Earnings Call
Arch Capital Group Ltd. (ACGL)
Earnings Call Transcript - ACGL Q2 2020
Operator, Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2020 Arch Capital Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. 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 also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current 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. François Morin. Sirs, you may begin.
Marc Grandisson, CEO
Thanks, Liz. Good morning and welcome to our second quarter earnings call. On a reported basis, Arch had an acceptable quarter despite COVID-19 related economic disruptions. Our operating results were good from the underlying accident year ex-cat combined ratio perspective as each segment benefited from the recent rate improvements. All three segments are poised to see opportunities to grow based on the underwriting returns outlook. Consequently, this quarter, rate improvements continue to enable us to expand our writings in our property casualty units as we increasingly achieve acceptable risk-adjusted returns. We know from experience that this environment is an appropriate time to raise additional capital so that we can more significantly take advantage of this hardening P&C market. As we have discussed in previous earnings calls, we continuously rank order our capital allocation opportunities among and within the units. And today, P&C insurance and reinsurance prospects have moved up the scale even as MI returns improved at the same time. To be sure, we are experiencing unprecedented times across our world and the insurance industry. There is still much uncertainty from the pandemic and its ultimate impact. The P&C industry faces emerging claims trends, the possibility of long-lasting lower investment returns, and a strain from on-model cat losses and chronic underpricing from the soft market years. This new reality points to the need for further premium rate increases for the foreseeable future. While not all lines are fully attractive on an absolute basis, the positive momentum is evident and has accelerated through the second quarter. Turning to our operating segments, I'd like to begin with the mortgage insurance segment. Reported delinquencies were 5.1% at June 30, 2020 and came in better than our expectation last quarter, which was at the early onset of the COVID-19 pandemic. As you may recall from our call last quarter given the uncertainty surrounding COVID-19, we were forecasting more pressure on the housing market and a more pessimistic view of the economy than is indicated by the latest delinquency data. As we stand today, we believe that the U.S. MI industry has been benefiting from a combination of solid credit quality of the post-2008 crisis originations; favorable supply and demand imbalance in housing inventory; as well as strong and swift government intervention to help homeowners. As a result, we're seeing better than expected delinquency rates emerging this quarter even as rates are at elevated levels reflecting the recessionary environment. Our current incurred loss view equates to a claim rate slightly above 5% on newly reported delinquencies. While this claim rate is significantly higher than what we have seen from claim rates on the previous hurricane forbearance programs, it is also significantly lower than what the industry experienced in the GFC and reflects the better underlying conditions I mentioned earlier. Because of the current economic conditions, the credit quality of our new insurance written business as measured by average FICO scores and loan to value is stronger than a year ago. Mortgage lenders have tightened underwriting standards, and a higher quality of loans originated is a direct benefit to us. We saw record mortgage originations fueled by the historically low mortgage rate, and that has created surges in both refinancing and purchase activity. This favorable financing environment is supporting home prices. We see prices rising around 5% on an annual basis across the U.S. Despite the weakened economy, we estimate that the mark-to-market homeowners' equity in the vast majority of our policies is in excess of 10%. The level of equity, as a reminder, has proven to be a strong indicator of a borrower's propensity to default; i.e., the higher the equity, the less likely a default will happen and turn into a claim. Turning now to our P&C businesses. First, let's talk about COVID-19, which is affecting many lines at the same time and developing much more slowly than a natural catastrophe. Adding to the uncertainty is the fact that many coverage issues have yet to be resolved. All of this informed how we approached our reserving for COVID-19 within our P&C segment based on a bottom-up approach to develop our view of ultimate losses. François will cover this in more detail in a few minutes. Moving on to the P&C business environment starting with insurance. We see a growing number of opportunities as net premium written grew 7% in the quarter for the unit despite the fact that our travel premiums decreased materially due to the pandemic. Excluding travel, our insurance NPW growth would have been approximately 17%. Most of our growth was generated in the E&S casualty, E&S property, professional lines and the specialty lines written out of London, about two-thirds of that increase came from exposure growth and the balance from rate. Our overall insurance renewal rate change was plus 8.5%, up significantly from plus 5.5% in the first quarter. Earned premium that we wrote at higher rate levels over the last several quarters helped lower our quarterly accident year combined ratio ex-cat to 96.1% from 99.4% for the same quarter in 2019. In summary, our insurance group's main mission right now is to grow in those lines where conditions improve enough to allow for an appropriate risk-adjusted return, and the market is allowing this ever more. Over to the reinsurance segment now. We had very strong premium growth at plus 50%, reflecting ongoing dislocations and improvements in the marketplace. Growth opportunities presented themselves across a vast majority of our business lines. Property cat NPW was up 153%, other properties was up 70% and casualty was up 35%. Partially offsetting this growth were declines in our motor quota share net premium written due to the impacts of COVID-19 exposure decreases. Generally, our reinsurance segment is able to seize on opportunities earlier than our insurance segment. We're also incrementally increasing our capital allocation to our property cat sector. However, our PML usage is still substantially below what we could deploy if return expectations were to get to the levels we saw in 2006. Our reinsurance accident quarter combined ratio ex-cat improved to 87.5% from 92.2% over the same period in 2019. This partly reflects our opportunistic underwriting strategy and capital allocation over the last two years, but also is a reflection of the benign attritional loss experience relative to the prior year's quarter. To summarize, for our P&C operations after several years of cycle managing our portfolio, we are well positioned to deploy more capital at attractive returns. With respect to our investment returns, our outlook remains cautious as we believe the economic recovery could be slow and take several quarters to develop. Accordingly, underwriting performance should be the driver of earnings for the industry in the near term, which we believe should help sustain the momentum of increasing premium rates. From a capital standpoint, we are in a strong position and we have room to grow with our clients after many years of playing defense. In other words, our core principle again of active cycle management exercised by our team has positioned us to move much more aggressively into a growing number of improving lines. Last, but not least, we want our shareholders to know that our employees' hard work and our clients' strong relationships over the last three months were critical in getting us through these tough times. And for that, a huge thanks to all of them. With that, François will take you through the financials.
