Arch Capital Group Ltd. (ACGL) Earnings Call Transcript & Summary

Welcome back to what I think is the insurance leave Day 2 of the Bank of America Financial Services Conference. We're very pleased to have Arch Capital talking with us here. We have distinguished leadership team here, Marc Grandisson, who is President and CEO; and Francois Morin, who is the Executive Vice President and Chief Financial Officer of the company. Just a little background. Marc was promoted to the position of CEO of the group on March 3, 2018. But -- I mean he's been there from the beginning. So formerly President and COO of the company and Chairman and CEO of the Arch Re business, Chairman and CEO of the Arch Mortgage business. As he’s one of the original employees, he joined Arch Re in October of 2001, as Chief Actuary -- worked for Berkshire Hathaway, F&G Re, Tillinghast/Towers Perrin, and he also looks great in Trilby hat. So Francois, Executive President, Chief Financial Officer and Treasurer, formerly Chief Risk Officer joined in 2011, October. Also, some experience at Towers Watson and Tillinghast. And both Marc and Francois graduates of Université Laval in Quebec City, oldest French language speaking school in North America.

Thank God there were no phones back then. Thank God. Because we'd have pictures. They’re not mine, but we don't want to share with anybody else, right, Francois?

[Foreign Language]

Exactly. [Foreign Language]

So I -- probably if this was a couple of days ago, I would have some different questions, but you reported earnings or the previous evening before, and they were good. Can we talk a little bit...

That’s it? That’s what we get, a good? Record earnings is good.

Stock was only up 1% yesterday.

Fair enough.

So can we talk a little bit about -- I just want to say, look, these were 28% ROE in the quarter. And it's still -- we're talking about 2022. We haven't even had the inflection of what's going on in 2023. Can we talk about what's been going on the last 6 weeks? And what -- how we can expect to build from there on the business?

So quickly on the 28%, I mean, it was low cat activity, healthy reserve release, as you know, on the MI space. And also, a lot of business written historically for last 2, 3 years that came in with our healthy margins. So all these things added to that good quarter, which was exceptional from our perspective, very happy and very pleased. We think it’s very good personally, but that's just my view. The -- going forward, I think for '23, I think it's more of the same. I think that with the conditions that we've seen in '22, it seemed like early '22, we were still having good market, but it was sort of losing a bit of its steam, a little bit of its momentum. I think, Ian, unfortunately or fortunately, depending on where you sit sort of reinflated, reinvigorated the hardening market. I think it just made us sort of getting a second win, if you will, in this market. And we start seeing it emerging in the fourth quarter, and it's become pretty clear, the renewal. And I think that the psychology like I mentioned, you said on the call, the psychology of the market is squarely in the camp of having more of that in '23. So we're very, very optimistic about the opportunities that we have ahead of us for the rest of the year, not only in property cat, all the property cat is certainly a number, a big story. But I think we still have very, very healthy rate level or maintaining, holding up better than I would have expected being in Stage 2 of the -- perhaps of the market cycle. So overall, I mean, I don't know what the ROA is going to look like this year. We don't have any guidance, but we certainly are collectively known the Arch in a really good position to earn very, very good returns over the next 12 months.

So I think if I ask you the same question about 2 or 3 times a year, you get a test on the different Arch businesses. If I go back to 6 months, what is the return on allocated capital in various businesses? And if I remember 6 months ago, we're going to say that insurance was 14 to 16; MI, 12 to 14; reinsurance, 11 to 13, maybe I'm wrong, rather than serving the right areas. That was 6 months ago, where are we today?

Yes. And the numbers are kind of in that ballpark. But we -- certainly, I think we thought that all 3 of our segments were kind of at the same level in, call it, 6 months ago. We were all kind of mid-teen-ish kind of results or returns, which is different than, call it, 2 years ago when we saw better returns from mortgage, and you saw us deploy more capital in that space. So we -- when we -- people ask us, which one of your -- what's your favorite child and all those good questions. I mean we certainly had mortgage ahead of the other 2. And then depending on specific kind of [ quarters ] or user, what we were thinking about, interest and ratios, we're still kind of a bit below. That kind of ranking, I think, has changed. I think mortgage, while we still think is going to be good for us going forward, we're downplaying it a little bit, still kind of in the, call it, double-digit returns, maybe down a point or 2 from what it was 6 months ago, so call it 11 to 13 kind of range. But where the shift has taken place is really on reinsurance, where reinsurance is now -- has gone up by more than a couple of points, and we see that as truly in this market, really the one where we think there's better opportunities. How long that lasts and how good can it be, can it get even better, time will tell. But based on what we saw 1/1, we're north of mid-teens for sure in reinsurance. And insurance is still very good. I think there's still room to grow there. A lot of it will depend on, I think, the ability that the insurers have to pass on the cost of reinsurance. There is that one -- like it or not, the 1/1 renewals, insurers have to pay more to reinsure, to buy the reinsurance coverage. I think there's -- they will have to find a way to pass that on to their insurers. It might take a bit of time. It won't happen all in the first half of the year, but that's why we think the momentum will keep growing and staying with us on the insurance front.

