Good day, ladies and gentlemen, and welcome to the first quarter 2021 Arch Capital Group Earnings Conference Call. As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management will also make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. I would now like to introduce your host for today's conference, Mr. Marc Grandisson and Mr. Francois Morin. Sirs, you may begin.

Thanks, Liz. Good morning, and thank you for joining our earnings call for the first quarter of 2021. The power of Arch's diversified strategy is evident again this quarter as we have strong underlying earnings across our three operating divisions and a 7.8% operating ROE despite the cat events. Pricing is attractive in almost all of our insurance markets and more than meets our cost of capital thresholds. As a result, we expect the next several quarters to continue to show improved underwriting margins, partially due to the compounding of rate-on-rate increases and the rebalancing of our mix. Importantly, the market is showing discipline in maintaining its momentum and the recent cat losses are likely to keep upward pressure on rates. Our three primary areas of focus for 2021 are: one, continuing our growth in the sectors where rates allow for returns that are substantially more than our cost of capital; two, optimizing our MI mortgage insurance book as it transitions from forbearance to recovery on its way back to normalcy in the next few quarters, our notices of default are leveling and the quality of recent production is excellent; three, actively managing our investments and capital to enhance our returns over the longer run. The past quarter, P&C premium renewal rates increased across a broader spectrum of lines, including several that did not show movement as recently as the third quarter of 2020. We also expect to see exposure growth as the economy recovers more fully, which, in turn, should further spur increased revenues and profit. On the MI front, housing has emerged as one of the stronger economic sectors due to a combination of positive house price appreciation with good affordability for homeowners. Although mortgage interest rates have increased modestly, they remain low compared to historic levels and continue to fuel strong demand for the purchase market. Finally, it's worth noting, and Francois will cover in more detail, that there's also some good news on the investment side as yields have increased slightly in 2021. For Arch, every 25 basis points increase in yield should result in about a 50 basis point increase in our return on equity. Now let's dive into the businesses a bit more. Turning first to P&C insurance. We are very optimistic about the prospects across our specialty insurance group for 2021. This past quarter, the higher level of premium earned from the post-2019 written period is one of the main reasons why our underlying combined ratio continued to improve. About two-thirds of the improvement was due to lower loss ratios as a result of the impact of rate increases as well as to underwriting actions we have taken over the past several years. The other one-third of the improvement was driven by a lower expense ratio. In Q1, we observed a plus 11% rate increase on a global basis, solidifying the momentum for improving margins in P&C. We are now in the fifth consecutive quarter of rate increase in excess of loss cost as evidenced by our current underlying combined ratio of 93.3% versus 97.1% in the same quarter last year. Adding to the rate improvement already mentioned, we've seen lower claims activity over the last four quarters. Nevertheless, we continue to be prudent by maintaining what we believe to be an appropriate safety margin in our reserving approach. One of our key principles is that we are cautious when recognizing favorable news but react quickly to adverse signs in the data. Next, on to our reinsurance segment. We had another quarter of improving profitability fundamentals. Our trailing 12-month accident year combined ratio ex-cat has improved significantly from a year ago. We again had a meaningful increase in net premium written of 25%. In the first quarter, we estimate that our effective rate change or rate over trend was roughly plus 8%. As with insurance, we expect these rate improvements to continue to be reflected in our underwriting results for the next several quarters. As you can see from our total premium growth in property over the last year, we continue to believe that risk-adjusted returns are more favorable in a non-cat XL property arena. Our reinsurance group incurred $146 million of cat losses in the quarter, which was within our expectations given the type of event and where we have historically positioned our property cat exposures. Let me explain a bit more. Strategically, we allocate more catastrophe capital towards homeowners and smaller commercial portfolios because we believe, one, they have homogeneous risk characteristics; two, the data used to model their exposure is of better quality; and three, policy language tends to have less variability than with larger commercial exposures. We believe that there is less uncertainty in the expected cat load of homeowners and smaller commercial portfolios. As a consequence of this portfolio construction bias, on a medium-sized storm such as Uri, at between $14 billion and $16 billion in losses that affects personal lines more markedly, we would expect our market share to be around 1%. And last, but certainly not least, mortgage. Overall, our mortgage group is very well positioned to produce good earnings as a reinvigorated U.S. housing market is promising in 2021 and beyond. In the first quarter, Arch MI U.S. new insurance written was $27 billion, around 60% above the same period last year and new loan originations are tracking towards another very strong year. As you know, last year saw a refinancing boom, which meant significant turnover in our insurance in force. Our first quarter annualized persistency was up from the 54% we experienced over the last 12 months as interest rates rose earlier this year. If mortgage rates continue to rise, we would expect persistency to gradually return to the longer-term range of 75%, which will be a net positive as we would hold more of the recent higher credit quality, higher risk-adjusted return portfolio on our books for longer. Looking next at our delinquency inventory, we still expect a large portion to cure based on many factors, including the strong equity position of our current DQ inventory. 94% of delinquent policies have over 20% of equity. We also had good news in March as the run rate for new notices of default was nearly back to 2019 levels at about 10,000 new notices per quarter. Outside of the U.S., we increased our writings in Australia as the housing market remains strong there. We like the long-term opportunity in Australia as demonstrated by our announcement to acquire Westpac's LMI business in March. The agreement allows us to free up capital even as we build our Australian presence and diversify our earning streams at attractive risk-adjusted returns. To borrow a sports analogy for this quarter, with a nod to our friends at Coface, this market feels a little like the last legs of the Tour de France. We just went through the tough section, came out among the leaders and a lot of riders struggle to keep pace. Now as we roll towards Paris, we can continue to build on our lead while remaining mindful of protecting our position and energy. We can go all out and be reckless at several stages as several stages of the race remain. However, our team is in great shape. We have many great riders working together to ensure we're ultimately smiling in that beautiful yellow jersey at the finish line. As usual, our focus is on finishing the race with grace and winning for our sponsors and our shareholders. Now I'll turn it over to Francois.