François Morin, CFO
Thank you, Marc, and good morning to all. We at Arch hope that you are in good health. On to the second 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 Ltd. In our filings, the term consolidated includes Watford. After-tax operating income for the quarter was $16.6 million, which translates to an annualized 0.6% operating return on average common equity and $0.04 per share. Book value per share increased to $27.62 at June 30, up 5.8% from last quarter and 12.1% from one year ago. The increase in the quarter was fueled by the strong recovery in the capital markets. Outside of the losses related to the COVID-19 pandemic, our underwriting groups continued on their path of solid growth and improving results, as we benefited from the generally improving property casualty markets. Losses from 2020 catastrophic events in the quarter, including COVID-19, net of reinsurance recoverables and reinstatement premiums stood at $207.2 million or 13.5 combined ratio points compared to 0.5 combined ratio points in the second quarter of 2019. The losses impacted both our insurance and reinsurance segments and include $173.1 million from the COVID-19 pandemic as well as $34.1 million for other catastrophic events, including losses related to civil unrest claims across the U.S. The losses we recorded in the quarter for COVID-19 across our P&C operations were split 45% insurance and 55% reinsurance. These loss estimates incorporate additional information that became available during the quarter and represent our current assessment and best estimate of the ultimate losses for occurrences through June 30, based on policy terms and conditions including limits, sublimits and deductibles. We are confident that the approach we took to develop these estimates is conservative and are comfortable with our estimates as they currently stand, but needless to say, we continue to monitor the pandemic in its effects as they play out, and we will adjust our estimates as necessary in the coming quarters. As of June 30, the vast majority of our COVID-19 claims are yet to be settled or paid, as approximately 90% of the incurred loss amount has been recorded as IBNR incurred but not reported reserves or as additional case reserves within our insurance and reinsurance segments. In the insurance segment, the loss reserves we recorded this quarter for the pandemic were primarily attributable to exposures in our North American unit across the national accounts, programs, and travel lines of business. In the reinsurance segment, the majority of the losses came from the property catastrophe, accident and health, and trade credit lines of business. As regards the potential impact of COVID-19 on our mortgage segment, it is important to mention that our estimates for our U.S. primary mortgage insurance book are based only on reported delinquencies as of June 30, 2020, as mandated by GAAP. As we discussed on the last call, our expectation at the end of the first quarter was for the delinquency rate to progressively increase throughout the remainder of the year with a resulting expectation that underwriting income for the overall segment would be minimal for the remainder of 2020. While we did see such an increase in reported delinquencies in the second quarter, the current delinquency rate of 5.14% is approximately 30% to 40% lower than what we expected it would be when we developed our forecast at the end of the first quarter. While that is a positive sign for the ultimate performance of the book, we are also aware that many uncertainties remain, including the rate of conversion from delinquency to cure or claim, which we expect to be different than under more normal conditions. In addition, it is extremely difficult to predict how reported delinquencies and forbearance—which represent approximately two-thirds of total current delinquencies—will behave over time, given the lack of historical data that is directly applicable to the current economic reality, which includes elevated unemployment rates, historically low interest rates, solid home price levels and unprecedented government intervention. As we look towards the remainder of 2020 for our U.S. MI business, in light of the developments we have observed during the second quarter, our current expectation is that pretax underwriting income for the remainder of 2020 for the entire mortgage segment will remain positive with a combined ratio in the 70% to 80% range, slightly better than the result we reported this quarter. In summary, while we are still faced with significant economic uncertainty, our expectations for the mortgage segment are definitely more positive than what we thought only a few weeks back. In the insurance segment, net written premium grew 7.1% over the same quarter one year ago, a strong result given the material impact COVID-19 has had on some of our businesses, such as our travel and accident unit. As Marc said, if we exclude this line the year-over-year growth in net written premium would have been 16.9%. The insurance segment's accident quarter combined ratio excluding cat's was 96.1%, lower by 330 basis points from the same period one year ago. Approximately 90 basis points of the