark, I don't want to -- do you want to add anything else to that (multiple speakers)?

Yes, sure, I'll just add that -- and the way you phrased your question you kind of answered it -- this clearly is a mix difference beyond the pure CAT aspect that Dinos mentioned, and then an example of that would be -- we seldom talk about it other than our fabulous results -- is the facultative group, which adds fabulous results for the quarter but not quite as fabulous as the prior quarter.

So, you know, you get a little bit of mixed differences and in the case of property businesses, the combined ratios can move.

As far as longer- and medium-tailed businesses, the combined ratios associated with those are consistent with what you'd expect in a declining market, inching up higher and it's simply a mix that caused the quarterly results to be what it is.

Got it, got it. And then, should we think about -- in terms of, like, the capital intensiveness of your business -- declining, you know, as you continue to maybe mix away from more capital-intensive business in reinsurance -- did that have an impact on your appetite for buybacks in the quarter, or maybe the amount of capital that you're willing to allocate to those sort of activities?

Yes, as a matter of fact, usually, historically, I would say that in the third quarter we refrain on buying back shares, even when we have big buyback programs, on the basis that it's the CAT season, and when we were committing 20% or 21% or 22% of our equity capital to a single event, a single -- a 250-year single event -- that is changing. And as you saw with the numbers we have reported, we are in the sub-10% of capital in any one zone and, for that reason, I think buyback opportunities are not going to be limited to the second quarter, but also in my view in the third quarter, because the CAT PML aggregations we have, and the excess capital that I have -- we have -- in the Company, they are such that I don't worry too much about an unusual event, that it will cause us significant harm during the third quarter.

Great, thank you. And then just one quick one, just in terms of thinking about Watford and the reinsurance business, I mean, should we be thinking that your gross premiums might stick around where they are, but that we'll see just the cessions line just increase as you sort of toggle the premiums between those two segments? Is that how we should be thinking about it, or just if reinsurance market conditions continue, should we expect to see gross premiums decline as well? And, thank you for all your answers.

Yes, it -- Mike; good question. It is a difficult one to answer, because it is the vagaries of the marketplace that drives that, as to what we might [bound] and what might be natively written on Watford paper versus written by Arch, Arch Re, Arch Insurance and ceded. So it's really hard to say what that direction might be. Just like -- I'd make a similar comment on any one of our units, it's hard to predict it.

So, I'd really prefer to not give a strong direction response on that, but all I can tell you is that we're continuing to be really happy with the flow, the kind of business we are seeing and the sources of that business.

It's hard to predict the future. I don't know where the market is going to go. At the end of the day, every single reinsurance transaction we do is based on the return characteristics. If it fits for Arch first, that's our priority; we put it on our paper and we retain the risk. And if, if it doesn't but because of additional potential investment return in Watford -- it fits their model -- then we will put it there. And that's the guiding principles that we have, and we have been operating since the formation of Watford. And that will not change.

So, trying to predict where the market is going to be is a dangerous, it's a dangerous proposition. I don't know where the reinsurance market will be in six months or a year from today.

You know, my instructions to our troops -- and I think we've got great underwriters, all you've got to do is look at their performance over the last 10 to 12 years -- is behave prudently in the market that has been given to you, and make the prudent underwriting decisions, and don't focus just on volume; just focus on return. And that's our guiding principles.

Great. Thank you so much for the answers.

Amit Kumar of Macquarie.

Good morning, and congrats on the quarter. Just a few questions on the MI segment.

The first question is on the discussion on the staggered program, clearly that's a meaningful number this quarter; how should we think about that opportunity, I guess, going forward?

It's -- I will make three points and I'll turn it over to Mark; he knows the numbers better than I do. But -- well, as well, you know. (laughter)

It's lumpy business. However, the incentives for both Fannie and Freddie have been increased -- their targeted amounts have been increased, as I think we talked in the last quarter, significantly, by 50%.

