Arch Capital Group Ltd (ACGLN) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arch Capital Group first-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference 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 the periodic reports that are filed by the Company with the SEC from time to time. Additionally, certain statements contained in the call 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 will also make reference to some non-GAAP measures of the financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website.

I would now like to introduce your hosts for today's conference, Mr. Dinos Iordanou, Mr. Marc Grandisson, and Mr. Mark Lyons. Mr. Iordanou, you may begin.

Thank you, Abigail. Good morning, everyone, and thank you for joining us today for our first-quarter earnings call. We are starting the year on a good note. Our first quarter was terrific from virtually all perspectives. Our reported combined ratio was excellent at 87.1%, which was aided by low level of catastrophe losses and continued favorable loss reserve development in each of our segments.

Investment returns were also very good, as our fixed income portfolio benefited from the interest rate declines we saw in the first quarter.

There are no significant changes in the property/casualty operating environment from last quarter, although there are some signs that reinsurance terms, especially ceding commissions, may be bottoming out.

Within the insurance sector, we saw slight deterioration in terms and conditions, while the mortgage insurance industry remains quite healthy. We are in a market where the importance of cycle management, not only in preserving capital but also maintaining balance sheet integrity, is paramount.

Navigating through this phase of the cycle requires that our underwriters remain disciplined, opportunistic and laser focused in execution.

Within the reinsurance segment, we are focusing more on special situations that utilize our underwriting expertise and capital strength, and our ability to respond quickly. In our insurance segment, we continue to focus on less volatile smaller accounts, both in terms of limits but also account size, and with reinsurance purchases helping us to reduce the volatility on large accounts in our high-capacity business.

The operating environment in the mortgage insurance space remains healthy, and we are generating excellent returns and continue to make significant progress in this segment. Marc Grandisson will give you more details in all of our segments in a few minutes.

On an operating basis, Arch earned $145.7 million or $1.17 per share for the first quarter of 2016, which produced an annualized return on equity of 9.7%. On a net income basis, we earned $149 million or $1.20 per share for the 2016 quarter, which results in a return of equity of 6.4% on a trailing 12-month basis.

Remember that net income movements can be more volatile on a quarterly basis, as these earnings are influenced by changes in foreign exchange rates and realized gains and losses in our investment portfolio.

Groupwide, our gross written premium increased by 6% to $1.39 billion in the first quarter over the same period in 2015, while net written premium rose 3.7% to $977 million, driven primarily by growth in our mortgage segment along with modest growth in our construction and alternative market business within the insurance segment.

Our investment results were excellent on a relative basis and acceptable on an absolute basis, given financial market conditions. Net investment income per share for the quarter was $0.57 per share, up $0.04 sequentially from the fourth quarter of 2015.

Despite volatility in the investment and foreign exchange market in the first quarter of 2016, on a local currency basis total return on our investment portfolio was a positive 1.48%, as returns on our fixed income investments were partially offset by declines in our alternative investment portfolio. Including the effects of foreign exchange, the total return was 1.82% in the quarter, a healthy result.

Our operating cash flow was $257 million in the first quarter, as compared to $16 million in the first quarter of 2015. Mark Lyons will discuss the cash flows in more detail in a few minutes. Our book value per common share at March 31, 2016 was $49.87 per share, a 4% increase sequentially from the fourth quarter of 2015.

While some segments of our business have become more competitive, we believe that groupwide and on an expected basis due to our mix, the present value ROE on the business written in the 2016 underwriting year should produce ROEs in the range of 10% to 12% on allocated capital.

Before I turn the call over to Marc Grandisson, I would like to discuss our PMLs which remain essentially unchanged from January 1. As usual, I would like to remind and point to everybody 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 reinsurance and all retrocessions.

As of April 1, 2016, our largest 250-year PML for a single event remains the Northeast at $494 million, or about 8% of common shareholders' equity. Our Gulf of Mexico PML decreased slightly to $438 million, and our Florida Tri-County PML increased slightly to $385 million.

I will now turn it over to Marc Grandisson for comments on market conditions before Mark Lyons discusses our financial results, and after their comments we will take your questions. With that, Marc.

Thank you, Dinos. Good morning to all. We continue to face the challenges of softer pricing as the property/casualty industry continues to report favorable prior-year loss development, and benefiting from below-average cat losses which obscures, we believe, the adequacy of risk-adjusted rates in the property market. However, in every market there are some dislocations present, and we remain vigilant in our efforts to seize those opportunities that become available.

On the positive side, as Dinos mentioned, recent actions by a few large participants in the marketplace may help to usher in a more disciplined environment in the casualty area in the near future.

P&C rates are declining in the mid to low single-digit range, but there are pockets of rates strengthening. Our challenge is to be confident that current rate levels are sufficient on an absolute basis.

On the other hand, in mortgage insurance which I will refer to as MI from here on, rates remain very healthy despite indications that they appear to be declining in light of the new rate cards filed by some of our competitors. Despite the headlines, we believe that on a risk-adjusted basis the aggregate effective rate levels of MI providers are actually higher due to a shift in the quality of the risk assumed.

Staying with our MI segment, which as you may recall includes primary operations in the US and mortgage reinsurance globally, as well as a GSE risk-sharing transactions portfolio. We estimate that the market's MI new insurance written or NIW was down about 10% in the first quarter of 2016, versus the fourth quarter of 2015. In spite of this, Arch continues to increase its presence in the sector.

Overall, our Arch MI segment grew its gross written premium this quarter by 21% over the fourth quarter of 2015, and 84% over the same quarter last year. The growth came primarily from new GSE risk-sharing transactions, as well as from a reinsurance contract with one of the major Australian lenders that we discussed last quarter.

Our US MI unit continues to increase its share of the market. Excluding the GSE transactions, we estimate that we continue to gain market share at a pace of approximately 2 percentage points per year since our acquisition of the US MI platform. At March 31, 2016, our total MI segment risk in force was $12.8 billion, which includes $7.2 billion from our US MI operation, $4 billion from worldwide reinsurance operations, and approximately $1.6 billion from the GSE risk-sharing transactions we wrote.

Our primary US MI operation increased its NIW $2.9 billion during the first quarter of 2016, of which approximately 69% came through the bank channel and 31% via our credit union clients. Seasonally, the first-quarter 2016 for credit union production typically runs lower than the other three calendar quarters. The amount of NIW from credit union this quarter is consistent with what we've recorded in the first quarter of 2015.

Our bank channel business continues to pick up steam and is becoming a larger contributor to our production, and RateStar is a primary driver of this growth. We introduced RateStar less than five months ago, and to date we have rate filings approved in all but three states. Through March 31, 2016, 1142 customers have elected to use RateStar. Over 50% of our commitments in the first quarter were obtained through RateStar.