Back in 2001, you had about 3, 4 years of very underpriced risk in the insurance markets and then some of the big cash flow problem when you had to pay out a $25 billion claim for the trade center. And Arch was formed along with another -- other company’s saying this was a seminal moment in the industry. Compared to that opportunity, how far away is the marketplace from a being a seminal moment in the cycle of the industry's history, where we are right now?

Yes. I think it's hard to compare interest rates were different back then. And I think that the trough of ‘97 to 2001 was deeper. And what we're seeing right now, we had a few member in solvencies and people, by the way, is idling on the wayside. I think it's different this time around. I think it's because -- large part because of the capital regime that's improved. It's getting more heavy for the insurance carriers. So I think that makes them a bit less susceptible to default in this day and age. But in terms of pricing, so we're not as much in a trough, but I think that if I look at the liability side of things, I think things got -- we had similar reaction in 2021 and into '22 in terms of picking up the prices. We had a lot of people pulling back their lines heavily and have really got a big repricing in the market that continues to this day on the E&S, there's still dislocation on a general liability, as we all know, in a property, obviously, for obvious reasons. On the property. So I think it's probably more like -- it's a combination of a bit of being in 034 and having just survived or a software through KRW, it sort of feels very similar. But I think the liability market is -- has already corrected. So it's a very similar actually got to think of it, it almost feels like we're in 2006, 2007, which, again, as we know, was a great starting point for multiple years of good profit for our industry. That's what it feels like right now.

So I think if I go back, I have been covering the stuff in the beginning, so I have a complete set. I don't know all the data. I think in 2008, you started giving out PML information. And the peak PML risk of the company as a percentage of shareholders quotas in 3Q '08 where you did to 22.8% of the company's risk the company and it's sort of by law says we're never going to exceed 25%, but we'll play in that sandbox from 0 to 25 depending on the market opportunity. We are a long, long way from exposing 22.8% of the company's capital against a major cat event in the Tri-County, Florida peak in zone. We've been trying to scale the opportunity right now and then say that Arch has a lot of capital could put to work if we wanted to, when will it want to?

Well, and if the pricing is at the level that we think where it's at and we think it will be for '23, the answer is, obviously, we want to put the capital to work and we have the appetite to do so. Just pretty basic math like getting to 25% is not something that we think is achievable in this environment. 25% of $12 billion is a much bigger number. And when you start adding up just rough numbers, just the limits that are purchased across either the U.S. or internationally, it would mean that we would become like a much larger market share participant in that space. And unless like some companies go under, there's insolvencies, we just don't see that happening. So could we go from our 8% to 10% to 12%? Absolutely, and we think there's a lot of room to grow there, getting north of 20, I think, it's just -- would take a different kind of a more -- a major market correction for us to even be able to get to that. But still, we think there's a lot of opportunity in front of us.

Yes. And Josh, we're a different animal. We're much bigger, much wider. We have much more diverse. We have MI that we didn't have back then. We have a big insurance play and the reinsurance play is also much significant, much bigger. It was and -- we were more dependent on a few things back then than we are now, right? We have way more. It's a bigger pond to fish from than we had before. That makes a big difference.