Last year, the GSE's -- they had a target of $90 billion each. This year's target is $150 billion for Fannie and $120 billion for Freddie, which we believe they're going to reach, as they reached their goals last year. So in essence, they're going to be more in the marketplace. Of course, they can use the cash market, the bond market, or they can use the reinsurance MI market for those transactions.

We were the innovators of these types of transactions. The first one we did, it was a combination of effort between us and Freddie Mac, and their incentive is to put more and more of that business into different sources of private capital pools, including the reinsurance market.

So, it's going to be lumpy. We don't know how many of these opportunities that are going to be there, that they're going to come our way, but we believe that they're going to be at an increased level from a year ago. And depending on pricing, we will continue to participate. And that's the best I can tell you, because we're not magicians; we can't predict the future.

But, we feel confident that stacked transactions or stacked-like transactions will be more in 2015 than they were in 2014.

Got it. (multiple speakers) --

Yes, I'll just add to that. Because I think you're trying to -- I'll just add some of the mechanics of it, is, as you know, there's the capital markets securities and then there's the insurance piece, and the capital markets -- kind of as I've alluded to in my prepared remarks -- the capital markets incept quicker, and the corresponding insurance transactions tend to get bound three to nine months later. So it has a built-in delay. Yet that the GSEs still wanted to incept identically and concurrently with the capital markets products.

So, once we bind, we may have three months, six months or whatever, of catch-up premium that we have to book. So any given quarter could have some component of catch-up, given that we continue to have a stream of these factor transactions, per Dinos's comment.

The other way you should think about it is, think about the notional loans that make these traunches up. Just like a subject based on a treaty, you have a rate that applies to it. However, this subject base declines over time.

So each of these factor deals has a 10-year maximum, but the average life is probably closer to seven, seven to eight years. But you have a declining base to which these monthly rates are applicable, and declines basically through prepayments, people moving, refi's, you know, the normal reasons why these things would roll off.

So that's mechanically, I think that's how you have to think about it.

And, to make your life a little bit more difficult, for your modeling, right now all this is accounted as derivatives; that's the $7.7 million that we talked about in Other Income, but we are hoping soon they're going to be converted to insurance accounting, so you're going to have maybe a little more clarity because we'll be reporting premiums, but we don't know exactly when that is going to happen. And it's going to be done on a prospective basis for all new contract but also for existing ones. Because, don't forget, everything we bound last year or this year still have a life for six, seven years into the future.

So, it will get a little bit more complicated and I feel bad for your models, but eventually you're going to get it when we get it.

No, life is complicated. Just one more question and I'll take the rest offline; if I look at the loss ratio for the MI segment, and if I compare that with some of the other, I guess non-legacy MI player, you know, what the guidance day gave and your presentation from March, is your loss ratio running higher because it just shows the level of conservatism? Or is there more to it?

Well, your reference point -- well, our loss ratio was in the mid 20s. But underneath that, that continues to have improvement on our -- basically our relative delinquency percentages and things like that. That continues to drop. So remember, you've got other things going on. We're reporting a segment total. So we are seeing in the US MI, declines.

But you also have any readjustments associated with our reinsurance divisions, our

In prior quarter, we had, I think, some re-evaluations favorably on the reinsurance contracts, in this win, and made -- one big deal may have gone the other way. You're going to get a little bit of noise, but I think the key core of your question is, are you continuing to see improvement in delinquency and claims in the US MI book? And the answer is yes.

And when you compare those numbers with the other public numbers from the US MI business, we are as good or even as slightly better than that. However, when you get into the reinsurance sector, we have a little more flexibility on the reserving side, to be conservative. And I would rather do that than be very aggressive on loss ratios.

Because at the end of the day, you know, early on in any business and depending on if you're in the P&C business or the MI business, your [peg] is a self-grading exam. And your real exam comes when the real results come. So, you know, that's been our approach in everything we do, and if I have the opportunity to be a bit conservative, I will take that opportunity than the alternative.

Got it, that is [our] philosophy. Thank you so much.