We have seen many positive sign since its launch. The increase in our application volume is very encouraging and points to our clients seeing value in our differentiated pricing framework. RateStar is proving to be an effective tool in differentiating Arch relative to its competition, while maintaining or exceeding our targeted average return of 15% ROE.

We believe that our combination of high ratings, superior customer service, and product innovation will allow us to continue growing.

I will turn now to our primary P&C insurance operations in the United States, which currently represent approximately 80% of our global insurance operation. We saw a more stable rate level change at 10 basis points effective rate increase this quarter versus the 140 basis points decrease last quarter, excluding the effect of ceded reinsurance.

However, that 10 bps increase is somewhat misleading, since it is skewed by one large professional liability program that renewed at a plus 7% rate increase in the quarter. Without the benefit of this program, our overall rate change would be a rate decrease of 80 bps.

We believe that we were able to recapture some of that rate erosion once we considered the purchase of our reinsurance coverages. Our insurance operations in the UK which represents around 17% of the insurance segment is still pressured from a rate perspective. Rate decreases across all our product lines were 4.6% this quarter. We continue to actively manage this portfolio towards the more attractively-priced lines.

On a groupwide basis, our insurance units premium written increased 4% in the 2016 first quarter versus 2015 on a gross basis, while they increased 1% on a net basis. We continue to adjust our mix of business and are generally able to buy reinsurance on more favorable terms.

Ceded premium increased 11% in our insurance group this quarter over the same period last year. Mark Lyons will provide more perspective on this in his commentary.

Areas of opportunity for growth in the insurance sector in the first quarter were in our, as Dinos mentioned, construction, national accounts, travel and alternative market lines. The vast majority of our growth came as a result of our ability to take advantage of the current dislocation in those areas where some major players are being challenged. In contrast, our executive assurance, property and programs businesses are areas where rate levels lead us to a more defensive strategy.

Finally, let's turn to our reinsurance group. Our teams are being reactive and selective, consistent with our long-stated strategy of cycle management. Most lines of business, especially the ones with good results, continue to see rate decreases in the 5% to 10% range. There are, however, several lines that are experiencing some level of rate increases.

A recurring question our team faces when looking at such areas is whether that positive rate change is enough to allow us to achieve an adequate return. As an example of this, we continue to struggle with large US casualty placements. There is increased demand by buyers in the market for quota shares, but we have been unable to provide a significant new transaction at an appropriate return.

Our reinsurance gross premium written declined by 1% for the first quarter of 2016 versus 2015, while on a net basis we were down 8%. Our property cat gross written premium for the 2016 first quarter was down over 10%, as we continue to exercise underwriting discipline and benefit from improved terms on retrocessional treaties.

Most of our efforts in the underwriting areas are currently directed to UK motor, specialty liability products, and niche areas such as professional lines, excess motor and cycle data.

With that, I'll hand this over to Mark to cover the detailed financial results. Mark.

Thank you, Marc, and good morning to all. As was true on previous calls, my comments to follow will be on a pure Arch basis which excludes the other segment, that being Watford Re, and I'll continue to use the term core to denote results without Watford Re and consolidated when referring to results including Watford Re.

This quarter, our core business mix based on net written premium changed as follows -- are relative to the first quarter of 2015. The insurance segment reduced from 58% to 56% of the total. The reinsurance segment shrunk from 37% to 33%, and the mortgage segment grew from 5% to 11% of the total. This shift in mix continues to reflect our view of the market and the relative return expectation each segment provides.

As for a longer-term view of our mix changes, I would point out that four years ago in the first quarter of 2012, within the reinsurance segment the property cat line represented 26% of net earned premiums, whereas this quarter it is down to only 6.9% of earned premiums. And this was accomplished through a 71% reduction in net earned premiums over the four-year period. Yes, 71%.

The insurance segment similarly reduced its property in marine net earned premiums by 38% over that same time period. Both actions reflect our view of severe margin compression in the property cat space.

Okay, moving on to this quarter's financial results. The core combined ratio for the quarter was 87.1%, with a 0.5 point of current accident-year cat-related events, compared to last quarter in 2015 of an 87.5% combined ratio which reflected 0.6 of a point of cat-related events.

Losses recorded in the first quarter in 2016 from cat events totaled only $4.2 million, stemming mostly from within our reinsurance operation.

The 2016 first-quarter core combined ratio reflected 6.4 points of prior-year net favorable development, which is net of reinsurance and related acquisition expenses, compared to 7.8 points of prior-period favorable development on the same basis in the 2015 first quarter.

This resulted in 93% even current core accident quarter combined ratio, excluding cats, for the first quarter of 2016, compared to 94.7% in the comparable quarter last year. In the insurance segment, the 2016 accident quarter combined ratio excluding cats was 95% even, essentially unchanged from the accident quarter combined ratio of 95.1% a year ago.

The reinsurance segment 2016 accident quarter ex-cats was 94.3%, similarly comparable to the 94% even ratio in the 2015 first quarter.

Moving over to mortgage, there accident quarter combined ratio was 71.9% in the quarter compared to 94.1% in the first quarter of last year. As I have said in the prior calls, it's important to remember though that the concept of accident year is more of a P&C concept and not a mortgage insurance concept, due to their accounting convention.

Now, as previously stated, the ACGL core accident quarter combined ratio dropped 170 basis points quarter over quarter, yet insurance and reinsurance segment ratios were virtually flat with last year's respective quarter. This is driven by the mortgage segment, as its inherent strong level of profitability is becoming a higher proportional contributor to our overall results.

The insurance segment accounted for roughly 11% of the total net favorable development in the quarter, net of associated acquisition expenses, and this was primarily driven by shorter tailed lines from the 2012 to 2014 accident years and longer tailed lines from the 2003, 2004, 2008 and 2012 accident years.

The reinsurance segment accounted for 84% of the total net favorable development in the quarter, with approximately three-quarters of that due to net favorable development on short tailed lines concentrated in the more recent underwriting years.

And the remaining portion due to net favorable development on longer tailed lines primarily from the 2003 through 2011 underwriting years.

The mortgage segment accounted for approximately 5% of the favorable development, which translates to a 4.4% beneficial impact on their loss ratio this quarter, resulting primarily from continued lower claim rates from the CMG business we acquired in 2014, and from the PMI quota share we assumed within that transaction covering the 2009 to 2011 book years.

As was the case last quarter, some of this favorable development benefit is offset by the contingent consideration earnout mechanism negotiated within the purchase agreement. And as a reminder, this contingent consideration impact is reflected in realized gains and losses and not within underwriting income.

The core 34% even expense ratio for the first quarter of this year was 50 basis points lower than last year's comparative quarter of 34.5%. Overall, the expense ratio, though, was aided this quarter by roughly 85 basis points due to the release of an overestimated year-end 2015 bonus accrual.