difference is due to our lower expense ratio, primarily from the growth in the premium base from one year ago and reduced levels of travel and entertainment expenses this quarter. The lower ex-cat accident quarter loss ratio primarily reflects the benefits of rate increases achieved over the last 12 months. Prior period net loss reserve development, net of related adjustments was favorable at $2.1 million, generally consistent with the level recorded in the second quarter of 2019. As for our reinsurance operations, we had strong growth of 50.3% in net written premiums on a year-over-year basis, which was observed across most of our lines and includes a combination of new business opportunities, rate increases, and the integration of the Barbican reinsurance business. The segment's accident quarter combined ratio excluding cats stood at 87.5% compared to 92.2% on the same basis one year ago, a 470 basis point reduction. The year-over-year movement is primarily driven by a more normal level of large attritional losses compared to a year ago, which explains approximately 330 basis points of the difference and the impact of the non-renewal of a large transaction from a year ago, which contributed approximately 50 basis points. Most of the remaining difference is explained by operating expense ratio improvements resulting from the growth in earned premium. Favorable prior period net loss reserve development, net of related adjustments was strong at $28.9 million or six combined ratio points compared to 3.1 combined ratio points in the second quarter of 2019. The benefit was mostly in short-tail lines. The mortgage segment's combined ratio was 80.9%, reflecting the increased level of reported delinquencies in the quarter as mentioned earlier. The loss ratio in the quarter is based on an assumed claim rate of slightly above 5% on newly reported delinquencies for our U.S. MI book, combined with an average expected future claim value for severity that is approximately 50% higher than claims we settled and paid in the quarter. This difference is explained by the fact that the distribution of the newly reported delinquencies carry a higher average outstanding loan balance, as a higher proportion is for mortgages from the more recent origination years and from states that have higher loan values such as California, Florida and New York. The expense ratio was lower by 100 basis points over the same quarter one year ago reflecting lower operating costs including reduced levels of travel and entertainment expenses. Prior period net loss reserve development was minimal this quarter at $0.2 million favorable. Total investment return for the quarter was positive 372 basis points on a U.S. dollar basis, as the strong recovery in the capital markets produced healthy returns across our entire portfolio. The duration of our investment portfolio remained basically unchanged from the prior quarter at 3.18 years. The effective tax rate on pre-tax operating income resulted in a benefit of 0.9% in the quarter, reflecting a change in the full year estimated tax rate; the geographic mix of our pretax income; and 110 basis point expense from discrete tax items in the quarter. As always, the effective tax rate could vary depending on the level and location of income or loss and varying tax rates in each jurisdiction. We currently estimate the full year tax rate to be in the 9% to 12% range for 2020. Turning briefly to risk management. Our natural cat PML on a net basis increased to $832 million as of July 1, which had approximately 8% of tangible common equity remains well below our internal limits at the single event 1-in-250 year return level. The growth in the PML this quarter is attributable to both E&S property within our insurance segment and property lines within the reinsurance segment, reflecting our ability to deploy more capacity to opportunities that safely exceeded our return thresholds, some of which were slightly tempered by additional reinsurance purchases. As you know, we issued $1 billion of 30-year senior notes at the end of the second quarter, enhancing our capital base and furthering our objective of maintaining a strong and liquid balance sheet. Our debt plus preferred leverage ratio of 23.8% remains within a reasonable range. As discussed on the prior call, we paused our share repurchase activity since the start of the pandemic, and we do not expect to repurchase shares for the remainder of 2020. At USMI, our capital position remains strong with our PMIERs sufficiency ratio at 161% at the end of June, which reflects the coverage afforded by our Bellemeade mortgage insurance-linked notes. In late June, we were able to obtain $528 million of coverage on our in-force book for the second half of 2019. Our ability to execute this transaction highlights the credit quality of our in-force book and further protects our balance sheet should an extreme tail event materialize. The Bellemeade structures provide approximately $3.1 billion of aggregate reinsurance coverage at June 30, 2020. With these introductory comments, we are now prepared to take your questions.
Operator, Operator
Thank you. Our first question comes from Elyse Greenspan with Wells Fargo.