(multiple speakers) yes, don't forget -- we have excess capital which -- we're not capital constrained, so in essence we've got a lot of flexibility there.

Got it; I'll stop there. Thanks for the time.

Kai Pan, Morgan Stanley.

Thank you, and first question is on the CATs. Do you have any potential exposure to the Nepal earthquake, [that] the Baltimore riots as well as some other large losses like [Pemex]?

I can never say none, because I don't know every contract we wrote, but it's minimal. My phone hasn't rang and nobody whisper anything. And usually, I'm the first to know. So --.

Okay, that's good. And then on the insurance side, you mentioned the casualty line pricing still outpacing loss-cost trend, so we haven't seen that flowing through in your underlying combined ratio. Just wondering, are we going to see that in the near future?

Well, actually you have seen it. It depends on your time period over which you're looking, but clearly the core ex-CAT actually and your combined ratio and loss ratio has improved. Now, it may be relatively flat or move a couple tenths here or there from the corresponding quarter, and that's just mix and noise.

Okay, so you continue to see that; is there overall, for the insurance segment -- because what I see here is really flattish, but you do expect that given the pricing in casualty lines --?

Yes, but what you've got to -- you see, you've got to look at the components. When you're losing 8% to 10% rate on property, which is a low attrition -- a low loss ratio business, so that has to move up. You know --.

Okay, so there's (multiple speakers) --.

So at 45, you might go to 52, 53, maybe 55. And then, you get the improvement on the other, so when you do it as a mix, you know, it might be offsetting some of the gains. So maybe it's not that visible to you because you've got to look at the mix.

We're reporting the numbers as we see them; we look at the segments. Some of the low loss-ratio business has been declining for us, because rates that have been actually declined significantly; it's not that we're not trying to hold on to the business, but we do -- but that mix also has to be taken into consideration to see if our casualty loss ratios have improved by more than a couple of points over the last, I would say, six, seven quarters.

Okay, that's great. And then on MI, just want to follow up on that. As you say, at what premium level do you think you can reach to kind of -- I don't want to call it steady-state but more reasonable to leverage your expenses?

I don't think about it in that fashion. I think we're going to reach probably steady-state in approximately three years, because you do two things.

One, you have a minimum fixed expense value requires for you as you're building up the business, but also depending if that business built fast or slow you have the ability to also adjust your staffing as you go along.

I would think we're not going to be at a steady-state on the MI business until probably the end of 2017, so probably 2018 will be our first year that will say, hey, this is our steady-state number. So that's the way I think about it, and I think our people think about it about the same way.

Having said that, internally we look at the profitability of the business, but as we do with everything that we do, independent of sector, to open it. If I'm making an underwriting decision today, what is that going to mean for the shareholders?

Because as shareholders, you know, they're there forever. And that's the way we view shareholders. We don't view them -- oh, today there with us and tomorrow they're going to trade and get out. I view every dollar of capital that is given to me that I have to guard it, that it's there forever. And that's the way we think and that's the way we behave.

That's great. Lastly if I may, if you look at the Watford investment return over the last few quarters, have been about the 3%, 4% annualized run rate; I just wondered, could you give a little bit more color on the portfolio allocation as well as what kind of targeted return you have in mind?

Well, the portfolio, it's a fixed income -- as we've mentioned before, it's a fixed income-based portfolio, and generally lower investment-grade or some noninvestment-grade. And that hasn't changed. It's more a function of the performance and what's rebounded, you know, really in this quarter. So there's really, Kai, no really change in the asset allocations to talk of.

And do you have any target return for that portfolio?

Well --.

It's not us who have a target return. I think Watford and Highbridge have target returns. They have -- I believe, but you've got to check with them, I believe their target returns on an unlevered basis, it would be in the probably 5% to 6%. And then on a levered basis -- because they expect to put about 50% leverage on it -- it will boost that return to high single digits. So, you know, that's their target returns over time, you know.

Don't forget, they're building up and they're trying to invest all their investable assets that they have; they're getting very close to that. But I think these are questions for Watford, not us. We're just a minority shareholder in there.