The insurance segment expense ratio improved 90 basis points for the first quarter of 2016, reflecting both a lower net acquisition and operating expense ratio. When one adjusts, however, for the aforementioned bonus accrual benefit, the expense ratio would be nearly 50 bps higher; however, still an improvement over last year's comparative quarter.

We as managers continue to focus on the total expense ratio, though, as mentioned previously, since the slotting of costs and benefits within net acquisition and operating expense ratios can be somewhat artificial. And ceding commissions are recorded in the net acquisition line and not allocated to every operating expense category that they represent.

The reinsurance segment expense ratio increased 120 basis points this quarter, primarily reflecting a 6.6% lower net earned premium base. I will note, though, that the reinsurance segment's expense ratio this quarter was 100 basis points lower than sequentially in the fourth quarter of 2015.

The ratio of net premium to gross premium for our core operations in the quarter was 70.2%, which is a decline from the 71.8% a year ago. The insurance segment had a lower 68.8% ratio compared to 70.7% a year ago, driven mostly as was the case last quarter by increased sessions on a larger alternative markets book, increased sessions on capacity driven product lines as Dinos mentioned, and a reduction in our P&C program business which had been kept overwhelmingly net and still is kept overwhelmingly net.

The associated average cede commission ratio on quarter share treaties improved another 200 basis points in the US. In fact, quota share treaty cede commissions have improved from 2012 to now by over 500 basis points in total, and the improvement ranges from plus 600 to plus 1000 basis points for some product lines.

Some of this net acquisition improvement, however, is masked by the growth of businesses using captive reinsurance arrangements. Many of these carry no or marginal front-end commissions, so the associated ceding commissions are lower since there are generally no front-end commissions to be reimbursed.

Moving to the reinsurance segment, the net to gross ratio was 66.6% in the quarter compared to approximately 72% a year ago, primarily reflecting cessions to Watford Re and other third-party retrocession.

The mortgage segment, in addition to premium growth that Marc mentioned earlier, had approximately $4 million of other underwriting income in the quarter from risk-sharing transactions receiving derivative accounting treatment, and $7 million of underwriting profit associated with risk-sharing transactions receiving insurance accounting treatment.

Over time it is expected that more income will continue to emanate from transactions receiving insurance accounting treatment.

The total return on our investment portfolio on a local currency basis was a reported positive 148 bps in the quarter, reflecting positive returns in fixed income investments, both investment and noninvestment grade, partially offset by negative returns from the equity and alternative investment portfolios. On a US dollar basis, total return was a positive 182 bps in the quarter.

Over 80% of the portfolio was comprised of fixed income investments. The embedded pretax book yield before expenses was 2.07% as of the end of the quarter, and duration remained fairly consistent at 3.56 years versus 3.35 years at the end of 2015 first quarter.

Dinos already mentioned reported investment income per share, so I won't go into that other than as a reminder that we evaluate investment performance on a total return basis and not merely by the geography of net investment income.

Core cash flow from operations was $257 million in the quarter versus approximately $16 million in the first quarter of 2015. Last quarter, as you may recall, had cash flow from operations being affected by a reduction in gross premiums collected, timing shifts of reinsurance premium cessions, and paid and deductible recoveries.

Core interest expense for the quarter was $12.6 million, which is consistent with our longer-term run rate. Our effective tax rate on pretax operating income available to Arch shareholders for the first quarter was an expense of 6.6%, compared to an expense of 3.9% in the first quarter of 2015.

This quarter's 6.6% effective tax rate has approximately 100 basis points of a non-recurrent discrete item out of our European operations. Fluctuations in the effective tax rate can result from variability in the relative mix of income or loss reported by jurisdiction.

Our total capital was $7.3 billion at the end of this quarter, up 2.9% relative to December 31 of 2015. Our debt to capital ratio this quarter remains low at 12.2%, and debt plus hybrids represents only 16.7% of our total capital, which continues to give us significant financial flexibility. We also continue to estimate having capital in excess of our targeted position.

Book value per share was $49.87, which is 4% increase over year-end and 4.3% relative to one year ago. This change in book value per share primarily reflects the Company's continued strong underwriting performance from all segments and improved investment returns.

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

(Operator Instructions). Vinay Misquith, Sterne Agee.

Hi, good morning and congratulations on beating numbers, one of a few companies to do so. The first question is on the new opportunities because of market dislocation. If you could discuss that, that would be helpful. Thanks.

Well, when Mark talked about some unusual transactions that we see on the reinsurance side, it doesn't mean we are going to do any, but we see more requests. So that means there's clients out there that they have special needs.

On the insurance side, we continue to focus on small, medium-sized accounts. I believe we have built the infrastructure around the country. We recently in our binding authority, we also opened another new office in Scottsdale, Arizona. So we're putting a lot of focus in trying to find these profitable segments for us.

But let me reemphasize, we always look for bottom-line results first, and we look at premium growth second. At the end of the day, you can't focus just on premium growth. Of course, that's not the case with our mortgage business. That business we like a lot, and we try to grow it as fast as we can.

So Marc, do you want to add to it?

Yes, absolutely. On the insurance side, I believe that we've seen an increase in submissions over the last quarter or so, because some of our competitors decided to exit some lines of business. There have been some mergers and acquisitions, so we are seeing some movement. It is not widespread, but it is certainly starting to occur. And we are seizing the opportunity whenever we can and whenever we think it's appropriate.

One area we are not participating and I want -- it seems that the flavor of the month now or the year is broker line slips here and there, so they can have control of the panel, etc. That doesn't fit well with us. We have not participated in any of these because at the end of the day, you can't have the title underwriter and give it to somebody else. Either you are going to underwrite or you are not. And with our troops, I want us to have the ability to underwrite ourselves.

That's great, that's helpful. The second question on mortgage insurance, if you could give us the metrics about how well RateStar is doing. I think you said 50% of the submissions were coming through RateStar, but do you think it's actually driving more submissions to Arch because of that? Any anecdotal evidence would be great.

If you look at it from a submission point of view, our first quarter it was 50/50. If I look at April, it's up to 68/32, and it's been trending like this. So RateStar has only been out there for five months, so I don't know where it's going to go, but it's more significant when I look at submission activity from the bank channel. The bank channel is predominantly RateStar now, maybe 8 out of 10 submissions in April that was coming from that.

On the credit union channel, it's still in the 50/50 range, so that's where the trajectory is going. The NIW, it was 44%, 45%, I think in the first quarter out of RateStar priced business, but in April it was 61%. So that tells you that it's -- more and more of that business is moving to the place that we want it to move because we have a lot of faith in the way we price the business. Marc.

Essentially, there's a huge increase in submission. We believe it's in the order of 50%, 60% if you look last quarter of 15% versus this first quarter, and the vast majority of that pickup was through the bank channel. So just to give you an overall sense in the quarter.

