Arch Capital Group Ltd (ACGLO) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Arch Capital Group earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions).

(technical difficulties)

We're ready to begin. I don't know what happened to her. Operator?

Hello? Caitlin?

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 law. These statements are based upon management's current assessments and assumptions, and are subject to a number of risks and uncertainties.

Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time.

Additionally, certain statements contained in the call that are not based upon historical facts are forward-looking statements within the meaning of the Private securities Litigation Reform Act of 1995. The Company intends to forward-looking statements and the call to be subject to the Safe Harbor created thereby. Management will also be making reference to some non-GAAP measures of financial performance.

The reconciliation to GAAP and definition of operating income can be found in the Company's current report on Form 8K furnished with the SEC yesterday which contains in the Company's earnings press release and is available on the Company's Website.

I would now like to turn the conference over to your host for today, Mr. Dinos Iordanou and Mr. John Hele. Please proceed.

Thank you, and good morning, everyone, and thank you for joining us today.

On an operating basis, we had a very good third quarter from both an underwriting and investment perspective. Our reported underwriting results as reflected by the combined ratio of 90% was satisfactory in the current environment aided by light cat activity and favorable reserve development.

From an investment point of view, we had an excellent quarter achieving total return of 4.75% for the quarter. We continue to remain cautious in our investment strategy, maintaining a relatively short duration and high credit quality for the portfolio.

With respect to capital management, we invested approximately $100 million in the repurchase of our shares during the third quarter. Consistent with our prior practice, we were cautious on the size of the share repurchase during the hurricane season.

John will give you more details on our investment portfolio and financial performance in a few minutes.

The most important measure of our performance is growth in book value per share. And we were very pleased with this quarter's and the year-to-date results.

Our annualized return on common equity was 16.4% and our book value per share grew by $8.72 to $69.40, a 14.4% increase from June 30, 2009 and a 35% increase from the end of 2008. Our cash flow from operations remains strong at $316 million for the quarter.

Now let me share some thoughts on our operating units. Our gross and net written premium for the quarter grew by 3.7% and 5% to $937 million and $727 million, respectively. On a year-over-year basis, our insurance group was down approximately 1% on gross written premium and up 1.5% on net written premium.

The slight difference in the net to gross relationship was due to the restructuring of certain of our reinsurance purchases as we purchased more excess of loss protection and less quota share.

Our reinsurance group's gross written premium for the quarter were up 16% while their net volume increased by 12%. The difference in gross and net is due to the additional retro purchases for portfolio management reasons.

Most of the reinsurance group growth is coming from the property, property Cat and property fac operations as more clients increase their lines with us during the quarter. A small portion of the increase is attributed to premium adjustments from casualty business written in prior years as actual bordereaux came a bit higher than our original estimates.

We continue to see reinsurance opportunities from buyers diversifying their insurance panels and gravitating to more financially secure reinsurers.

With respect to the operating environment, the degree of rate improvement that we saw in the first and second quarters moderated, and the pricing environment is basically unchanged from the first two quarters of this year. We continue to see the best opportunities for adequate risk-adjusted returns in the property and property cat lines, and we continue to be very cautious in our underwriting approach to the casualty business.

As always, our strategy is to allocate our capital to opportunities that we believe will generate the best returns. As a result of the current operating environment, our 12 months trailing mix of business is 48% short tail lines and 52% medium and long tail lines.

Of course the shift is more dramatic in our reinsurance business where 70% of what we currently do is property-related and only 30% is casualty- and professional liability-related. And the insurance group was still 70% medium and long tail lines of business and 30% short tail.

This is a result of our capital allocation process as we continue to allocate 80% of our available PML to the reinsurance group as we see the better opportunities in that sector of the business.

With regard to loss activity, we have observed relatively benign activity over the last few calendar quarters. This favorable loss emergence appears to be driven by modest frequency as well as severity trends. Independent of this trend we continue to price and reserve our business, based on the long-term loss trends we see which are higher than our most recent experience.

Overall, we achieved a 3.4% rate increase during the quarter on our entire book of business, ranging from single-digit reductions to low double-digit increases, depending on the line of business. This overall rate increase is consistent with the current loss trends we have experienced, but is lower than the long-term trend projections.