Thank you, Marc, and good morning to all. Thanks for joining us today. On to the first quarter results. As a reminder, and consistent with prior practice, the following comments are on a core basis, which corresponds to Arch's financial results, excluding the other segment, i.e., the operations of Watford Holdings Limited. In our filings, the term consolidated includes Watford. On the transaction, we announced late last year to acquire Watford in partnership with Warburg Pincus and Kelso. To use Marc's cycling analogy, our team has been pedaling hard in anticipation of the closing, and we are down to the last few kilometers before we reach our final destination. I will provide a bit more color on its status in a few minutes. As you will have seen by now, we had a very solid quarter despite the severe winter storms with after-tax operating income for the quarter of $239.8 million, or $0.59 per share, and an annualized 7.8% operating return on average common equity. Book value per share increased to $30.54 at March 31, up 0.8% from last quarter. In the insurance segment, net written premium grew 20% over the same quarter one year ago, 28.4% if we exclude the impact of the pandemic on our travel, accident, and health units. The insurance segment's accident quarter combined ratio, excluding cats, was 93.3%, lower by 380 basis points from the same period one year ago. The improvement in the ex-cat accident quarter loss ratio reflects the benefits of rate increases achieved over the last 12 months and changes in our mix of business. In addition, the expense ratio was lower by approximately 80 basis points since the same quarter one year ago, primarily due to the growth in the premium base. As for our reinsurance operations, we also had strong growth of 25.3% in net written premium on a year-over-year basis, 40.8% if we adjust for an $88 million loss portfolio transfer that was recorded in the first quarter of 2020. The growth was observed across most of our lines, but especially in our property, other than property catastrophe line, where strong rate increases and a few new accounts helped increase the top line by 84.3%. The segment's accident quarter combined ratio, excluding cats, stood at 84% compared to 91.3% on the same basis one year ago. Once we normalize for the one-time impact of the loss portfolio transfer, the improvement in the ex-cat accident year combined ratio was 590 basis points, which is almost entirely attributable to a corresponding improvement in the loss ratio. The overall expense ratio remained relatively unchanged, again after adjusting for the LPT. Losses from 2021 catastrophic events in the quarter, net of reinsurance recoverables and reinstatement premiums stood at $188.3 million, or 10.5 combined ratio points, compared to 7.4 combined ratio points in the first quarter of 2020. These were primarily a result of the North American winter storms Uri and Viola in February and consistent with our earnings pre-announcement two weeks ago, close to 80% of the losses came from our reinsurance segment with the rest attributable to the insurance segment. We remain comfortable with our level of loss reserves for COVID-19 claims, which remained essentially unchanged from prior estimates. Approximately 65% of the inception-to-date incurring loss amount sits within our incurred but not reported reserves or as additional case reserves within our insurance and reinsurance segments. The key performance indicators we track to help us assess the ultimate impact of COVID-19 on our mortgage segment keep trending in a favorable direction. Chief, of course, being the delinquency rate, which came in at 3.86% at the end of the quarter. Arch MI had another excellent quarter in terms of production. And with refinance activity leveling off from prior peaks, we saw our insurance in force remain relatively stable with an increase from our international book, offset by a small decrease in our U.S. MI book. The combined ratio for this segment was 42.4%, reflecting the lower level of new delinquencies reported during the quarter. Both the loss and expense ratio were slightly lower than the pre-pandemic levels experienced in the same quarter one year ago. As a reminder, I wanted to remind everyone of the seasonality that exists in the reporting of operating expenses across our underwriting segments, investment expenses and at the corporate level. Given all incentive compensation decisions, including share-based awards get approved by our Board of Directors in February of each