But thank you so much for all the answers; good luck.

Ryan Tunis of Credit Suisse.

I guess my first question is probably for Mark, and it's a little bit of that pesky accounting one, just on understanding these [stagger] deals. But just trying to think of how to think of the normalized run rate here on the 7-7. I mean, should we think about it -- if you guys don't write another deal in the second quarter would that stay kind of around here? Or, I think you mentioned $3 million of catch-up revenues; would it be $3 million less? Or would it be zero? I'm just kind of trying to understand how [low] (multiple speakers) is the profitability?

Well again, without any forward looks and taking your assumptions, saying there's nothing else written, on a go-forward basis, what's on the books -- this seven -- let's round the numbers. The $7.5 million had $3.5 million of catch-up, so that's $4 million. And then you need to apply your own persistency assumption of how fast those loans fall off. And that's (inaudible); you have to apply it to (technical difficulty) on that. And that's your best way of doing it.

Okay.

Let me give you a number and then you can do your [decay] factors yourself, right? All the staggered transactions we've done, they're pretty much last year, this year. They have 16 -- $617 million of insured limit and a lifetime premium -- it will be approximately $111 million. You know, that's the lifetime premium over the period.

Now, you can say it's going to take six or seven years, or seven to eight years, whatever. We believe that 2015 it's approximately -- we don't do another transaction, about $20 million. That will average about $5 million run rate a quarter. That will decline a bit if we don't write any other transactions in 2016, decline a little bit in 2017, until you get to around $111 million over the lifetime of the contracts. (multiple speakers) --

The only clarification -- because that's a good view Dinos gave you, but that's an ultimate view.

Yes.

First, it's nominal dollars.

Yes.

Secondly, it's ultimate. You were kind of asking a question on the vagaries of timing, and timing of catch-up, it's hard to predict quarter by quarter by quarter. Dinos is right, but it doesn't address the timing of when they are recognized.

Okay, that's helpful. And I guess kind of staying on the GSE deals, this is a little more I guess higher level, but I guess up until now I think -- either you guys have said it or I've read somewhere, but 70% of the capacity has been, I guess, capital markets-driven.

Do you guys have a view, maybe looking out over the next two to three years, how much of that comes to the MI side as opposed to capital markets?

We don't know that. I think that's a question for Fannie Mae and Freddie Mac. Actually, in 2014 it was 80/20. It was only on the first quarter of 2015 that it was 70/30. They determine that, and they -- and that's why it's so hard to predict. They view -- I believe they view the insurance/reinsurance marketplace as more of a steady capital. Where they view the capital markets as having a limited capacity, but that capacity can be fickle. It can be priced very high at some points and very low at some other points.

So, it will depend on the pricing. They test the capital markets first, they see what they can get. From there they test the insurance and reinsurance market, what they can get from there, and they make those determinations.

But, they do have an incentive to broaden the base of private capital willing to take credit risks so they can de-risk the pool significantly, so they can go back to Congress and say, hey, you know, we have the risks, the entire portfolio. So the taxpayer is only taking the very end tail risk, the Black Swan scenario which -- you know, I think it's a good thing; it allows private markets to price it and take the risk, and nobody has the omnipotent capacity to take unlimited risk. Only the federal government can do that, but that's the very end, the tail event that none of us has the ability to do.

Got it. And then I guess just quickly, my last one on the MI business, it looked like half of the NIW, it sounds like, didn't come from credit unions. I'm assuming it came from banks.

I'm just interested, I guess, in kind of the breakout of that NIW, how much of that maybe came from your top five-type banks, how much of that came from some of the other nationals and some of -- and how much of it then came from the smaller guys. I don't know if you can give me that level of granularity but I'd be interested in that.

I don't have it in front of me, that granularity. You know, maybe when we have a -- I think we have an Investor Day coming up in May, and probably -- I'll make a note and then we will have a little more granularity to share with you there.