Yes, that's helpful. Marc, if you could -- more to clarify about rates. I think you mentioned that the risk-adjusted rates are actually higher now for this, rather than lower.

Yes, because of --.

Well, you know, they're recurrent. The expected ROE on the business is higher than our rate card.

Okay. And even from a competitive standpoint, you've not seen the competitors step in and do something similar?

Right now, the rate card seems to have stabilized. There are rumors -- the only thing I can comment to you, Vinay, is there are rumors that some people will be extending their rate card or doing the risk-based pricing approach like we have. But we have no way of knowing what's going to happen right now. But right now, it seems that the rate card has stabilized where it is right now.

But our future, Vinay, is going to be RateStar. We like the risk based approach to it. Looking at the many characteristics of a particular mortgage and trying to get the right price for the exposure that you have, and we continue to refine our approach with that. I have a lot of resources committed to that effort, which is no different than what we do on the P&C side to begin with.

Good, okay, thank you.

You are welcome.

Amit Kumar, Macquarie.

Thanks and good morning, and congrats on the results. Two quick questions on MI, and thanks for being patient with us and explaining the finer nuances of the MI market. The first question probably ties back to Vinay's question on the broader space. Recently, the National Association of Realtors wrote a letter to FHA asking them to cut their premiums. If FHA cuts their premiums, does that change the entire private MI market, or is that a different kind of -- it's obviously a different risk, so it does not impact you that much?

Well, it depends what sectors -- you are correct. A lot of what they write, the private MI companies do not. They (FHA) write the low credit score, high LTV type of business. So depending what they do, it might or might not affect the broader market.

It's tough when you have the government competing with you with entirely totally different capital requirements. None of us, none of us or our competitors in the space, would be allowed to operate with the capital ratios that they have. So I don't know, it depends what they do and then we'll see the effect that it will have on the marketplace. And by the way, thank you for the compliment of being patient. My guys here, they say otherwise.

The other question I have was in regards to the excess capital that you mentioned. There has been chatter in the marketplace, obviously, regarding the disposition of a large MI asset, one of the largest companies. At this stage of the cycle, Dinos, how do you look at growing organically? And I'm talking with MIPs versus looking at this obviously very large and game-changing property out there?

All I can say is we will look at all avenues. Right now, our focus has been to grow organically. But given other opportunities, we will evaluate them. If they get presented to us, we will evaluate them. At the end of the day, we get paid to put capital to work at effective returns and that's where our entire team is focused on. And it's no secret that we do want to grow the exposure we have in the MI business.

Got it, fair enough. That's all I have for now. Thanks for the answers, and good luck for the future.

Thank you.

Jay Gelb, Barclays.

Thank you. On the core reinsurance segment, I was somewhat surprised to see the gross written premiums were essentially flat. You mentioned some specialty opportunities. I was hoping to get a better perspective on whether you think that overall business might be flat from a premium volume perspective, or maybe even grow this year.

I don't know about the rest of the year. It depends what we are going to be offered, but in the first quarter we certainly seized opportunity in a few larger transactions that Dinos alluded to at the beginning, and also a couple of opportunities which I highlighted in my comments which are the UK motor and some specialty liability, although not being very big but more nichey, more specialty in nature.

So I would just say it's a reflection of -- and UK motor, for instance, if you do a large quota share you will have a lot more throughput in the quarter, so that's a great example as to why premium could actually be stable year on year.

That makes sense, Marc. The other point I wanted to touch base on in reinsurance is the high level of persistent reserve releases. Can you give us some perspective on what continues to drive that favorable result?

Well, let me give it an attempt and then I'll give it -- I'm being surrounded by actuaries here. Marc and Mark, they are both actuaries, but -- we have a methodology; we haven't changed our methodology for the 14 years. To simplify, we try to track the accident year based on what we believe we price the business at.

And then the other thing we do is on long-tail lines if we see unfavorable development we recognize that early on -- any unusual event where we ignore favorable development, at least for three or four years. So that's been our methodology; recognize bad news early; don't celebrate too early on your wins; and we follow the data. So whatever the data tells us quarter after quarter, that's what we report.

Now, that was a guy who doesn't have an actuarial degree, so I'll turn it over to Marc or Mark -- Mark Lyons to give you the more scientific answer.

Good, and my scientific answer as a reformed actuary is I have nothing more to add.

Thanks, Mark. The final question I have was on mortgage reinsurance. Clearly, there was a big benefit in 1Q from the Australian deal. I'm trying to think about on organic -- I guess organic is not the right word, but on a normalized basis what do you think the growth rate could be in mortgage insurance? Could this be a $500 million gross written premium business within a year or so?

Well, we don't know. Australia is a market that's dominated by two or three players or four banks, and we have a major relationship with one of the top four. It's kind of hard to see where, if any, we're able to grow relationships in other banks. But currently right now, we have a stable, very strong relationship there. And what you are seeing right now is a production -- even though we call it reinsurance, it's really flow business that we assume on a 100% basis. So it's really like insurance, if you will.

For the rest of the world, we are exploring all other geographical areas. Dinos and I are spending a lot of time trying to figure out what we could do in Europe, what we could do -- we already are in Europe, Canada and other countries. And this is sort of an ongoing try to grow and use and take advantage of our expertise and strong knowledge and deep knowledge in the MI space to do more of it.

It's really hard to see what it would be in two or three years' time, but for the Australian business I think you get pretty much a good picture of our quarterly production.

Hey, Jay, it's Mark Lyons here. Let me just add, the difference between finding the business and expanding it versus the accounting recognition of it. The Australian market is a single-premium market. So you've got to really contrast that with the US, which is dominantly monthly. So it builds up and is recognized slowly.

And by single, it's not like it's a single program writing a big bullet single. It's not the case. The underlying business, the business that is reinsuring, is a series of every homeowner having a single premium as they put into play.

So the recognition will be accelerated relative to the US, so you can't extrapolate that into something that may appear ultimately to be larger.

That's helpful, thank you.

Michael Nannizzi, Goldman Sachs.

Thanks so much. Just a couple here. I think most of mine have been answered, but the ceded level that we saw in the first quarter that lifted from the first quarter last year, you guys expect to be ceding back to Watford or whoever in that sort of 30% range from here, or was there anything unusual in the quarter?

Okay. Oh, you are saying the 30% because of the 70% net to gross.

Yes.

Remember, those sessions are dominated by the insurance group ceding overwhelmingly to third-party -- unrelated third parties. You have increased retrocession on a property in marine that the reinsurance group will do. You have minor bits in the mortgage sector, really as a function of the deal that was cut originally on the transaction.

So the movement -- yes, there's Watford cessions, but the level of Watford cession is fairly consistent over the last couple quarters. The biggest lever is what the insurance group does, and as Dinos pointed out, they were just shy of 70% this quarter.