year, the first quarter has generally been the quarter with the highest level of operating expenses, and we do expect the current year to follow this pattern. Overall, with the underlying improvements in both of our P&C segments, and mortgage segment fundamentals returning to pre-pandemic levels, we are excited by the prospects for each of the three legs of our stool. Our objective to deliver a well-balanced return to our shareholders with meaningful contributions from each of our underwriting segments should become more and more apparent as we move forward. I've kept my segment-level comments a bit shorter than usual in order to give a bit more color on the performance of our investment portfolio this quarter and on the new line in our income statement titled, income loss from operating affiliates. As regards to the investment portfolio, total investment return for the quarter was a negative 18 basis points on a U.S. dollar basis. Our defensive positioning with a short duration and limited credit exposure relative to our benchmark helped us withstand headwinds we experienced on the heels of an 80 basis point increase in the 10-year treasury rate during the quarter, which was a main factor in the negative 56 basis point price return on our portfolio during the quarter. Net investment income was $78.7 million during the quarter, down 9.3% on a sequential basis. This decrease, while certainly affected by lower available interest rates and higher investment expenses due to incentive compensation payments and investment management fees, is also very much the result of deliberate portfolio actions taken over the last few quarters. Specifically, we continue to maintain a short duration on our portfolio, 2.71 years at the end of the quarter, based on our internal view of the risk and return trade-offs in the fixed income markets. We also continue to deploy additional capital to alternative investments, the returns from which are generally not reflected in investment income. Finally, we transformed some short-term investments this quarter into our 29.5% equity ownership in Coface as well as an investment in corporate-owned life insurance policies. Again, both items whose returns are included in operating income but are not reflected in net investment income. Equity and net income of investment funds accounted for using the equity method, and realized gains from nonfixed income investments returned approximately $154 million during the quarter and were key contributors to the growth in our book value. Now on to income from operating affiliates, which we are including in our definition of operating income. This quarter, in addition to our share of the quarterly results of investments we have made in operating affiliates, being primarily those from Premia Holdings at this time, we also benefited from an initial nonrecurring gain we made at closing of our acquisition of a 29.5% ownership stake in Coface for approximately $74.5 million. Consistent with our accounting policy under equity method accounting, we will report our investment in Coface on a quarter lag. As regards to the Watford transaction, shareholder approval was obtained in late March, and we are awaiting a few final regulatory approvals before we can close the transaction, hopefully, over the next few weeks. As we disclosed earlier, we expect our ownership of Watford to increase to 40% at closing. The effective tax rate on pretax operating income was 10.6% in the quarter, reflecting changes in the full year estimated tax rate, the geographic mix of our pretax income, and a benefit from discrete tax items in the quarter. We currently estimate the full year tax rate to be in the 10% to 12% range for 2021. In brief, our natural cat PML on a net basis decreased to $778 million as of April 1, which had approximately 6.7% of tangible common equity remains well below our internal limits at the single event 1-in-250-year return level. Our peak zone across the group changed from the Florida tri-county area to the northeast, reflecting our view of better opportunities given the current rate environment. Our balance sheet remains strong. And our debt plus preferred leverage stood at 22.1% at quarter end, well within the reasonable range. On the capital front, we repurchased approximately 5.3 million shares at an aggregate cost of $179.3 million in the first quarter. Our remaining share repurchase authorization currently stands at $737.3 million. With these introductory comments, we are now prepared to take your questions.