You know, usually we don't try to focus at this level of our development, to specific originators. We are trying to get as broad as we can, and sign as many of these originators. And as you saw, we're pretty happy with where we are. We have 10 of the top 15. I don't know what that top 15 is, but it might be maybe 60%, 70% of the market.

Now the question is, how does that flow? The fact that you have connected all the pipes and you have all the agreements, it doesn't mean the water is flowing freely. It starts trickling in and then it accelerates, because all these things have to -- you know, there is a lot of work that needs to be done on getting the systems to work with each other and start getting the flow.

So -- but we'll give you more of a color in our -- we're going to have our MI people doing a presentation, and then we'll get into that granularity at that point in time.

That's helpful; thanks so much, guys.

Charles Sebaski. BMO Capital Market.

Good morning or afternoon, I guess it is now. I had a question in trying to understand the ROE impact, the ceded business to Watford Re. So, we don't know exactly what it is but this quarter it seems like it's maybe $50 million of business ceded to Watford. And I assume that that's 10% ROE business like the rest of yours?

But the income to you guys from Watford on the minority ownership and other fees and other stuff, how does that transition? How do you look at that? You go, okay, we transitioned $50 million of premium that's generating a 10% ROE -- how does that return from Watford look relatively? And does that free up capital (multiple speakers) --?

Well, you're starting with a premise that is incorrect --

Okay.

All right? If the $50 million had a 10% ROE, it would be on our books. Based on the investment returns we achieve.

Okay.

Don't forget, we have an A+ rating; it requires a different capital, and also it requires through the rating agencies and regulators a different investment philosophy.

Now, that business for us -- you know, would it be maybe mid-single-digit ROE? By putting it into Watford we're boosting the ROE, because that set of shareholders are willing to take more investment risk, and the way you've got to think about it is that they have at least, I would say, 250, 300 basis points investment advantage over a traditional P&C operation. Having that advantage on business that it has approximately 3 1/2 year duration, and 70% is loss and loss-adjustment expense, you can do the math. You know, you compound 300 basis points for 3 1/2 years, for 70% of the premium, and you're adding 7, 8 points of ROE on an after-tax basis.

So, you take something that is in the 6-7 and it becomes 14-15.

So, that's the way you've got to think about it. Now, 5, 6, 7 is not acceptable to us because first of all, it creates a lot of tension within our ranks. Our incentive compensation for our underwriters is based on us achieving a minimum of 8% ROE.

If we don't achieve that, I think we run home with empty pockets, our wives are really upset about that, you know. So at the end of the day, there is a culture here when we get to our underwriting, that we've got to hit on an expected basis, certain targets. If we don't hit it, that's when we go.

Now, to do the math, we get -- not utilizing our own capital, we get -- well, 11% we get by utilizing our investment, which is our own capital. But of course we get fees and we get profit commissions through the back end. We just have credits to our shareholders because there is no utilization of capital for that.

I haven't done the math on $50 million but if you want me to do it, I can do it and I'll have Don give you the arithmetic. But you can probably do the arithmetic yourself. You know.

So I just -- so that's what I thought. I mean, regardless of the initial premise of ROE being wrong and it's mid-single digits, but when you cede that, conceptually whatever capital was supporting that to begin with is now free and clear, to go under capital management or (multiple speakers) --.

That's correct.

-- and the return, then, generated from the 11% ownership is a magnitude higher relative to now that freed-up capital, right? I mean, because it's (multiple speakers) --.

That's the right way to think about it.

But the investment return, long-term investor-return leverage over a traditional insurer being realized.

Yes.

Yes. And so then on that basis or just -- and that construct, how much business currently -- because -- can you cede to, when you look at your book, if we look at this year, I mean what's the potential -- obviously there's changes in capital market and pricing -- that can be ceded? Or is there a governor or a limit on, in any given period, how much business you can cede to them?

Yes, there's limitations on the basis of their capital base. When we cede business to them, they collateralize it for us, on the expectancy. So in essence, there is limitations from their point of view as to how much they can write based on their capital base, independent if it's cessions from us for things they write directly into the market themselves, and of course how much capacity they have on either LOCs or collateral they have to put up depending on where their business is emanating.