Let's put it in perspective. I want to let -- that it's possible that you can ask questions. I have plenty of questions. But if you raise a hand, I'll stop and pause, just say you know just like but all right, I might get in trouble with them and try and trip you guys up a little bit. We'll see. If we think about back in 2005, Arch -- from 2001 Arch said, "You know what, it will be easy to start a property reinsurance business when we want to. We're not going to go all in. We're going to try to do some more complicated things. We're going to start in insurance practice, and we're going to try and work more in cash as we and build a practice there." And then Katrina, Rita, Wilma hit and everyone else had mismanaged their PMLs and created a great opportunity better than even in 2001, which was crowded to go and suddenly Arch was the only game in town. It became a great moment for you. Fast-forward Hurricane Ian, I don't know exactly what your loss in Hurricane Ian the 3Q loss are about $550 million Hurricane Ian being by far the biggest part. Your 1 in 250 Tri-County, Florida PML at the time is about $888 million. The Gulf of Mexico Hurricane loss around 7:30. It feels to me that Ian is like maybe a 1 in 10, 1 in 20-year type event and your PMLs were like for the 1 in 250-year event. not that it has to be right, the models are only as good as the models are. Do we need to be -- should we have confidence in Arch's PMLs? We certainly shouldn't have had confidence in a few of your competitors' P&Ls in 2005, when we saw what happened during Katrina. How good is the modeling and how comfortable should we be that we really understand that risk?

It's a really good question and even our Board is asking that question all the time. It's because it's the one thing that's most -- it's the hardest one to explain. Let me try to explain how it works, right? So you have a car, right? You don't have a car.

I don't have a car.

So you have a car yes. Probably -- if your car is worth $30,000, probably you having a loss in 1 year is 1 in 500 or whatever, to have a full total loss on this one, right? But if you start adding up all the cars on the block, if you have 10 cars, you multiply the property of this happening by 10. And if you go in is down the city of New York City, then there's pretty sure you're going to have multiple of that number, right? So that's -- the thing about property cat is the one we give you the PML, we give you what is exposed in the Tri-County in this case, right? So it's a really localized area that's where the peak zone is. But we don't talk about all the other areas. So when you look at Ian, it's a Tampa Bay thing, it's a Tampa Bay. But when you look at the distribution within the Tampa Bay the environment, the model will tell you it's about a 1 in 100 to 1 in 150. So when you look at our 250 in Tampa Bay and you look at what it is, it sort of makes sense and it actually holds up pretty, pretty well, right? So in and of itself of Tampa, it's much closer to the 1 and 250 million because it's a 100 to 150. Now if you take the microscope and you just pull back from Tampa and look at the overall of Florida, a size of loss above 50 to 60 is about 1 in 20. And if you -- when we talk about them, if you just step back and look at the overall U.S. include all the other perils and all the other zones. This is the same as going to the New York City and saying how many cars we're going to lose in the year. Well, it's probably 1 every 7 or 8 or 9 years as it happens. So the question that we ask ourselves is we have an exposure for Tampa Bay. This is where it hit. What is our market share expected and then we come out across -- in that line and it's exactly what happened. So the modeling has been very, very sturdy and very solid from that perspective, right? But the point that you're making is sort of belies what underlines what we talked about yesterday, right? We have a one in PML that increases from 7.7% to 8% of capital. But we don't talk about the other ones that we've grown first probably could have grown, right? If you have 1 in 250 in 1 zone is one thing, but we and 250 at 900 across a multitude of zones, it's more likely you're going to get to that level. So I think historically, our book of business has been more like relying on 1 or 2 zones, most likely in the U.S. because it's an of better prices. I think this market is allowing us to expand sort of take a step back and have a broader sense for a broader exposure around. So we should expect pushing the 1 and 250 ml, which is what we talked about just before on a peak zone. So the capital -- we look at capital is more like on a global basis on an aggregate basis. And this, we have grown that this year. But to go back to your initial question, everything hangs together pretty well. So I'm not surprised at all. It actually gave us what we would expect to get and we checked that, to be honest. Because we want to make sure we get it right.

So one of the things that has supported pricing over the past few years before this big reinsurance property cat well, I guess, is that pricing was poor in '16 to '19, not different than a lot of other companies. You've got some adverse development in that area in that area. To what extent do you think the industry -- and we haven't seen most of the 10-K, so we don't know how '16 and '19 developed for most companies. Has the industry finally confessed it since are we have a lot more holes to fill going forward. And so that's going to a continued force in pushing rates higher because there are those holes in the past?