Our first question comes from Phil Stefano at Deutsche Bank.

So the idea of rate adequacy is something that's gotten a lot of airtime with people focusing on the second derivative of the pricing move. I was hoping you could just talk about how you see rate adequacy from your perspective. Primarily, it's an insurance question, but reinsurance would be appreciated as well. In my mind, it feels like the messaging is that exposure growth will help to carry the baton; I don't know how to put that into a biking analogy. But move to the front from the tailwinds of pricing that we've seen and push forward to the next leg.

Yes, that's a good question. I'll stick to the cycling analogy. At a high level, the rates remain very healthy. An 11% rate is above the loss cost trend, as we mentioned earlier. We started noticing this last year in the first quarter. We are now experiencing another round of rate increases. While there were some increases last year, the policies currently being renewed in the first quarter have undergone additional rate hikes. Right now, the market is focused on rate increases and being cautious in capital deployment. If we reflect on how things were 18 or 19 years ago, along with the development of the combined ratio over the last six quarters, it's clear that we are getting rates above the loss cost trend, which positively impacts our combined ratio each quarter. There's more to come. We set our first quarter prime last year and added another layer this year. I wouldn't be surprised if we have more adjustments in the coming quarters. It remains to be seen how much further we can go, but everything we have currently is contributing to improving the margins.

Okay. And switching gears a bit to look at mortgage. The incident rate assumptions were high single digits, something like 8%, 9%, as we talked through the second half of 2020 results. Can you just let us know where about you're looking at booking that now? And maybe weave in some additional color commentary around what exactly it means optimizing our MI book as we kind of migrate from the forbearance world to a more traditional operating environment.

Absolutely. First, regarding optimization, we hold a significant market share in the U.S., and we'll soon establish a solid presence in Australia as well. It's still early to focus on higher return areas. We saw some growth in the latter half of 2020, and the market is moving back toward normalcy. Our strategy will be to focus on our best base pricing, similar to our approach in 2019 and early 2020, ensuring we target the most lucrative segments of the market to enhance our returns moving forward. For new notice of defaults, our roll rate this quarter was 9.1% for U.S. mortgage insurance, slightly better than last quarter's 9.4%. While we are no longer predicting where the delinquency rate will end the year, it has decreased to 3.86% this quarter, which is significantly better than we anticipated a year ago.

Okay. Hopefully, a quick follow-up on the MI. Is there any clarity on the GSE limitations on dividends out of the operating entities? Any sense on when this will be lifted?

Well, great question, Phil. There is a moratorium that's in place till the end of June. We are certainly hopeful that the moratorium will expire and not be extended. Nothing definitive. There are discussions going on, but certainly, from our side, the hope is that in the second half of the year, we would be able to start dividending some of the capital from our U.S. MI operation.

Our next question comes from Elyse Greenspan with Wells Fargo.

My first question is about last quarter's call, where you mentioned that your property casualty businesses were generating returns in the double digits and that the mortgage segment was nearing the 15% level. There were some disruptions in the quarter due to catastrophic events and certain investment items you highlighted. Do you generally expect your businesses to continue generating returns in the double digits, with the mortgage segment around that 15% level?

Yes. Our view has not changed in terms of expectations of what we've written from what we said last quarter, at least, very much in line.

Okay. That's helpful. And then on the underlying side, in your prepared remarks, you alluded to continuing to get underlying margin improvement. I mean, you guys have done a really good job over the past few years of adjusting the business mix, and we're seeing that come through in both insurance and reinsurance. So would that comment imply that the last three quarters of the year from an underlying basis would be better relative to Q1? Was it a year-over-year comment? Just directionally, how should we think about the margins in insurance and reinsurance?

Yes, it all relates to the price increase that the market will implement over the next several quarters. The earnings we are seeing in the first quarter include some lower pricing from last year. However, as we moved towards the end of 2020 and into 2021, things improved. Therefore, everything else being equal, we should expect the margins to expand. If there are additional rate increases, we should see that reflected in the numbers eventually. The sentiment and momentum are certainly indicating potential margin improvements.

And then in terms of mortgage, right, you guys had pointed to kind of getting back to the 35% to 45% combined ratio, 42% in the quarter, right? So currently, within that range, based off of what you know today and the fact that you mentioned, right, the level of new notices is slowing, would you expect that the combined ratio for that business would continue to trend better during the next three quarters relative to what you reported in Q1?