So -- but we -- since it's a new company, and it has quite a bit of capital, they have in excess of $1.1 billion in capital, they got a size 10 shoe and a size 3 foot right now. So there's plenty of room for the foot to grow into the shoe. (laughter)

And outside of your return dynamics in the reinsurance book, the mid-single-digit ROE profile, is that really the only limit -- limiting factor for you in ceding business there? It's just sort of, this business is below our return threshold -- outside of that there's no other, hey, we're not going to do more than this? Or there's -- you know, what other factors might be?

Well, there's three scenarios here, okay? And I'll give you the scenarios.

Let me start with a premise. We have an obligation. It's a contractual obligation. As a matter of fact, I think -- I don't know, a dozen or more of our employees are actually dual employees. They are employed by us and also they are employed by Watford. A portion of their salary is paid for them for activities that they do on their behalf.

Now, business comes to us; we underwrite it, and then we decide that it fits the Watford model, we put it there.

Business originates from Watford; they're still in the market and then, and then they use those employees and they say, hey, we sourced this, we got this phone call directly; underwrite this piece of business for us.

That can take two paths. One path is, the client -- it might be a European client -- will accept the Watford paper, or it might be a US client, or -- and they say, well, you know, we want Arch to issue the paper and let them reinsure back to you.

So those are the three scenarios that happen. In the first one, we determine the ROEs based on what we've seen. It doesn't fit our book, it fits theirs, we will put it there.

In the other two scenarios we've got an obligation to work the deals on their behalf, we work the deals. And in some cases when I say, can we have a little piece of this? Because -- and depending on how much of that deal they want to give us, we might even take it at Arch.

Don't forget: Arch takes 15% of those deals through the backend for underwriting consistency. So when I generate some activity for Watford, that it was originated and it was Watford paper, not only I have 11% ownership in the Company but also I take a 15% quota share through the backend. So it's not -- it's hard for you guys to look at all the components and even our reporting with the other sector sometimes might be getting a bit confusing to you, but at the end of the day I'm trying to explain to you all the scenarios. And those are the three scenarios, usually, that happen on a day-to-day basis.

The only thing I would add is a different cut of it, by the line of business as opposed to the flow of business that Dinos was talking about. And it's been more a decision upfront, not upon return characteristics as much as preservation of capital and not put a lot of CAT business in there -- because you could get unlucky and have a cash call early, and you want that compound interest on a fixed-income strategy, to have the ability to work and compound.

So if you have a big cash call early, you hurt the ability for that to happen. So that's the only other thing I would add.

And the longer the tail, the better the advantage we have. So the construct of that book is not to feed it with a lot of short-tailed business; that's not really where they have the advantage. The advantage is on longer-tail lines.

Low volatility, more predictable combined ratios, longer tail. Hard to find, hard to do, but that's the premise.

Thank you very much for the answers.

(technical difficulty) Meyer Shields, KBW.

Sorry about that, two quick questions if I can. First of all, I guess the corporate or other expenses were down about 30% year-over-year; is that sort of decrease sustainable?

You know, what I can tell you on corporate expense, we're not -- I don't like overhead and I'm not adding to it. So I would say they would probably be steady. I haven't really focused on the delta this quarter to see if it was significant or not, but I can tell you, we are keeping a very lean holding company staff.

Mark, do you have any more detail on that?

Yes, Dinos. On corporate expense, if we're categorizing it the same way, Meyer, it was down around 13% to 15%. And it was mostly driven by a reduction in stock-option expense. So that's -- depends on what people do and how it gets exercised and so forth.

So I would say we continue to look to push those down, but I wouldn't go crazy expecting a compounded benefit every quarter.

Okay, that's helpful.

Does the opportunity exist, now that there are lower premium volumes in the reinsurance segment, to reduce the expenses there?