But the growth in low-volatility businesses are kept overwhelmingly net, and the high-capacity business as Dinos talked about -- and by high-capacity, we mean $25 million limits, things like that -- those are going to be reinsured more because we can get more favorable terms.

So we cut the aggregate net volatility of the total book as a result. But just keep in mind, Michael, it's the insurance group that drives that ratio.

Got it. And then the other income primarily in reinsurance, I guess a little bit in insurance as well, that stepped down in the quarter. Did those dollars just move to a different line item, maybe somewhere else's geography, or was there a change in the --?

No, no. It's a great question. Think of it this way; quarter to quarter that other underwriting income in reinsurance was virtually flat. It's coming from the GSE transactions mostly. Last year there was what we called catch-up premium on the difference between when the capital markets piece when out, that's done earlier, and then the reinsurance segment was done later and had to catch up because of the time gap between them. So that was roughly $3.5 million of catch-up. That's the first thing.

The second thing would be occasionally, we call it periodically, we reevaluate that Ethniki loss portfolio transfer, and in that year's quarter there was an adjustment, whereas this year's quarter there was not.

I see, okay. But now that we are all caught up, then we should be reverting back to the pattern that we were experiencing previously? Is that --?

For the derivative-oriented transaction for the GSEs in the reinsurance -- in the mortgage -- the answer would be yes. Ethnicki, it depends when we deem a change is needed.

Sure. No, I understand.

The derivative accounting for those transactions would be deescalating and going to zero over seven years, right? So every quarter there's going to be slightly a little less, a little less, until it gets extinguished seven years out.

But main point being that other than this timing change you mentioned in the first quarter, nothing has really changed as far as that's concerned.

No, no. That's correct, yes.

All right. Then in reinsurance, so the expense dollars and other operating expense declined in the quarter sequentially. I was just curious if the transaction or the item that you mentioned in insurance was relevant in reinsurance as well, Mark, or was there something else there?

I'm sorry, was that an operating expense question, or an acquisition expense question?

Operating.

Oh, operating.

So other operating -- yes.

I think the quarter and then the segments, as well as in total, was kind of affected by the bonus accrual takedown that I mentioned.

Okay.

So I would expect the run rate to be a little -- marginally higher on a ratio basis.

Okay. So is the order of magnitude similar to what you mentioned on the insurance side in terms of what the --?

Within spitting distance, yes.

Okay, that's fair enough. Okay, great. Thank you so much.

Which is as good as I get.

As a reformed actuary. Thank you.

Kai Pan, Morgan Stanley.

Thank you, good morning. Do you see any potential impact for the second-quarter cats?

The second-quarter cats, yes, we have some reported losses. I don't know how big the impact is going to be. Mar, you have more of a feel for that.

Right. As you know, a lot of this stuff is pretty fresh; it just happened. And it's a series of events, it's not a single event. So you can appreciate that we are still accumulating some of that.

I think from a 10,000 foot view down, it's more likely that there's insurance exposure than reinsurance exposure out of our UK operations, I would think. But our view at this point, Kai, is that across all of those aggregated together, it will still be contained within our cat load. So we don't view anything unusual in that regard emanating from it.

Okay. What's your sort of cat load assumptions?

Our cat load would be just shy of $40 million.

$40 million a quarter, $40 million a quarter.

Okay, that's great. So stepping back on the mortgage insurance, a couple years ago, Dinos, you mentioned that these could become the third leg of the stool. But looking back at the premium, it's only less than 10% of your overall premium. But if you look at underwriting results, it's more than 20% now. So it's very meaningful.

I just wonder whether the growth in this market faster than your other two segments will even exaggerate, or basically both your underlying margin as well as ROE will be growing faster than it has been.

You've got to look at it from a lot of different perspectives. Premium is not the right measure for mortgage insurance because the accounting model is total different; the way the business comes in is total different.

I write a mortgage today and I'm going to be receiving premium over the duration of that mortgage, which is usually seven years or so. So you've got to look at it from capital consumption, and you've got to also look at it from the return point of view.

And yes, I think we are on pace based on what we wanted to create, a third revenue stream for the Company and a third earnings stream for us. I wouldn't be surprised that depending on what happens on the P&C insurance, reinsurance, that from an earnings point of view they might be even more than one-third. They might go to 40%, 45%.

On the other hand, P&C can turn in a couple years and it will be -- we do look at it from a risk management point of view as to how much exposure we have in each one of the sectors and do we feel comfortable with that vis-a-vis our balance sheet. Or do we need to buy reinsurance behind it or bring other capital providers into it.

We know we are not close to any of those decisions. We believe that we still have a lot of room to grow on the mortgage business. Marc, do you want to add something?

The only thing I would say in terms of creating a third leg in the sense of a very sustainable and profitable on a return basis, I think we have accomplished that and we are really looking forward to more of that in the future So from that perspective, we're not really getting into the discussion as to how much it could be, would be.

In the end, we are writing and looking at what we see every day, and we are very pleased right now. And I think we have achieved at least establishing a stake in the ground and creating that third flow, diversifying flow I would add, to our core P&C reinsurance and insurance. So we are pleased with that.

Look, I think Marc went on to how little cat we write today versus what we wrote four or five years ago. Things might change, but we always have that -- sometimes we shrink in areas that I don't like to shrink, but if there is no return, why be in it? Other times, you've got to limit what you write because you are exceeding your tolerance from a risk management point of view.

I can tell you right now, I am way underleveraged on the cat business. I wish the market was better for us to write a lot more in the cat area, and maybe one day will be again, and we will be up utilizing quite a bit of capacity in that area.

But that's the kind of thinking that goes through our heads. First, if it's profitable, let's write more until -- we've got a guy called Chief Risk Officer, he's another actuary, Francois, who rings the bell sometimes. He's nowhere ringing any bells yet because our risk tolerance in every sector is well within what we like to have.

Kai, I'd just like to tie together that commentary with managing the cycle and exposure with the fact we had $4 million of cats in the first quarter. If we hadn't reduced our volume 71% since 2012, we probably would not be able to report $4 million. So it's got income statement aspects, price return aspects, and balance sheet risk management.

Just follow up on the risk management. This might be a high-class problem for you guys. If the mortgage becomes a meaningful portion of your overall profit pool because of different accounting treatment, basically you cannot smooth it out, for example, booking reserves. Do you worry about volatility to the earnings?

Listen, there is two things that bring volatility to any book of business, including mortgage. One is what I will call micro decisions, that's the underwriting decisions. That we control is within our hands, so we -- you know.

And then the other volatility is macroeconomic changes, very high unemployment, which we monitor and see which direction (it is going). I would assign two-thirds on the micro and one-third on the macro. And at the end of the day in our quarterly risk management evaluations on everything we do, we'll look at those parameters to make sure that our compass is pointing us in the right direction.