I want to clarify that the 35% to 45% range I mentioned is intended to represent a steady state over the cycle, rather than a stress environment. Do we feel we're in that kind of environment? Yes. Delinquencies and new notices are around 10,000 orders, which is encouraging. Is it possible that the combined ratio in the last three quarters of the year could be lower than in the first quarter? It might be, but we cannot say for sure. It will depend on reserve releases, if there are any. We will have more clarity on this once forbearance programs conclude and people come out of them. Overall, we are still comfortable with the range we provided. Whether we exceed that range or fall slightly short will depend on future data, but it's certainly a possibility.

Okay. And then one last one on the FHFA this morning announced new refi options for low-income families. Could you help us think about how that could impact the back book within your mortgage insurance portfolio?

Yes. I think regarding all the questions about the FHA, the FHFA, and various government policies, our approach is to respond to these developments as they arise. Our focus is on risk-based pricing, ensuring that we allocate capital in alignment with policies that meet our return thresholds. While we acknowledge the push for more affordable housing, which we support, there remains a healthy understanding of the associated risks in Washington. Therefore, we are not overly concerned. The targeted markets for these policies tend to be those with lower credit scores and higher loan-to-value ratios, which are not typically where we are most competitive or focused at this time. So, we are not losing sleep over this, Elyse.

Our next question comes from Jimmy Bhullar with JPMorgan.

I have a couple of questions. First, regarding the MI business. Delinquencies have improved slightly, but they're still quite high. It seems much of this is linked to government forbearance programs rather than actual borrower hardship. Can you share your perspective on this? You touched on it a bit in your comments about equity and homes. Secondly, concerning your COVID-related reserves, last quarter you mentioned that around 70% were still in IBNR, and you haven't experienced significant additional losses recently. I'm curious about the likelihood of that number being overly conservative now, considering the economy is reopening and the potential for reserve releases related to those.

On the forbearance, I have a different perspective compared to what you might think about the delinquency rate. At 3.86%, it's a solid position to be in. Although we are not completely through the COVID situation, things are looking positive, but we still face potential issues. Of the delinquencies at 3.86%, two-thirds are in the forbearance program. Among those in forbearance, 94% have more than 10% equity. This contributes to the delinquency count remaining in the inventory. The forbearance moratorium has been extended potentially until the end of June, as the government wants homeowners to recover. While this creates a higher level of uncertainty, we have seen many cures from forbearances initiated last April or May, with fewer than two-thirds now back to being current. This higher delinquency number reflects the forbearance situation, which is beneficial for homeowners, especially given the high equity levels. Overall, this is a reasonable position for us, and we expect improvements as the year progresses, aiming to return to core delinquency levels of around 1.4% or 1.35%, similar to what we historically observed at the end of 2019. I'll let Francois address the COVID question.

Yes, regarding COVID, I mentioned that we are still at 65% in Incurred But Not Reported (IBNR) and Accrued Claim Reserves (ACRs) through the end of the quarter. It's still early for us to determine whether our accrued reserves will hold up. We are comfortable that we have made a prudent provision for COVID-related claims, but it will take time for things to settle. I believe that many of our reserves will likely remain in IBNR for an extended period, and we will reassess from there.

Our next question comes from Josh Shanker with Bank of America.

I have two questions. First, I noticed that expenses were higher in the first quarter this year compared to the first quarter of 2020, which didn't see the same elevated expenses. Can you explain what was exceptional during that quarter? Additionally, how should we approach the first quarter expenses moving forward?

I want to highlight two points. First, I recommend comparing the expense ratio and operating expenses from the first quarter of 2020 to the last three quarters of 2020. There's a significant difference there. I want to clarify that the issues we observed in the first quarter of 2021 are not expected to recur or represent our future rate. This quarter, there are a few factors I believe influenced the results. One factor is related to short-term bonus compensation. We have a process where we accrue bonuses throughout the year based on expectations, and when they are finalized in February of the following year, we adjust accordingly. Last year, during the first half of the year, we had slowed our accruals because we anticipated underperformance, but it turned out better than expected. Consequently, this quarter reflects a bit of a catch-up regarding the bonus accrual. I consider this a one-off situation. The second factor pertains to equity and performance shares that were introduced three years ago. This year marked the first vesting, which included a final calculation this quarter. While we accrued for this, the estimates are never perfect, and we are experiencing some catch-up in this area as well. These are the two main factors influencing our results. We manage operating expenses closely and recognize that there can be fluctuations from quarter to quarter. However, moving forward, I am confident that expenses will trend downward from the current levels.