Well, most of the expense on the Reinsurance segment comes with ceding commissions, if you don't have the business you don't have it. When you talk about the factory which is all underwriting, I have no intention of destroying a high-performing factory. We have great underwriters in our insurance business and we have every intention to keep every single one of them, because I'm not going to be running around finding them when I need them a couple years later.

So, no significant reduction on what I would call personnel expense, etc., because I want to maintain those groups at the level we have them today, and they can produce significant earnings for us in the good times. And basically, that's a pretty valuable piece of the Company.

And, Meyer, we as management, and the Board, both look at that delta, if you will, as it goes through as a cost of an option to keep that intellectual property ready, banked to explode when it's appropriate to.

Okay, no, that makes sense. I just wanted to understand it. And lastly, really quickly, with the other underwriting income in mortgage insurance, are there any expenses associated with that or is that a net number?

The expenses, the expenses there in the MI bucket, and that is a clean number. When internally we look at it, we have a different set of numbers, but accounting requires you to report in a certain way. So we report all the MI expenses under the MI sector, and the other income comes clean of any expenses.

Perfect; thanks so much.

Jay Cohen, Bank of America/Merrill Lynch,

A couple of questions, I guess starting with the mortgage side.

When the accounting -- if and when the accounting changes, for the staggered transactions, will the bottom-line impact be vastly different on a quarterly basis? If you're accounting as insurance versus derivative?

No.

No, it should be just more explosion of a single line into a lot of lines -- written premium, earned premium, expense, acquisition costs, loss reserves, paid losses.

But bottom line isn't going to change anything.

Okay, that's good to know. And I guess the other question -- within the mortgage segment we do have these other operating expenses kind of moving up as you build out that business. When do they start to level off?

We're on a steady state now on dollar expenditures. Our marketing team is fully deployed; there's no significant positions for us to fill. So right now it's just for them to go out and execute in the marketplace.

But the buildup, you know, after we bought the assets from -- the CMG and the assets from PMI, it was to create the marketing team that we have which, it's approximately -- give or take a few heads -- about 60 people. And we have reached that level now. We have filled every single key position.

I would just add to that, depending on whether you look at it quarter over quarter or you're looking serially, Jay, quarter over quarter you've got the distortion because in the first quarter of 2014 was only two months, not three months -- which I think you know ? but on the serial point of view, though one other tweak for what Dino says to all those salespeople now on board, is there's a split of the expenses of the US MI staff that's kept net to us versus what goes back to PMI. And that changes as a function of the work that's done.

So, the simplest thing to think of is -- and it varies by function -- controllership, IT, and so forth -- but, is the claim function. As claim inventory liquidates on that finite set of claims, the dollars associated with the claim function would shrink and therefore Arch, as opposed to PMI, would absorb those. So, that mixture changes over time and that's the only other tweak I would make to Dinos' comment.

Right. (multiple speakers) -- but, based on activity, we have the ability to manage that, right? But the activity from us managing the PMI runoff, so to speak, it will diminish over the next three, four, five years and now it's a question, do we need all that personnel, and if we do, we'll keep them because we're building our business versus allocating all that cost back to PMI.

Got it, perfect.

Last question was, with Watford, Arch earns some fees for running or helping run Watford; where do those show up in your reported results?

There's more than one place, but most of them at this point's in an offset to acquisition.

Got it -- acquisition in your reinsurance segment?

Correct, yes. (multiple speakers) well, where it emanates. Some of it (multiple speakers) --.

Right. And don't forget, Jay, profit commissions are not in [VAT] yet, right?

Right. Got it.

We've got to see that quicken first.

Perfect. Thanks for the answers.

Ian Gutterman, Balyasny.

Dinos, I think the souvlaki is going to all be gone, this call has gone so long here.

No, no, today -- today on the menu is keftedes. Keftedes is Greek meatballs.

So, I guess my first question is, the other specialty reinsurance has been declining at a fairly noticeable pace the past few quarters. Could you give a little color on what specific lines in there are shrinking and maybe even what's left that remains, that's a big part of that line at this point?

Mark, do you want to handle that?