Kai, lastly, because I want to make sure given the way you phrased the question about the accounting model. As much as we criticize (the accounting) it has nothing to do with our risk management evaluation. We project that to ultimate like we do our PC lines.

So we make persistency assumptions, claims, emanating from possible future delinquencies that are performing loans now and so forth. Just because it's the accounting model's flaws doesn't mean we follow that in our risk management evaluation.

And we have a stress test model that we run assuming certain economic conditions, where the housing market might go, where unemployment might go, etc., and where interest rates are going to go. And then based on that, we see where we are with our book and where our book is going to be.

That's great. Lastly, if I may, on the buybacks that are now trading at -- you bought back around 1.3 times for the first quarter of book value, and now trading at more than 1.4 times. Is that out of your comfort zone?

Well, I mean if you ask me if I'm trading well, which is your assumption, no. I still think I'm cheap, but that's the CEO talking his own account. Having said that, we're very disciplined into when we put capital to work. And depending if we are going to buy our own shares or if we are going to buy something else, it's got to be within that three year or so of (inaudible) that we've got to recover anything we pay above book value. That's what's been guiding us both in if we try to invest in third parties or if we're trying to invest in our own stock. So that's basically where we are.

Kai, I applaud your five-part question.

Thank you so much.

Jay Cohen, Bank of America Merrill Lynch.

Just a couple of questions. The first is, Mark, maybe just to make our lives a little bit easier, the reversal of these bonus accruals, can you actually give us the dollar number and where the location is?

It was roughly $6 million and change, distributed all over, actually.

It was all three units and corporate. But it was -- call it $7 million.

Okay. Next question, I guess I'm looking for a little bit of guidance or help here. There's some line items within the mortgage insurance --.

We don't give guidance.

Well, call it help then, not guidance. Assistance for a non-actuary, not even reformed, how is that? Certain line items within mortgage insurance will jump around pretty dramatically quarter to quarter, and you are looking specifically at the acquisition expense ratio. It's ranged from 33% to 13% just in the last six quarters.

Any sort of range that you can put that in that we should be thinking about?

Well, on the traditional mortgage insurance, what we do in Arch MI and Walnut Creek is steady. It's your salesforce every quarter, etc. Those numbers fluctuate on reinsurance transactions and on risk-sharing transactions.

The cost with risk-sharing, it's very, very small because we have a small unit, a couple of people that they review those transactions in the home office. And then they -- and Marc and I and Andrew Rippert who also has to approve all those, we don't allocate our costs into it. It's at a corporate level.

And Jay, the early business we had in mortgage were largely mortgage reinsurance contracts and transactions, and we migrated towards more of a mortgage insurance profile. And that explains the ceding commission on reinsurance treaties right now on mortgage space are in the 28% to 35% range, and we're not doing many of those or at least not new, as we speak.

Got it. So in quarters where you have a big reinsurance transaction, the acquisition expense ratio will look a little lower?

No, you go the other way.

Because this is assumed, not ceded.

Right, correct. Yes, assumed.

I'm just looking at it like this quarter, the acquisition expense ratio within mortgage insurance -- within the mortgage segment was quite low and you did a large deal. Maybe I will take it offline with Don after.

No, no. We did another big reinsurance deal.

Exactly, Jay. I'm not sure which deal you are talking about.

I thought you guys did a sizable deal in Australia for the mortgage reinsurance.

So that is not a reinsurance transaction. As Marc said, it's really reinsurance in the legal sense of the term, but we are doing 100% percent of really flow business. And as Marc alluded to, that premium is earned over a very long period of time and the earned premium is actually very small as we speak.

Even though the acquisition there would be high, it doesn't really flow through the balance sheet or the income statement as we speak. It will take time to get there.

Got it, okay. Those are my two questions. So thanks for the information.

Okay, you're welcome.

Charles Sebaski, BMO Capital Markets.

Good afternoon, thanks for getting me in. I guess one follow-up on that Australian transaction. You say it's going to earn in over a long period of time. So despite the $43 million, we shouldn't see much affect on earned premium from that going forward for the next four or five, six quarters?

Yes, that's exactly right. Just picture, just to make things simplistic, picture every month being a $1 million single, and then those singles, each of those $1 million has to be earned over -- it's not linear, but six, seven years. So the written recognition is going to be a lot faster than the earned recognition.

Okay. Also on mortgage, has there been any activity on GSE risk-sharing over the quarter? Is there a pipeline or anything, or is it kind of stagnant until something pops? Just curious what the outlook looks like for that.

There is activity and there is a list of transactions that are coming down the pike. Marc, do have the detail on that or --?

In the quarter there were, I believe -- three transactions, I believe. Yes, there were two transactions in the quarter and there's actually a calendar, Charles. There is a projection for the year that the GSE has shared with us. We are not sure we are supposed to say anything, but you can track that. They are on the pace to do, from our perspective on now, two to three a quarter for the next -- for the remainder of the year. So we have done this first quarter, and are working on some as we speak as well.

Excellent. And then finally on reinsurance, would appreciate your guys' take. Some commentary in the market that the changing landscape in reinsurers means that smaller panels of reinsurers mean you have to stay at the table, maintain business. You guys have been contracting here.

Do you believe that there is risk that over time you need to maintain some particular level of profile with cedents, or can you keep contracting and still get back in opportunistically? I guess I'm trying to understand the --?

Well, listen, it's a great question. At the end of the day, we have good ratings, good paper. We can be good partners, but I'm not there to do it on a just relationship basis and not have a return. My responsibility is to have returns for my shareholders.

I'm not going to put that capital to work at a disadvantage on the hope that some future, I'm going to make some money. If the deals make sense for us and our cedents, we will do them. If they don't, we don't, and we look for something else.

This is a big market and we are still writing over $1 billion of reinsurance. Maybe not all of it is what I would call the traditional quota shares for large clients, etc., but we find little things here and there, niche things here and there, and we do it.

Our people, believe me, they are working harder today than in a good market, because to find these small little nuggets they've got to process a lot of ore. So they are shoveling a lot. At the end of the day, that's our approach.

We don't believe that we ought to give our pen away through just purely we ought to be making relationship-only decisions. Relationships are very important. We try to be as service-oriented as anybody else with our clients, give them our perspective about the market.

And pricing, we do underwriting audits, etc. We share all that information. But we've got to do a transaction that has adequate return for us. Otherwise, we won't do it.

I appreciate the answers.

Marc, you run the reinsurance. I shouldn't be speaking on your behalf.