Before I turn it over to John for more commentary on our financials, let me update you on the PML aggregates. As of September 30, 2009, our one in 250 PML from a single event expressed as a percentage of common equity was 20%, below the June 30 level of 22% and our 25% of common equity self-imposed risk-management limitation.

The reductions was directly attributable to the increase in shareholders' equity, not a reduction in PML or our willingness to entertain additional CAT writings.

With that, let me turn you over to John for some more commentary on our financials. John.

Thank you, Dinos. Let me give some more details regarding what was an exceptional quarter for both sides of the balance sheet.

The combined ratio of 90% this quarter was light cat activity of only $5 million in the reinsurance area compares to 105% a year ago when we had significant cat activity of $143 million. Favorable reserve development improved the combined ratio by 7.7 points this quarter compared to a favorable 7.6 points a year ago.

The loss ratio of 60.6% in the third quarter reflected 7.6 points or $56 million of favorable development in prior year reserves compared to 9.3 points or $68 million recorded a year ago. Approximately 60% of the favorable -- of the total favorable development came from short tail lines while approximately 70% of the total development was in the reinsurance segment.

The insurance segment loss ratio of 68.4 reflects a favorable development of 3.8 points, 2/3 from property and other short tail lines and the remainder from medium and long tail lines. The insurance segment loss ratio of 48.7% reflects favorable development of 13.4 points, approximately half from property and property cat and other short tail lines, and the other half from medium and longer tail lines.

The total acquisition expense ratio of 16.6 decreased by 1.5 points from the prior year as there was less impact from profit commissions from prior year favorable reserve development in the third quarter of 2009 compared to 2008, as well as the change in the overall mix of business.

The total other operating expense ratio of 12.8% reflects an increase of 0.5 points from the prior year, mainly due to property facultative operation in the reinsurance segment. Last year there was a one-time catch-up deferral of acquisition costs and this year the facultative operation, which operate primarily on a direct basis, is a larger percentage of earned premium.

In looking at the year-over-year expenses in the insurance operations which are basically flat, there were nonrecurring expense accruals in the third quarter of 2008 of $5.7 million while in the third quarter of 2009, there were additional expenses related to the expansion of the executive assurance and professional liability lines of business of $3 million and, as well as $1.8 million from the addition of personnel in Canada and other areas.

On a per-share basis, the net investment income was $1.60 in the third quarter of 2009 compared to $1.86 in 2008. The pretax net investment income during the quarter of 3.76% reflects a book yield before expenses of 3.93% at September 30, down from the 4.06% at June 30 and 4.74% one year ago.

While the duration of the portfolio remained approximately constant at 3.09 for the last quarter lower available yields and high quality assets have continued to impact the portfolio. The total investment portfolio grew from $10.7 billion at June 30 to $11.5 billion at September 30 driven by a general recovery in asset prices; a 20% return in our total bank loan fund portfolio of $458 million, new investments with the TALF program and good cash flow from operations.

During the quarter we added to our 2009 issuance non-agency RMBS portfolio that now totals $127 million with newly restructured deals called ReREMICS that offered very high credit protection. We also participated in the US government TALF program purchasing securities worth $251 million during the quarter.

TALF was developed to encourage investments in certain highly rated asset-backed securities. Arch invested $31 million into AAA structures and also received nonrecourse notes from the US government for $220 million. This structure gives an expected return on the portfolio in excess of 10%, after taking into account the interest and principal on the loan over the next five years.

Due to the unique aspects of the program, we are breaking out the TALF investment and loans in the balance sheet this quarter and in the future. We are also separating out the nonrecourse TALF loans from our capital structure as these loans are for TALF investments only.

Credit-related impairments were $4.6 million, primarily due to some reductions in expected recovery rates on certain residential mortgage-backed securities. Arch's CMBS portfolio comprised mainly of older vintage CMBS's performed well in the quarter with a market to book value of 102% and we recorded no impairments.

Our total accumulated other comprehensive income turned to a positive $222 million -- the first time positive since March 2008. Our shareholders' equity increased to $4.46 billion at the end of September. The common shareholders equity was $4.14 billion representing $69.48 per share. We took the opportunity to buy back 1.5 million shares for $98 million at an average price per share of $64.04 in the quarter under a share repurchase plan which added $0.14 to the book value in the quarter.