Yes, let me just pull something. Okay.

The one obvious place is property CAT, which (multiple speakers) -- and then we reduce significantly on the [Morodor] quota shares overseas. That's another area. And then we'll give you more granularity. Mark.

Because as you know, we're -- I think our reinsurance group is good at finding opportunistic opportunities. When you get them, they hit a quarterly statement, and they're really not renewable. So you may recall, we had conversations of some relatively large premiums a year ago's quarter that were opportunistic in nature. And those didn't repeat, so --.

Got it.

-- And that's where all those specialties are. There was also a bit of a falloff in some accident and health business. But I think predominantly you can -- besides what Dinos said -- you focus in on these opportunistic transactions that were unique to the marketplace at that time.

Perfect, I just want to make sure on that.

With the decrease in the CAT exposure and the short-tail exposure, can you give us a sense of how much your CAT load has come down on a model basis?

Let's see. Well, pretty material, as you might guess.

Ian, do the calculations; I haven't done it. But go to the old PMLs and do the division between the new PML and the old, and that will give you an indication as to what the -- you know.

Okay. And I was wondering if that would work or not.

I would say, right now if I would take a guess, it would be around $40 million a quarter or thereabouts, so it would be about, I would say instead of $200-plus million it might be about $160 million.

Got it; okay, thank you.

Listen, this is back-of-the-envelope. I'm pretty sure from the back of the envelope, but you know, there's no precision in that number.

That's okay; I was just trying to get ballpark, okay.

It might be $159 million! (laughter)

Exactly -- .2.

The other I was wondering on PML is, can you give us a sense of how different, how much your gross PML has come down to your net PML? Meaning, how much of the PML reduction is -- you know, there is an increased retro buying versus actually cutting the gross?

Well, the gross came down a little bit. It was maybe in the order of about 5%, 6%, thereabouts, you know. And then most of the other reduction is reduced writings and also retrocessional buying.

Okay, got it. And then my last thing before letting you get to your meatballs is, (multiple speakers) --.

It's keftedes, there is no meatballs in Greek language!

I know, I can't pronounce that, Dinos. I'm not as good -- I don't have that dialect down yet. (laughter)

Just sort of as how to think about excess capital, right? I mean, obviously, with much less CAT you should be able to write it at a different premium-to-surplus then you used to do, right? So, how should -- is there a good metric to think about, rule of thumb, for how to evaluate excess capital?

There is no rule of thumb. We want the SMP model, of course, if you're writing less CAT, the allocation to the CAT business from a capital point of view is less. We factor that in, into our excess capital calculation and then we make decisions off of that. You know, listen ? I've got a guy, my chief rescope is Francois -- you know Francois [Moray[. He's got to do some work at some point in time. I've got to ask him to do something, you know. So he does a lot for us.

I mean, if I were to just look at sort of the capital charge for your PML, how much that's come down, and then say that's one part and then the other part would obviously be the difference between earnings and return of capital, is that a fair way to look at it, that essentially (multiple speakers) --?

Yes, it is. And also, you've got to look at the mortgage side as we deploy more capital. Even though, in the mortgage we're overcapitalized already; it's going to take us another, I don't know, six quarters, maybe even longer to fill the shoot. But, so.

Okay, I guess what I'm dancing around; maybe I'll ask a little bit more directly -- it seems like excess capital is getting to be maybe, I have to go back to some of the times when it was really high, but it may be getting in the upper quartile of where it has been historically.

It's up there, yes.

(multiple speakers) yes, okay, got it.

But, from a ratings agency perspective, to your point, pretty close to every dollar we have a reduction in CAT PMLs, adds a dollar to excess capital.

That's kind of what I'm getting at, okay. All right, great, thank you, guys.

Thank you. You have no further questions. I would now like to turn the call over to Dinos for closing remarks.

Well, thank you all for listening and we're looking forward to the next quarter. Have a wonderful day.

Thank you for your participation in today's conference; this concludes the presentation. You may now disconnect. Good day.