The one thing I will tell you about our reinsurance portfolio is that it's not really the same, as Mark alluded to, the same portfolio that we had when we started. I think that a lot of what we've been able to create on the reinsurance side which mirrors what has been done on the insurance side is we tried to get as -- not controllable, but as somewhat protected or a line of business that has a little bit of stickiness to it, more stickiness to it because it needs more knowledge or more expertise.

Property facultative is a great example of that, and in that segment I think we are still very active finding ways to grow, and actually do more and be more relevant for our clients. So we are not beholden to the large placements, as Dinos mentioned, which is a good place to be.

Thank you much, guys. Have a great afternoon.

Meyer Shields, KBW.

Thanks and good afternoon, everyone. Really quickly, the mortgage insurance operating expense number went up sequentially. I wasn't expecting that. Everything else was phenomenal, but is that the new run rate?

No. As Dinos mentioned, it's a segment. The segment is made up of pretty disparate operating expense contributors. Clearly, until we hit scale on the US MI acquired piece, that's putting pressure on it.

The mixture of that with GSEs where the OpEx is marginal at best and the reinsurance, again depending on the structure of it, it really comes down to mix. So I would not read in anything to an incremental change quarter over quarter.

Okay. Are you discussing the dollar amount or the percentage?

Well, technically both, but mostly the ratio.

Okay. Thanks, that helps. And then on the insurance segment, I guess, you've talked a lot about a shift towards smaller account and low volatility. Is that going to have an observable impact on either the acquisition expense ratio or the loss ratio of that mix shift?

Well, this shift has been happening now for five or six years. We didn't divert to that. The largest initiative we have, which is about $160 million worth of business, is our binding authority business. And that has a little higher expense component.

It comes from binding authority wholesale agents and, in essence, they do a lot of the work totally electronic. They use our systems, they price -- are pricing algorithms, etc. But they do all the input and they issue the policies. Our system is so good that you can bind and issue a policy within 24 hours in the agent's office. So it has a little bit of a higher expense.

Yes, I would also say you actually have seen some marginal improvement just in the past quarter at 30 bps down on the net acquisition ratio. Just remember, premium taxes are in there too, and when you go from a quarter to a softer market it tends to become more admitted than not admitted. So you get a little bump there, everything else being constant.

But the biggest thing that you should keep in your mind is as we move to lower and have moved to lower volatility businesses, they come with a higher acquisition cost and a lower loss ratio.

So the fact that we have a higher proportion of higher commission-oriented businesses, yet the net aq is continuing to go down, shows you the leverage power of our reinsurance cession with increased ceding commissions. It's offsetting and sometimes more than offsetting that mix shift towards higher aq (acquisition cost) businesses. Make sense?

I'm sorry?

Does that make sense?

It does. I'm not contesting it. Just interesting, a lot of competitors have talked about lower volatility business having higher loss ratio.

Well, remember, we are after volatility containment. You can cede a lot depending -- what's left is still -- especially if it is quota share -- is still highly volatile on its own. You are getting ceding commission override and you are putting gain into your income statement right away, but what you still have left is volatile.

Okay, that makes sense.

We've moved more towards, as Dinos said, smaller account and small policy limits associated with those.

That we keep 100% net.

Okay. No, that helps. Are the ceding commissions that you're seeing in reinsurance the same as you are benefiting from on the insurance side?

Yes. The answer is yes.

There is pain on one side and there is gain on the other side.

The market is phenomenal.

Okay, perfect. Thanks so much.

Ian Gutterman, Balyasny.

I guess first, Marc, you talked earlier about growth in UK motor, and I think a number of others have talked about that. Could you just talk a little bit more about what exactly that business is and what's appealing about it? I guess I have ancient bad memories of that causing trouble for people from time to time.

Oh yes, and you are quite right, it is very interesting and very volatile if you are not careful. But we have a good relationship with one big originator in the UK, and they have been a partner of ours for a little while and we've been able to maneuver through the cycle with them, alongside with them.

And we are seeing rate increases over the last three or four quarters, I would say, and we were able to seize on the opportunity and give them what we think are appropriate reinsurance terms to be partners with them on a going-forward basis.

In addition to this, the excess of loss in the UK has also gone through a tough time in terms of a lot of changes in the rate level, and we were also able to take advantage of that. This really is a reaction to echo what you just mentioned to the fact that rates have been increasing and improving.

And as I said in my comments and they have increased enough that we believe that returns are there for now for us to take advantage of it.

Got it. And so you are doing XOL then?

We are doing both, as well as quota share, yes.

Got it, got it. And are there loss caps on those to protect you, or is it just you can (multiple speakers)?

(multiple speakers) These questions that you are asking me I'm not sure I'm comfortable sharing that with you.

That's fair, that's fair, okay. Okay, I guess maybe what I was getting at is I always think of that being a long-tail business. And just are there ways if you see it deteriorating, is it just you won't renew it the next year, or are there other things you can do to protect yourself if five years down the road it goes bad?

Are you talking about the motor business or the XOL loss?

I guess that's probably more on the quota, right, but I mean, I guess it could be either.

The quota share you can adjust very quickly by -- based on your underwriting audits and how you are monitoring rates. Don't forget, we do a lot of underwriting audits and we continue to watch the pricing on a quarterly basis.

Now, the biggest bet is the excess of loss bet, because you get that wrong and it's not as easy to correct. You can get out later on, but sometimes it might take you a couple years or three years before you recognize that you didn't get the pricing right. But that's not -- from a premium revenue point of view is not as big as the quota share. So we watch both, believe me.

Okay, understood. I was just curious because I've seen a lot of people adding to it. On the MI, I guess a couple things on rates. One is now that everyone has lowered their rate cards for your non-RateStar business or existing rate card, I think, in certain cells looks off market. Do you feel you need to adjust your rate card to match everybody for those customers who want to keep that business?

Ian, we just issued our rate card on April 7, so about three weeks ago. So we are now matching everyone, so there's no plan right now to do anything else.

Got it, got it. Okay, I missed that, okay. And then on the RateStar business my sense is, and again, obviously I don't know exactly what your rates are. But it feels like conceptually, a lot of what the competitors did to change their rate cards felt like it was trying to get closer to where you and UGC are. Is that fair that maybe the advantage of rate cards are a little bit diminished?

I don't know what drove the actions, because you are mixing apples and oranges. At the end of the day if you have a pool of risks that on average gives you a good return ROE, and now through a selection process maybe one or two competitors, they might be taking out of that pool certain mortgages for a slightly less price but at much better risk characteristics. That means the remaining part of the pool needs to be priced a little higher than the past, not a little lower.

So adjusting the rate cards are not going to get at exactly what adjustments they make. You might be getting into adverse selection, so to speak. At the end of the day, the problem with the rate card is it's a simplistic way to price. Just credit score and LTV alone is not the only thing that is going to tell you as to how that mortgage is going to behave.