Total shares repurchased to date have added $0.37 to the operating EPS in the quarter, increasing the operating ROE by 2.8% to 16.4%. We will continue to consider share buybacks under our existing remaining authorization of $350 million; and we expect to discuss our longer term plans at our next Board meeting.

We currently estimate our current excess capital is approximately $700 million to $800 million compared to what we target for the various rating agencies. Portfolio liquidity remains strong and we experienced solid positive cash flow from operations of $316 million in the third quarter.

In the 2009 third quarter, our cash flows were negatively impacted by a $46 million payment due to the commutation of a nonstandard auto treaty announced in the second quarter.

That concludes my remarks and we are pleased to take questions.

Cate, we are ready for questions.

(Operator Instructions). Jay Gelb. Barclays Capital.

Good morning. On the excess capital position, how much of that do you intend to deploy into buybacks and over what time frame?

This is a discussion we are going to have at our next Board meeting. Right now I only have $350 million remaining from the existing authorization.

As I said in my prepared remarks, usually we are not aggressive in share buybacks during the third quarter because, even to the last few weeks, you still expect storms that might or might not happen. We will probably be a little more aggressive in the fourth quarter, but that is a discussion as John said that we are going to have with the Board, and as -- once we make decisions will probably announce them for everybody to know what that decision is.

And when is the Board meeting?

It's next week.

And then separately can you talk about -- you mentioned the rating, the low single-digit rate increases across the portfolio. Given what's happened in terms of the recovery of balance sheet and still some slack demand in the economy, what are you -- what's your sense in the outlook on the persistency of those price increases?

There are two schools of thought. Let me give you some of my thoughts. I was more bullish in the first quarter and second quarter than I am today. In the third quarter, because of the recovery of the asset side of the balance sheets for most of our competitors and the benign cat activity, it makes people to be more competitive, in my view.

On the other hand, they are recognizing that when you take out reserve releases, you know, favorable development and you factor in normalized cat instead of light cat activity, you know the current accident years, they are not anything to write home about. I mean, they still produce returns, but they're closer to the 10% range. And that is not what we try to achieve. Our long-term strategy is to achieve 15% ROEs over a long period of time.

Having said that, I believe we are going to be in a competitive marketplace for probably another year or two until you see some pain on the balance sheets which I don't see as of yet for most companies in the next four to five quarters.

But in a very low interest rate environment, people are getting cautious. And that is why you are seeing the leveling off of price reductions. So I think we are going to be in the next year or two in a kind of a leveling of marketing in my view.

I might be wrong. I don't know. I mean, only the future will tell us what happens. But if you are asking of my opinions, I think that is where I think the market is going.

Thanks again. It's a real instructive answer.

Matthew Heimermann of JPMorgan.

Just a question. I was hoping you could just speak to the loss, accident year loss ratios in the quarter? I guess particularly in the reinsurance segment, but also insurance. They both seem to be running a little bit hotter than they were in the first half of the year. And I didn't know if that was claim-specific in the quarter or there were other factors?

No. I don't think there is anything that is claim-specific. It is our view -- we are very systematic in the way we reserve the Company. We make sure we understand the rate increases or decreases that we have been achieving over the years.

And we try to be realistic with our accident year picks by factoring in what we've seen over the last two or three years which, even though rate decreases have leveled off and in some cases as you saw from my prepared remarks, we achieve a 3.4% rate increase on average on a blended basis, not everything is equal in every line of business.

Some lines of business we are still giving up rates. On other lines of business we are gaining rate. What we do may be a little bit different than most other companies. The loss trends frequency and severity, if you have a short window and you only look at it for the last few quarters, you can get optimistic.

We don't use that as a guidance to how we price the business or how we reserve the business. We use longer term trend averages and maybe that's what's causing this our accident years to be -- book a bit higher. But that is our view, what we believe the business is from an accident year point of view and we book it at such.

And if we are wrong at the end of the day the money is going to be there. Nobody is going to rob the bank. They're up there. If we don't need it we can always take it down in later quarters.

That makes a lot of sense with respect to the insurance segment. I guess with the reinsurance now being 70% property, I guess -- and I was just shocked that you would see running from like a 55 suddenly to a 60 a month. There was something wrong with my math.

You have got to look at the mix. You know some of it is excess-of-loss, but we do write a lot of quota share. When we write quota share you have to reflect the underlying pricing that is happening in the marketplace. So that's basically why that is happening.