Okay, great. My second question is regarding a rough calculation. It seems to me that you're currently holding about $20,000 in reserves for each mortgage that is in default. If I recall correctly, before the pandemic, your reserves were slightly higher, maybe around 2021, but it appears you're back to the same level of reserves per default notice as you were before the pandemic. Considering the current pool of mortgages in default, I would assume that there is a greater likelihood of those defaults being resolved compared to the usual conditions. Am I incorrect in this assumption? Do you believe that the percentage of resolutions is in line with historical trends, or do you anticipate a higher percentage will resolve or move to claims based on your current reserves? I know that's a lot to unpack, but I'd appreciate your thoughts.

Yes, I think, Josh, my response may be shorter than you expect. The situation is very uncertain, and we've adopted a conservative approach in putting together our reserves due to the significant uncertainty around future developments, such as the duration of forbearance, the economic recovery, and the ongoing impact of COVID. We are not completely out of the woods yet. As an industry, we have been cautious in our reserving. Historically, forbearance programs have shown an 8% ultimate claims rate with regular delinquencies, while forbearance during a catastrophic event might result in a 1% to 2% ultimate claims rate. However, we've opted to be more cautious in setting our reserves. We have not changed our stance on this for now, and we've paused any revisions to our prior reserves. We will evaluate the data over the next several quarters. I hope your assumptions are correct, and that we find that this situation trends more towards a typical forbearance rather than a standard delinquency issue.

Is there a timeline for when that moratorium ends? Or is that a subjective item?

Regarding our reserving, I looked at the CFO and they are quite challenging. I believe we need a few more quarters before we are ready. I would expect that over the next two to three quarters, the situation is changing more rapidly than we anticipated back in the third quarter of 2020. We see positive trends, and eventually, when we have reliable data, we will take action. I am optimistic that this will happen in the next three to four quarters.

Our next question comes from John Collins with Dowling & Partners.

It's actually Geoff Dunn. Two questions. One, just back on the provision this quarter from MI. Can you share the average severity assumption that went along with the 9/1 incidents? I think it was about $54,000 last quarter.

$4,800.

What was the total severity factor?

9.1%? Is that the one you're looking at?

I'm sorry. So $4,800 was the actual vision, and then it was not clear.

Have a reserve for annually. Yes. Yes.

Okay. Perfect. And then secondly, Francois, you mentioned looking for dividends in the back half of the year from MI. How do you think about the capacity there, given that the surplus levels at both the primaries are down to about $200 million at year-end?

We certainly have room. One aspect we need to consider, and I'm sure others do as well, is the contingency reserves. It's not solely driven by PMIs. There are limitations regarding the amount of dividends we can declare due to our contingency reserves and the ten-year timeframe. While one might look at a 190% PMI ratio and assume there is significant capacity, we do have some capacity and we are content with it. However, it is clear that we will need to conduct additional modeling to determine how much of that capacity we can utilize. There are also other sources for those funds. Generally speaking, a couple of hundred million should be feasible, provided we receive the necessary approvals from the FHFA, the GSEs, and the relevant state regulators. If it's possible to secure more, we will certainly aim to do that.

Our next question comes from Brian Meredith with UBS.

I have a couple of questions for you. First, Marc, I'm curious about Watford since you own 40% of it. The model there is somewhat different from what you usually implement in your traditional business. The combined ratio is significantly above 100%. Are there any plans to adjust the strategy, or will you maintain the current approach? Additionally, as you report those numbers, will you treat the realized gains as part of your operating results?

I'll let Francois address the second question. Regarding the first part, we have a 40% stake, which means we're not in majority control, so there is a Board of Directors in place. However, I believe we are facing a challenging market. While the underwriting side is healthy, we think it might be beneficial to concentrate our resources more on underwriting rather than investments, but this will need to evolve gradually. We will also need to communicate with our partners at Watford to understand their return expectations. This is a discussion that is ongoing. Broadly speaking, we should anticipate Watford taking a more strategic and opportunistic approach at this point in the cycle, given the current opportunities. It seems like the emphasis on investment income was more favorable back in 2014 and 2015.

Regarding part two of your question, Brian, the acquisition allows us to take a closer look at our accounting policies. The realized gains you mentioned will also be considered at closing. We were already reviewing this, and we just need to finalize a few documents and agreements. We'll ensure that we keep you informed about any potential changes and their impacts on our financials.