There are other parameters around, and I think that's where our advantage is. Our advantage is we introduce other factors to allow us to more appropriately price that business.

Clearly, Ian, to your question more directly, I believe that going to a more refined rate card is a one step for most of them to get to that direction. There's recognition to Dinos' point that the rate card has been historically too generic in nature.

Okay, that was my question.

It might die within a year or two, and it might get into more as to what we do. In all of our other businesses on the P&C, I don't care if it's auto or homeowners or lawyers and accountants, we don't have one or two rating parameters; we have multiple parameters. And then you look at it from many different perspectives to put a price. So I think the mortgage insurance business is moving in the right direction in our view.

For sure, for sure. Then just last one on that topic is, if you were to look at a sizable acquisition in that space that would take you over the one-third mix, could you just talk about how you evaluate metrics meaning -- obviously, we can all look at EPS accretion, but sort of what are the different things you look at in addition to just EPS?

Is it ROE, is it your PE -- I think one of the concerns some people might have is those companies trade at lower multiples, so if it becomes too big a part of your mix it might hurt your evaluation. Just how do you think about the combination of accretion versus evaluation versus returns?

You know that old saying, it says in the short term the equity market is a beauty contest, and in the long-term it's a weighing machine. That's Buffett's analogy. As long as I'm producing good profits and I keep adding, I don't worry about what these revaluations might be. Because how do you explain one competitor we have who is trading at 1.7 times book in the MI space versus another competitor we have who is trading at 1.1.

Well, maybe one has legacy business and the other one doesn't, etc. So I'm not worried about that because the mortgage insurance business produces very good ROEs and should demand a higher multiple than the P&C will right now. And we only have one marker out of the seven who has that purity in only having post crisis business, and the market is rewarding them with the 1.7 multiple.

So I don't know. Our actions is not about the market multiples. Our question is, are we producing a good return for the capital that we are committing to a particular sector, and is the ROE acceptable? That's what drives us. That's the key driver in what we do.

The reason I ask is --.

And for an insightful guy like you and the others, it would wind up being that ACGL would bring up the mortgage multiple, rather than the mortgage multiple bring down ACGL.

Well, the reason I ask is because if it's something big, I assumed to have to use some stock. So that was sort of the context I was thinking about. Maybe a better way to say it is what things do you -- historically, you haven't done anything that's required an issuance in stock. So sort of what are the things you evaluate in deciding whether stock makes sense in a merger?

Well, let me just start on that one. We've talked about this before. On tangible book value, that's not new, as to how when we repurchase our shares at a premium, what's the recovery period? That is still an in-force principle that we would look at. And that's one of the criteria, not the only criteria, but that's certainly one of them.

But don't lose sight of the prior discussion which is on the risk management side. So EPS is a no-brainer; we're going to watch that -- that's [tactical]. We don't want to impair the balance sheet, number one, so what's the recovery of (any premium); and the risk management aspect. We wouldn't go into it if there weren't high ROEs to begin with, but defensively ,we don't want to put any dents in the balance sheet.

Got it, makes sense. What's for lunch today, Dinos?

That's your best question.

Today we have keftethes. That's the Greek meatballs. I can give you the recipe when I see you. They are phenomenal.

I remember those from last summer. Thank you.

Thank you. Mark Dwelle, RBC Capital Markets.

Just one follow-up question, something that was discussed on the Australian mortgage transaction. Kind of what you said kind of confused me. Is this a recurring revenue transaction, which is to say we will see another one of $40 million or whatever the number will be next quarter and then continuing thereafter? Or is this a one-off, one-shot deal?

No, this is like I said, we are sorry for the confusion. I just want to make sure it's clear to everyone. This is really like business that was produced in that quarter. That relationship is still existing. It's been around since last year. So yes, I would expect, depending on the level of production, that our partner will do in Australia, we could be around that same level if they continue producing at same level.

If they originate the same level of mortgages, they will flow through with us and it continues. And it will continue as such until they cancel us or there is a termination by either party in the relationship.

So this puts in place really a fairly -- I'm going to use the word permanent or at least hopefully long-term kind of floor flow of premiums that should last for, at least on an earned basis, for quite a long time.

Yes, that is correct.

Okay, that's what I thought and that's my only question. Thank you.

Michael Nannizzi, Goldman Sachs.

Sorry for the follow-up, just one last one here. Back to the MI and, Mark, maybe your comments on the expenses. I mean, I'm looking at premiums doubled year-over-year; acquisition ratio is in half; dollars are down notionally; other operating expense, the ratio is flat. And I understand there was a reinsurance transaction that may be obscuring some of that trend, but I would generally think that the ratio of dollars, it would seem to be more fixed in nature, the operating expenses. That ratio would improve and that the acquisition ratio would remain relatively flat, again, absent some adjustments.

I'm just trying to get some understanding of what that -- and I understand there are like three different businesses. They all operate differently, the stackers, expenses are low and things of that. But with a line that's growing this quickly, I feel like I'm just missing the mark on how to think about it. Should we be looking at expense dollars relative to written premium dollars as opposed to earned during this growth phase? Just any guidance or help --not guidance, but any help in how to think about it would be great.

Well, I think written is a better way. It's more of a statutory view, but it still makes more sense. We talked about hitting critical mass and steady-state at some point. But also, Michael, think about how market share is measured. It's measured on NIW, which is effectively new premium, but that's new exposure.

The premium comes in at a slow buildup rate over time. So if we get to a reasonably larger market share in two, three years, that doesn't mean that overnight the whole in-force book is where it needs to be. That means the marginal amount in 2017 that we hit market share of X is additive to the portfolio.

In PC world, we have new business and renewal business. Here you don't have renewal business. You have new business and in-force. So all you're doing is adding onto the heap with the new NIW that you are getting. So this is a long-winded answer to say you've got to be patient. The OpEx dollars are really not going to grow as much. You've got to wait for the revenue to catch up with that, and it will.

Okay, okay. So OpEx doesn't grow as much. And the acquisition expense, I'm guessing that was impacted somewhat by this Australia transaction and the lack of the reinsurance transaction you mentioned that you had in the prior year.

But it is sort of teens level of acquisition expense? Is that, given the mix of business you have, is there anything in there that we need to peel out in order to think about the forward?

No, I think it is the mix. The mix will change by quarter. It, by the way, changes in the reinsurance segment, it changes in the insurance segment by mix. It changes the reported acquisition expense. OpEx, the questions you asked are applicable to any of our business segments, but acquisition can fluctuate as a function of the business we write. So I would say no, it's a mix thing quarter by quarter.

Got it, okay. Thank you so much.

Thank you. I'm showing no further questions. I'd like to turn the call back to Mr. Dinos Iordanou for closing remarks.

Well, thank you all. A little late lunch today, but I'm going to enjoy the keftethes along with the team. We are looking forward to seeing you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.