I think the answer is yes, right? We believe there's some pressure. I think we don't -- we can't name names, but some of our companies that we reinsure to that period, I mean, we can see some development coming through. And I'm not -- I don't know, but I'm not certain that things were sort of reconciled at their level and to what they recognize. So I think it's a classic state of a cycle where you try to manage the best you can, right? You have some bad losses, some bad news coming through. And I think it's -- and you sort of feed off of a much better market right now. So I think we're going to have a bit more of that as we go forward. I mean it's -- I'm not saying who and how much it's going to be, but the hard market by definition is you start seeing the pressure in your book of business to your claims activity and demands and payments and trial and outcomes. And I think we're going to see this through some of the numbers, but is it going to be as glaring and as obvious as it once was? I don't know. I don't -- I'm not convinced of that because we're still buy laws as an industry, putting below 100 combined. I mean we're doing pretty well. So we have some margin, and we have an investment income that's picking up collectively. So that helps a lot of the -- as which a lot of the returns that we publish collective as an industry. But I think, yes, we should see -- I don't think we're going to see the true outcome of the past year, 2021, '22 for a little while. That's the question. It's going to take a while to see it through.

You just mentioned the investment income. Arch has coming into this moment or this year shorter than most companies in duration, lower exposure to equity correlated assets which was one of effects in the news, you've suppressed some of the earnings in prior years, the ability for you to grow it for years probably greater than most companies. Is there an undergirding philosophy for why Arch hasn't taken more risk? And ultimately, like we see how quickly the investment comes growing, has that approach paid off?

Well, I mean, fundamentally, when we were founded, we -- that was -- our premise was we're going to make our money on the underwriting right? That was -- that's what we're here for, that's where our expertise is. Investments, yes, there's float and we got to manage it well, but we're not here. We're not here to become something we're not, right? We're here to make money in the underwriting, and we'll enhance that with the investment income. We had -- for sure, we had a fairly defensive position and allocation for a number of years. And hindsight's 2020, could we have been a bit more aggressive? Sure. And could we have made a bit more money? Sure. But all in all, that was a strategy, and I think we're happy with it. But I will say that going forward, I think we are realizing that we are a bit bigger. We have more capital. We have the ability to take on particularly a bit more liquidity risk, right? So we -- I mean, as much as the regulators and outsiders want you to think that you might have to pay all the claims tomorrow. The reality is it's just not going to work that way. So we have the ability to make longer-term investments that we think are better risk return proposition for us, and we're doing a bit more of that going forward. So I think on the risk spectrum, we're not going to be -- we're still going to be managing our investment portfolio relatively defensively, but I think we're shifting a bit more to taking a bit more risk, whether it's in alternatives or equities, maybe not as much, but structured products I think, is something that we're looking at in a more extend or expanded way.

I don't want to get too granular, but I will, I guess, you give some disclosure about segment -- where you're deploying capital in the various segments by line. Over the past few years, you've grown a lot in property, marine, aviation, other things that go into that bucket. You've grown some leased in programs. Your loss ratio has improved dramatically, but your expense ratio has actually gone up in the insurance business. And tuning for me, and I might be wrong, I feel like that higher risk sort of property marine aviation business, I mean I feel that when you take that volatility, oftentimes, you don't have to pay as much of an acquisition cost to get it. Whereas program business is really expensive from an acquisition cost business. You have to pay these programs to get their business over time. Why is the expense ratio as you've grown so much not seeing a change that I would expect from the business mix changes.

A couple of reasons why a lot of our lines of business that have a higher expense ratio such as travel went to 0 pretty much during the pandemic. So that recovery really made a big difference in terms of the expense structure that we have to do it. And the other thing that's happened very nicely for us at Arch, I would say, Josh, is our U.K. business really got a lot better, a lot bigger and more scalable. And that carries in and of itself a higher combined ratio. So you see that the expense ratio, you can see that contribution also adding to this. So recovery from pandemic on lines that were historically higher acquisition ratio and more cat deployed in Lloyd's, which also increased [ the ratio ]. The third thing is less quota share. less reimbursement of our expenses through quota share, right, we're buying less, we buy excess in certain times. So when you buy excess, as you know, the acquisition ratio does not get shared with the reinsurer, you just carry your growth as net expense. So that sort of would also partially inflate your overall OpEx. To us, what we focus on, as you know, is combined ratio and what it means in terms of returns and the returns have improved. But -- so we don't really lose a whole lot of sleep over. We do, to the extent that we don't want to be way off of the market, specifically the OpEx. So the acquisition is it's what you participate in, right? The market carries a 15% expense or 3 or 0 or 20. It is what is by virtue of choosing to embark in this marketplace. That's the acquisition. The OpEx is more our own, and we have to grow our OpEx dollar-wise. Percentage-wise, it's decreasing because we're growing, we're earning into it, a lot of it. But we had to do this to grow and get access. We almost triple the book of business, as you know. So we had -- we need people to make decisions. We need a lot of people to take care of that business. So all in all, I think it's all explainable and very rational. The fact is on the reinsurance side, very similarly, right, more quota share, less excess of loss, right, participating in the marketplace and the market environment that is beneficial on a quarter share basis. Well, you're going to have an expense ratio that -- because you have to reimburse the reinsurance the insurance company. So all of it is totally in line with what we would have expected. Based on what you know in travel, for instance, travel, we don't buy any reinsurance on it. So everything we do in terms of acquisition expense flow through gross and net. So that also helps --that helps explain why it's gone up not down or they have been stable.