Great. And then, Marc, my second question is, some of the, I guess, calls we've heard so far from the insurance brokers this quarter, have highlighted the fact that new business has gotten competitive. Renewals, companies still try to raise prices, but new business is getting much more competitive. I'm just curious, are you seeing that? And what does that potentially mean for the kind of length and duration of the cycle? Are we getting towards the end when that happens?

No, I don't think so. Some comments were made about the E&S market, which has been vibrant, indicating a renewed underwriting appetite from Main Street writers. This trend is not going away. In terms of new business, it's normal to expect these conditions. We have transitioned from the initial year of adjusting to the new underwriting policy to a phase where we focus on what we want to prioritize in new business and potentially seek growth. Everyone here agrees that the market is strong, which likely encourages more willingness to take on those policies. However, I believe the market is hardening, and while new business might become more competitive, rates are not decreasing. There's no trend of undercutting, which is an important consideration. Historically, we have had high expectations for pricing in our new business efforts, and I don't see a softening in that regard from the external market. Additionally, existing players are not expanding significantly enough to ramp up competition. New business will likely need to be nurtured by new entrants, which isn’t unexpected. Therefore, I’m not overly concerned. A hard market doesn’t last indefinitely, as you know. We are already in the second round of this cycle, and I wouldn't be surprised if we see another round. Even after that, it will take time for conditions to soften to the point where returns diminish. We need to sustain our sales efforts for a while longer.

Great. And then one just last quick one here. I noticed your construction and national accounts business finally started to grow, again, in the first quarter. Is there anything unusual there? Or is that something that we should see picking up growth as the economy improves?

I believe there are a few key points to consider. We are focusing on attracting quality accounts, and there is still some movement among accounts as clients weigh their options on whether to stay. We have a strong product offering in these situations, which I mentioned earlier, where there hasn't been much momentum. Additionally, we are observing rates trending positively for the first time, largely driven by workers' compensation. It's evident that clients continue to engage with us despite the waning interest in investment income and ongoing COVID-related exposure. We are seeing positive progress and still delivering a solid product, but we need to proceed with caution as we are committed to the long-term growth of our franchise. Overall, this is a promising narrative for us, and I appreciate you highlighting that, Brian.

Our next question comes from Derek Han with KBW.

So my first question is, you talked about strong pricing and new accounts driving growth in the property business line within reinsurance. How are you thinking about the loss trends in that line of business, both in reinsurance and insurance?

Yes. We evaluate loss costs like we do for our other business lines, particularly concerning catastrophe losses. We review the historical cat loss data from similar accounts. For reinsurance portfolios, we consider the portfolio’s experience, coupled with some internal modeling based on our expectations of demand fluctuations. We then set our prices to ensure a healthy margin, which aligns with our historical approach. One advantage of the property business is the feedback loop is quicker compared to general liability portfolios, where it can take years to determine if the pricing was accurate. Property allows us to adjust our pricing more efficiently. Currently, our growth in this business line is supported by our willingness to engage across the reinsurance sector, which some competitors may be hesitant to do. It's also important to remember that when pricing property business, relying solely on the most recent data point isn't sufficient; a longer-term perspective with a margin for safety is necessary. I realize I'm trying to condense 25 years of knowledge into a brief explanation, but I hope this gives you a general idea.

Yes. But the only thing I'd add to that, I think, there's certainly been a lot of press in the last few weeks and months around building materials, costs going through the roof in some areas. So that's certainly something that our underwriters are fully aware of and fully engaged in adjusting their view of price as they trend. And so that's part of the underwriting decision when you're in some parts of the country where costs of materials, whether through shortage or just a lot of significant demand, I think that is impacting the trends or the pricing that we're trying to get on the product. So I'd say that's maybe a bit more on the insurance side, more direct, but I think it's a bit of a something that is more top of mind currently.

That's really helpful. And then I have a quick second question. There was a sequential increase in the MI G&A ratio. Was that all incentive comp?

There are a few factors to consider. In the first quarter, we typically see current costs, including payroll taxes, which tend to increase in this period. These expenses generally decrease over the course of the year. So, while incentive compensation plays a significant role, there are also additional factors that contribute to the overall expenses. From our perspective as well as yours, you can expect a return to lower levels starting in the second quarter.

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

Thank you for joining us this morning, and we're looking forward to better news, hopefully, in the second quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.