Okay, I won't beat that horse anymore. I guess the other question I had was with respect to the growth in executive and insurance and the national casualty business or the national business (multiple speakers) casualty, can you just opine a little bit on I guess what the pricing trends are specific to those two businesses and what you are picking up and how that might be different or just how that might contrast with what is in the book already?

Let me start with national accounts. National accounts is a loss-sensitive business. These are large accounts that they self-insure a significant portion of their risk.

So in essence you're more of an access provider and a service provider for those business. It covers their general liability, umbrella liability and workers comp and usually the contracts you issue is statutory comp, and usually $1 million limits for GL and auto and it's done either on retrospectively rated plans or high deductible plans etc.

So our advantage there is that there has been a flight to quality so some rotation of those accounts out of -- the major writers of that business has been AIG, the Travelers, the Hartford, the Zrich, ACE, XL, etc. So we -- with what happened in the last couple of years it gave us the opportunity, also our model is slightly different, the unbundled model that we have which we jointly choose a third-party administrator between us and our client to handle the day-to-day claims from a service perspective, in some cases is more attractive to clients.

So we like that business. We do it carefully because there's credit issues associated with that business. You want to be always able to make sure that you're securing all the liabilities that you have, even though you are not taking a lot of underwriting risks, you might be taking credit risks and we watch both. So I would attribute growth in the national accounts, in the kind of people that we were able to attract and also the market turmoil with some of our competitors, so it gave us more opportunities in the marketplace now.

I guess I was looking more towards what was happening specifically with price and that line of business relative to (multiple speakers).

The price for our national accounts business has been up in the quarter about 2.1% if you -- but I was describing what the business is. We make our money not only just on where we take underwriting risks, which is the excess over and above their retentions, but also we do make money on the service fees that we write.

On the executive assurance area, I think -- let me give you -- the rate increase for the quarter was positive so it was a plus. Some of our growth is coming out of the UK and some of the growth is coming also from the new teams that we have.

No real major change in strategy, other than we are writing more now in the private company segment and the not-for-profit segment as the new team that we have has more market relationships in that. And we still like the pricing environment in the executive insurance but we are more cautious.

And in some products we have reduced exposure especially in the financial institutions segment where pricing is still positive. But it kind of eases off with the rate increases we were getting in the first and second quarter.

And then I got just, hopefully, a quick numbers questions. I was just hoping -- on the bank loan fund, am I correct to assume that there's no leverage left in that portfolio?

In other words if it's carried out 79.8% when we think about recovery it would be to par, not par time something?

No. Well, the total bank loan funds still have leverage in them and leverage is about 1.7.

So 1.7 times 25 is kind of the -- would be upside to par if it all came back?

Yes.

The other question was just on the TALF participation. Can you just give us a sense of what the yield is on the $250 million and what the interest cost is on the $220 million?

Yes. It's about four and two I think. But it's floating. It depends upon how these earn over time. And then when you lever that up and you got in excess of 10. It changes by bond in each -- it's different between the different portfolios. But on average we expect on this portfolio, slightly over 10.

And that's 10 on the equity? On your equity? (multiple speakers)

Yes 10% on invested equity, but nominal yields around 2.5% or thereabouts.

Because these are highly rated --

AAA.

Tranches.

Tranches and they're not very long. Two to three years.

And then will that all be reported net through NII?

Yes.

Okay. Perfect. Thanks.

No no, not NII. Through -- it's all recorded [for] value through the [P&L], both the assets and the liabilities. So it will flow through the realized gains.

Got you. Got you. Okay.

Vinay Misquith of Credit Suisse.

Good morning. Sorry to ask the same question again, but on the reinsurance side it's just seems that the accident loss ratio ex cat picked up five points in the third quarter plus it's the first half of the year and you mentioned a little bit of business mix change. Was this some prior unfavorable development for the year or two on that and should we (multiple speakers)?

No. There was no prior year unfavorable development. It's our call on the accident year. Don't forget, we monitor pricing. When you write quota shares we think that that's the right accident year loss pick, that is how we're going to book it.

So should we expect a similar sort of run rate for the next quarter and for the rest of next year? Would that be fair?

I can't predict the future because at the end of the day, the one good thing about property lines in that they are short tails. Quarter after quarter and you factor additional information on performance.