So that actually could pivot into my next question. inwards versus outwards reinsurance. Obviously, you're going to have a great opportunity to sell reinsurance here, but you're also a buyer of reinsurance. And you have the ability to retain more of your own cooking fact you view everything, you're right, you could retain it all, you're not writing it to lose money for your reinsurance partners. Given the higher cost, higher ceding commissions, a higher cost of property risk and sessions, where should we expect a ceding commission -- I should say, a percentage of business that you're seeing to move over the next year to.

I mean the first areas, but I'll start you could probably add. But I think at the high level, I think reinsurance is not only an economic transaction, economics. So you also have to be reasonable, take a step back as managers of the business and as custodian and the capital on behalf of our shareholders, you can't. It's been tried before, as you know, Josh, on people went there and is paid dearly for it. So to me, we always reminded that at any price, we cannot afford not to buy reinsurance because we need to be careful about this, right? There's an extra price that you have to put in the back of your mind that you need to pay for, for this bring more stability to the overall balance sheet. Having said all this, I think we've done a lot more purchase on the mortgage insurance side, as you know. So that -- well, that also helps us work with the net exposure that we have our business. So we also do this on the insurance. But now I think it's more the way we're looking at insurance and reinsurance on the term there's growth in that session. I think it's probably more stable. I think we did make a couple of choices on the insurance side a couple of years ago or 1 year, 1.5 years ago in terms of how we purchase on a polisher basis versus excess. I think most of the changes have been done. I think we should expect a similar kind of run rate going forward on the net to gross ratio for insurance. Reinsurance, I don't know, Josh. I wish I could tell you it depends on the year, depends on what's written, depends on what they can find. It's always high volatility from that perspective. Always trying to do the right thing, but it's hard to determine what's going to happen. And [ I’m like ] I just told you a bit more purchase on MI because put a little bit perceived heightened level risk in the mortgages and housing. So we try to be prudent and careful in the way we're managing the capital there. So that's why you see a...

Yes. And just one thing to add, just -- there's tremendous value in buying reinsurance beyond just the financial kind of capital support. It's the expertise you get with the reinsurers and we say that because we know we provide more as reinsurers, we provide more than just a balance sheet to support our seating companies, right? It's the interaction between the underwriters because as a reinsurer, you see across the market, you see what's happening and then it's an important dialogue that as a buyer of reinsurance, we see value in that as well, right? So we're happy to give it. We think it's something that's part of our proposition when we sell reinsurance, but as a buyer of the reinsurance as well, it's something that we think has tremendous value. So we're not going to go to not buying reinsurance and whether -- some lines of business, we're buying a 50% quarter share. We go to 40% because the economics tell us that's what we should do. That's absolutely, I think, a rational thing to do. But we're not going to go to 0 because it costs a bit more money. There's -- over the cycle, you're going to have highs and lows, but also maintaining relationships because, again, reinsurers do bring a tremendous amount of market intelligence and knowledge about the line of business that is, again, is extremely valuable.

So you mentioned buying maybe a bit more on the mortgage side as the risk changes. The capstone of the Arch MI reinsurance structure of the Bellemeade transactions. And we've seen the ILS market get much smaller in the past year because pension funds and said, well, we can go get 7%, 8% return on A plus as bonds, those are also the same kind of purchasers who have supported the Bellemeade structures. Do we need to be concerned that the way that Arch mortgage is managed has a more difficult time managing itself in a higher interest rate environment?

Nothing. What we tell our team is like, listen, at the end to exactly what Francois just mentioned, the diversification and the quality and the data information you get out of reinsurance, the stability of it, like you need to be a provider a buyer of that product, specifically the Bellemeade as you mentioned. I think the Bellemeade for us is a -- you just have to buy just buy every day and just give you the information, the feedback in the marketplace, which helps inform what you price on the front end. And we tell listen at the margin. But again, we're buying 4 or 5 million. At the clip, it used to be less than 3% yield spread. What is it now? 600 bps, 620 or something. I mean it's not insignificant, but in a grand scheme of things, it doesn't really move the needle as much as we might think. So we just now and just go with it and buy it through the cycle. My the same because we remind, I remind everyone is, oh, the spread at 650 it's too expensive. You used to buy 3. Well, maybe you be underpaid at to reach over the cycle, maybe the real price is $4.50 or $4.80, sometimes you pay a bit more simplistic be a bit less, I guess, we're not going to lose sleep over this. These are small amounts of money in the grand scheme of a $15 billion capital company. It's not significant. It's a prudent thing to do, again, being prudent.

I get into a time machine and go back 6 months, your stock was worth much less than it is today. I think it was a word more.

I think it's work more. Sorry that's my speech.

And then so if you ask some everyone second, why does the stock trade where it does, well, well, Archies -- they have this mortgage insurance business, it's only a 5, 6, 7x earnings business, if that, it's not a good business. And of course, you don't believe that at all. And we can see where a stand-alone mortgage insurers trade. And it's not a great valuation. To what extent do you think that, a, the market will appreciate the valuation of that mortgage pride and the idea that this was a business that used to be poor, but now is a much better run business. And if the marketplace doesn't ever decide that mortgage insurers are actually worth the cash flow they generate, is there a closed block solution just like some of these life insurance companies have done and said, look, if you're not going to appreciate my fixed annuity business, I can sell to somebody who does.

I think to me as a shareholder of ours, the key thing is why we want to get rid of the business that gives that much kind of return. And I will tell you all directors and our shareholders are like we understand it, but yes, it sure as hell helps get the returns and reinvesting in other areas of the business. I have a teenager and she's -- she’s no longer a teenager, she’s 20 years old, I've been telling her the same things for 10 years and she doesn't seem to understand. But now I think that the frontal lobe is growing. And I can see like green shoes and a brain, it clicks, oh, dad, I think that you were not wrong there. I don't know what I was thinking. But it takes -- my point to it, it takes a while. It just takes a while. And I think we're recruiter of habits and it's very hard for us. We're anchoring ourselves down to 2007, '08 as investors. We lost money, people have scars to show for and don't want to hear anything about this. But I'm a father. So my daughter doesn't -- the fact she doesn't listen doesn't mean I want to repeat myself. I'll keep on repeating myself. And at some point, she'll grow out of it and she'll say, you know what dad? You're a smart man. You are really good man and a good looking one, too, that's what I would say. But all kidding aside, this is sort of the best thing we could do because it's also what -- it's a core thing that you have to believe at Arch. You're going to be going against the grain almost all the time. And it's not easy, Josh. You can see I'm almost crying right now. It's been so difficult, all kidding aside. It's hard to go against the grain when you think about this, right, being contrarian. I always thought people with agreeable specie. We like to like to say yes, we'd like to belong, feel like we're part of the group. And oftentimes at Arch, we feel that we're a little bit different than anyone else. And this mortgage thing is very similar to what we're used to. And what works through time is keeping true north and knowing where it is and keep it through. And at some point, numbers will overwhelm everyone. So it will take a while. I thought we were there before the pandemic. The pandemic. We went to [ $48 ] a share, we're at 1.7 to 1.8x almost [ 1x ] book. I was like, oh, we’re like, well, maybe people are finally getting it, went through it, the [indiscernible] program, everything worked out pretty well. People will say, well, we still have to go through a crisis, which is fair. But I think over time, we got proven to be extremely beneficial. I think it's already proven, but it takes a while for people to realize that.