If we think that attritional losses that have been booked higher and actual performance is better we have to reflect it. So I can't predict the future. I'm just giving you the methodology that we use in setting out our accident years and some people think that maybe we are a bit more conservative than others, but I don't know. I think we are what we are. Yes.

Fair enough. On the property fac business there was a significant amount of growth this quarter.

Was that from new business or is it higher line sizes from existing clients?

It's both. Our line sizes haven't changed, but I think we are penetrating more clients. I think we're doing business today with about 140 different clients. So as the team is becoming more known in the marketplace and our penetration with clients gets deeper, that is what is causing it.

And it has been a steady kind of growth from this team over the two years that they have been with us.

Sure. And with respect to new business, one thing we've heard from competitors is that new business is written at maybe 5% lower pricing or sometimes even more low pricing than the new old business. If you could, help me understand your business and your new business and how that compares to your -- to any old business.

You are correct in that assessment. We monitor that as we are one of the few companies that not only measures rate movements on renewal business, but also we have a system, a benchmark system that allows us to compare our new business in relationship to our renewal business.

It is not as high as 5%, but is less than if a renewal piece of business gets 100, our new piece of business depending on the product line is probably going to be in the high 90s. So there is at least three, four points of price differentiation between new business to existing renewals.

And why are these plans coming to your Company versus staying with the old carrier?

For many different reasons. Sometimes it's a -- when you compete in the marketplace, sometimes it's service. Sometimes it's capacity you're putting on. Sometimes it is relationship with the underwriter. Some of our new underwriters that we have hired, they had existing market relationships. So they seize some of the accounts that they had a relationship with in the past.

So it's not one single reason that you get a new piece of business. But don't fool yourself. When you get a new piece of business that means you competed in the marketplace. And that is why as we monitor new business pricing we find it to be a little more challenging that renewal pricing.

Sure. Fair enough. And one last point on the executive insurance. You mentioned some of that growth came from the new teams you employed. Has the new team that you brought over contributed to some of the growth this quarter within the executive assurance?

Don't forget we don't -- when we get personnel, I mean. David now runs a whole segment of our professional liability and executive insurance. So when we get new people joining our team, we integrate that into our existing operation.

So and, basically, underwriters have responsibility over accounts we had or new accounts as they are coming in. So I don't try to maintain statistics about what was new and what's -- it came from either a new employee or an old employee.

The whole team is fully integrated already and is in operation nationwide under the executive management of Dave McElroy.

Thank you.

Dean Evans of KBW.

Thanks. Good morning. I was wondering if you could touch maybe on the progress of some of the newer teams of underwriters that you've brought over and some of the new hires recently, how they are progressing?

We're very pleased with all of our teams. I mean, going back with the fac teams that we brought or executive assurance teams we -- or the underwriters we hire either in the UK office or in Canada, we are very pleased. At the end of the day that's our trademark.

We try to get talent when we have the opportunity to hire talent in the marketplace. And I think we give them a strong balance sheet to operate from and a good underwriting environment that we don't put pressure on volume. We do put pressure on them on returns and a lot of good underwriters don't mind that environment. Especially when you link that with our compensation system that we -- you know, our underwriters they know they are going to get compensated on ROE performance. And we seem to be attracting those type of people.

And I guess a quick numbers question as a follow-up. John, could you give that sort of the mechanics behind the lower tax rate in the quarter and what drove that?

Where we had some of -- you know, where the reserves were released in the quarter, mainly from Bermuda, drove less taxes through the quarter.

Okay. So it's just that simple? There's nothing with the (multiple speakers)

Well, I mean it's a low cat (multiple speakers) quarter. Most of the cat business is written in Bermuda. There was a lot of investment income this quarter -- or most of that is coming out of Bermuda. So that is an unusually low tax quota.

I should just clarify on the TALF investment income where it's booked, just to be clear on this. The investments are booked through net investment income in the income statement and the expenses for the loan is an interest expense.

Great. Thanks.

Mark Dwelle of RBC Capital Markets.

Good morning. Related to the TALF, is that particular facility, does that have some pre-specified duration or maturity? Or can you come and go from that as you please?

We participate through various dealers. It's running I think now till sometime next year is the current authorization. We don't know if the government is going to continue this, but it has been fairly successful. We would like to see some more, but it's hard. There's not that much supply of these things. We pick only the best quality pieces we can and we operate through a couple of dealers.