So I think that. So I think in the first chatter of Arch going into MI was run in 2013, it took you a little longer than you wanted to acquire the business? And then maybe you didn't have an intention on becoming the largest player in the space, but UGC came to you at a price that made a lot of sense. Also, we didn't get see UGC as a privately run -- or a separate run corporation, we don't have the financials, but we do know that UGC did not do nearly as badly in the global financial crisis as the other companies, so they're all the same. And so one of the things that Arch and UGC brought to bear the Bellemeade transactions protecting against the tail risk multivariate pricing and your competitors sort of looked at you and they also now have a capital market solution for the extreme loss scenario. They -- everyone's kind of migrated away from rate card type pricing into multivariate pricing. And we're coming down to an industry whose pricing is a matter of basis points. And I don't know if someone -- it's not even just ultra the nearest base, right? Have the Arch underwriting advantages and risk advantages have been competed away because it was transparent what you were doing and therefore, was able to?

Not all of it. I think the technical aspect is being sort of -- there's a convergence in the industry. I think that is true. But I would say it's the same thing for properties, I think for liability, all line lines of business, we're all participating in the same marketplace, but we still find a way to outperform most of our peer group. And that's because the secret doesn't reside within a technical aspect, approach a thing. It really resides with the management and the company's desire and willingness to go in or go out of market and being more -- and being really, really prescribed as to what it is at the right and don't write. So I think that underwriting advantage because it's cycle management philosophy is still something that is really unique and really hard to replicate because it takes a lot of belief, I just talked about being contrarian. It's not an easy place to be. Our underwriters are saying, no, from '16 to '19 to deals that are the same as they were before, but if we can't get to the pricing. And the brokers are telling them, well, I got like 25 other offers, why the hell would I keep on calling you? And it's really hard for underwriters to say no for all this time, when they got battered up and they have to believe in a system in the way it's built. So go back to the risk-based pricing on mortgage, I think that over time, we would expect this to converge the same way auto pricing and everything else converges. But I think that the management fortitude and willingness and resilience is different. I think it's a different, correct?

But I asked a question like, why is Progressive over right, still outperforming the auto market because every auto carrier in the country the ability to build the same models. So actuaries and data scientists and modelers are easy to find. It's how you use the models that makes -- to Marc's point, that makes the difference. And again, if we can be the progressive of MI multivariate models, I think it's not a bad place to be.

Going back to MI. PMI had a model that actually gave them the risk indication forward looking. When we bought them, 11 or 12, it took us 3 years to buy. Is 2, 3 years to buy them down. It took us a while. They had their system. Their model was there. And if you look at the indicated riskiness in the portfolio, they knew it. It was right in front of them from '05 through '07, '08. But the management was like no, no we're going to keep on growing because the Wall Street wants it, we need to deliver the growth. But they knew that all the signs were there.

You mean when the -- in the SE financials on said that As is the same as A?

Yes.

Like that we sort have known there was some.

The same thing. The PMI Executive Group were told, more than once, a multiple time under no uncertain terms that they're going through the wall and it couldn't help themselves. It's different.

Look, I take your progressive comparison. Progressive is a competitor where they're in a market where there are still 300 competitors. In MI, you compete with 5 or 6 competitors. You like oligopolies.

No, I don't.

There's another one that you have a 29.5% stake in a business, Coface. You've not -- you said if the right terms, we're really happy to be for that business if it made sense. Can you talk about as you have a lot of places to deploy capital as you're considering if the right opportunity will come along, how does the trade credit markets look as a place to deploy capital in today. Everyone is afraid of recession and so -- and look, people derive that. And you paid EUR 9.9.

EUR 9.95.

EUR 9.95, and it's at 13 right now. So it's not like -- so it's an okay investment.

How much dividend that we get?

The answer is it's like any other opportunity. It's all about the returns. Right now, we like the business. They've done a really good job. It's performed very well even with COVID, with all the uncertainty in the Ukraine, you name it. But today, we still think there are better opportunities to the floor of capital in the returns business, primarily. And -- but 3 years from now, if market corrects and trade credit starts delivering we think we could -- if we bring it all in-house, part of the Arch family had 100%, then we think you can give us 17, '18 ROEs, we'd be more than happy to do it. So it's just -- it's all about returns.

And Josh knowing us, we tend to wait for possible bad news to happen and then we come after the fact that would be a much more Arch playbook like and then they have record year this year. So that's -- we're wait and see analyzing, looking at them. They buy good reinsurance for the record. It's a pretty well-run company.

I think we'll stop there as we're at the 0 time. But I hope that everyone has -- appreciative Arch Capital making time for today. I hope…

Did you learn anything? No. You know everything right?

I'm going to write a big note right now.

All right. Good.

Thank you, guys.

Thank you.