But we think it is an attractive opportunity for at very low risk to get some good returns.

And then I know people have kind of kicked this can around already, but in terms of the pricing, I understand your comments earlier, Dinos, particularly related to the casualty lines of business.

But I would've thought that there would be signs of much greater price pressure on the property lines, particularly after coming through a year with very little activity really anywhere in the world, particularly in the United States. So you are saying that we are not seeing that in (multiple speakers) --?

I can tell you what we are measuring. I think in our property lines, we achieved a 5% increase for the quarter and, of course, it's down from 7.2% of the second quarter. But it is still a positive increase and don't forget that's specific to our book of business.

Our property book of business is more heavily E&S-driven. Of course we write some national property accounts to and you know, now I don't know what is going to happen with January 1 renewals in the cat market, which it is going to get negotiated in the next couple of months in November and December for the cat placements both on January 1 and in April and of course, the Florida exposures in June and July.

But don't forget that market is being pretty disciplined. It's been -- there are models. There is exposure, pricing that needs to be considered and I don't anticipate significant movement and pricing.

There might be a bit more competition, but you can't go on one year with no cat and base your pricing on that basis alone. We look at the long-term averages. We look at what the long-term expectancy is and we have to price our business on that basis.

Okay.

I think the rest of the market does the same.

Okay. Most of my other questions have been answered. Thank you.

Ian Gutterman of Adage Capital.

My first question is on the excess capital. If I just do some quick math and assume you deployed that whole $700 million. $800 million, your P&L would -- just from the denominator going down obviously your P&L would go from 20% to write around your 25% limit. So I guess I'm wondering is that $700 million or $800 million really deployable excess capital or could you only maybe use half of that and half of it needs to sort of sit there in case there's mark to market impact or a cat or something like that? (multiple speakers)

I think all of it is deployable because you are doing a static calculation. Don't forget -- I don't expect to be reporting quarter after quarter with no earnings. So I want to keep my job. I like my job.

Certainly but there are quarters where, because of whatever credit markets do or because we have a cat (inaudible) quarter that it could go down for a quarter, right? We saw that last year. (multiple speakers).

The way we measure excess capital, you have got to understand. We look at the rating agencies requirement. We put a cushion on top of it because we don't want to run thin on capital ever and then we measure excess above it.

So, and the reason you see us we get on authorization for share repurchases, you don't do it all in one day. You can do it over time and you do it, depending where your share price is at in the marketplace and also what opportunities you have to deploy capital.

I don't think the 700 million or 800 million is a number that is not available. I think all of it is available and it's a question of and like I said we will have discussions with our Board as to how and when and under what circumstances. But our long-term goal and we have been consistent for years is that we always want to be capital-conservative for the balance sheet for our insurers, but also capital friendly to our shareholders. If we have excess, we will find a way to get it back to the shareholders.

And also and sort of thinking of buffers and how much we have, just remember that we have a relatively low debt structure to our total capital position, which is another area of a conservatism that we run the Company at.

That all makes sense. I guess what I was wondering that if that is all deployable is this the time to maybe start to reconsider dividends, given the magnitude, the excess capital and that maybe the Company is mature enough to be able to support even a small dividend?

Clearly we can support a small dividend, but don't confuse one with the other. I mean, a small dividend is not going to give you capital management. I mean if we pay up to $0.25 a quarter that's $1.00 a year. We only have 60 million outstanding shares. It is not going to be a lot of money.

And in a capital-intensive business, you don't want to get locked in on paying a high dividend. That's not the right way in my view to run the Company.

So when we talk about capital management, we are talking about something that is significant. We measured the excess. I think it belongs to shareholders. If I have a clear vision that I can deploy that into the marketplace at attractive rates, I am going to hold it onto the balance sheet and try to do that. Because that is what shareholders pay us to do.

But if I see the horizon and it says, no I can't deploy it, the best way is to return it. And right now, where our share price is creating, buying back shares is the most effective way in my view.

That makes sense. I just wanted to make sure nothing changed in the philosophy.

No. I'm not senile yet.

And then I also want to talk to questions on the accident year loss ratio, here I guess on the insurance segment. Can you maybe just help us understand and I appreciate that you are trying to be conservative and all that and it's the right thing to do -- but what about your business mix suggests that you should be over 100%. I mean, I guess that is where I am a little confused. Is this (multiple speakers) ?

We loaded it, increased IBNR,And as you can see we have a much higher accident loss ratio in the insurance group because we have more casualty lines -- .

Longer-term lines.

It's long tail lines and you know at the end of the day, I don't think some of our competitors are factoring yet new money invested at what rate and what kind of a return you are going to get on that business. So I think the market is pricing that a bit light in my view and for that reason, that is where you are seeing the shift that we have reduced our writings. If you look at -- and we gave you the supplements are in the -- where are we growing and where we are shrinking. And as you can see it's been consistent on the both of the insurance side and on the insurance group. We are shrinking in healthcare. We are shrinking in casualty. Within the reinsurance group we are shrinking and casualty which includes professional liability.

So we try to do the best we can in navigating through these waters, but on the other hand, I am not going to be optimistic on the accident years.

I guess that's where I'm confused. When I look at your insurance book, casualty is about 10% and then I see a lot of (multiple speakers)

No. But don't forget that is not the only thing that is long tail. Right?

But what are you calling long tail. To me professional liability, executive assurance, construction those are all mid tails. I mean (multiple speakers).

Let me -- just so since you asked the question I will give you a flavor of what it is. Our professional liability, most of what we do is small accounts. And it is all claims made so it is medium tail.

We still consider it executive assurance even though it is all claims made as long tail. In our construction business, it is a national accounts. We write three line retros and we write large deductible plans and those basically have long-tail characteristics.

The auto is not a predominant component. It is mostly workers comp and general liability. That is the bulk of the premium. We consider that long tail.

Our program business is medium tail. And of course our health care is long tail. Even though it is written on a claims made basis and we write a lot of facilities and we write some excess hospital liability, and it is a long tail line of business. And in the other, which includes our excess workers comp, that is very long tail too. So we don't try to -- we measure long tail business and we set up reserves on that basis.

Fair enough. I mean I understand what you're saying. I probably need to do some more math and try to work it all out. I guess it's just, intuitively, it would seem you would need just given where interest rates are, what that probably weighted average duration is, that it would seem you had -- that you are talking and maybe the mid-single digit ROE if we really end up having that insurance book over 100 at today's yields.

In some product lines that's what they're earning. That is why I believe at some point in time, you'll see the kind of pain that I believe some managements ought to recognize because you have got to run your business as to what you're doing today. What you have done a year ago, five years ago, three years ago and you are living off the hay that you have in the barn is not the right way to think about the business.

You have got to think about what you're pricing the business today and what is the returns today. And that is the way we try to focus and that is what we do.

At the same time, we don't try to fool ourselves because some others might not like that we book our current accident year excluding adjustments to over 100. We are going to do what we believe is the right thing.

Very good. Thank you.

Brian Meredith of UBS.

Good morning. Just two quick questions here. First, back in the reinsurance space. When you increased the loss picks this quarter did that have any impact on the first and second quarter loss picks that you had booked them? So was there a little bit of a catch up at all?

No. None whatsoever.

So this is purely on business written in the third quarter?

Business earned in the third quarter.

And then, second question, Dinos. Can you chat a little bit about your view on the M&A environment and maybe that as a use of excess capital here looking forward?

I get asked this question. Maybe I'm not a good M&A guy. I just -- it's very, very hard to find the right opportunity for M&A. The culture has to be right. The book of business, what you're trying to gain has to be right.

More importantly, you have got to have a clear view of the balance sheet that you are merging into or you are buying and the price has got to be right. And it is very rarely you can get all four right.

So our preferred way of growing is by finding people and adding to our underwriting talent that, culturally, they are a good fit with us in our philosophy as to how we want to run the Company and we have been successful doing that for the last seven, eight years.

And unless there is an extraordinary opportunity that they really come across we are going to continue on that path. I would rather return excess capital to shareholders than try to force some transaction that I will live to regret.

Great. Thank you.

There are no further questions at this time. I would now like to turn the call over to Mr. Iordanou for closing remarks.

Thank you. Thank you, everybody, for joining us. We are looking forward to talking to you next quarter. Have a good afternoon.

Ladies and gentlemen, this concludes the presentation and you may now disconnect. Have a great day.