Elyse Greenspan, Analyst
Hi, thanks. Good morning. My first question on the property casualty side, you guys seem pretty optimistic and started to see a continuation of pretty good growth in the quarter. And so you guys don't disclose the capital supporting your property casualty versus the mortgage business, but if we're sitting outside the company and we just want to get a sense of the opportunity at hand and the capital that you have given the recent debt raise could you potentially if it really is a strong market double the size of your insurance book of business on your current capital base?
Marc Grandisson, CEO
I believe that's a reasonable evaluation. Generally, you can view capital allocation on premium from property and casualty as a one-to-one ratio, which gives you a framework for capital usage, but there is definitely capacity for more. Additionally, that perspective is shaped by how you develop it. Property casualty has different capital needs compared to other lines of business, like quota share in reinsurance. There's ample opportunity for us to expand.
Elyse Greenspan, Analyst
Great. On the mortgage side, the current delinquency rate is about 30% to 40% lower than expected. As you provide a new outlook for positive underwriting mortgage income for the rest of the year with a combined ratio of 70% to 80%, can you share where you anticipate delinquency rates will move in the third and fourth quarters?
François Morin, CFO
We don't have a precise prediction for the quarterly movements, but we initially estimated a delinquency rate of around 10% by the end of the year. Currently, we believe it will be closer to 8%. We're monitoring the situation weekly and receiving data from all our servicers, and that's our current outlook. We anticipate an 8% delinquency rate by the end of the year.
Marc Grandisson, CEO
Yes. I think to add to this Elyse. I would say that this is it's a one quarter data point so it will take us we still take a longer-term view and are not fully all reflecting the decrease or the lesser delinquency that we had. We had reported versus what we expected where you get 30% to 40% and then François told you a 20% increase. That tells you sort of a level where we're thoughtful and measured in the way we want to recognize any immediate improvement.
Elyse Greenspan, Analyst
That's helpful. And then my last question. You guys have pointed to the severity per claim. I believe you said it was about 50% higher than some of the claims you settled in the quarter just given the higher housing values, I believe. If I look in your supplement on the mortgage page, the average case reserve per default went down to 6,900 in the quarter and it has been 14,400. Why would that number have gone down if you're actually setting up more for the current claims? I'm just trying to reconcile those numbers.
François Morin, CFO
Yes. The average is largely influenced by the percentage of delinquencies that are in the early stages. If we consider the newly reported delinquencies for the quarter, they have about a 5% claim rate compared to older delinquencies, where the claim rates are higher for more mature cases. So there are no changes in assumptions; it's mainly about how the mix of our portfolio or delinquencies varies over time. This quarter notably saw a significant increase in delinquencies as a result of the pandemic.
Elyse Greenspan, Analyst
Okay. Thanks. I appreciate all the color.
François Morin, CFO
Thanks, Elyse.
Marc Grandisson, CEO
You’re welcome.
Operator, Operator
Our next question comes from Mike Zaremski with Crédit Suisse.
Mike Zaremski, Analyst
Good morning. It seems there is some conservatism built into your expectations as you anticipate the delinquency rate to keep rising. Is the government stimulus, particularly the continuation of the $600 weekly unemployment insurance subsidy, a significant factor in this? Should we be focusing on unemployment levels as well? I'm trying to figure out how to assess the situation because, so far, the results have been much better than anticipated, which is positive.
Marc Grandisson, CEO
So Mike, the straightforward issue is that unemployment is significant; it plays a role in contributing to delinquency and claims. The most important leading indicators that signal a higher risk of delinquencies mainly involve house prices. As long as house prices remain stable or continue to rise, or as long as there is a reasonable amount of equity in the house, we have observed that borrowers tend not to abandon their mortgage obligations. In the context of the great financial crisis, we experienced a combination of falling house prices and rising unemployment, which exacerbated the delinquency rates. However, we are not seeing that situation currently. We are focused on the government actions that will be beneficial, and I believe we will start to see the effects of this following the forbearance period. For now, the house price index is very encouraging for us and serves as a key indicator of homeowners' likelihood to default.
Mike Zaremski, Analyst
Okay. That makes sense and that's helpful. Then in terms of we get a number of questions about the court cases in the United Kingdom that the FCA has been writing about. Is that included in your COVID IBNR whether those court cases go for or against the industry?
Marc Grandisson, CEO
Yes. We've taken a conservative approach and had reserves in place as of the end of March. We have appropriately set aside funds with a good level of reinsurance, so we are well-covered. If things progress positively, it could be good news for us moving forward.
Mike Zaremski, Analyst
Okay. And just lastly quickly I'm sure other people will ask about kind of the segments. Any thoughts on new capital entering the broader insurance and reinsurance marketplaces? Do you feel that capital will continue then or is it having an impact on your ability to play offense at this point or is it still just a drop in the bucket? Any color would be helpful. Thanks.
Marc Grandisson, CEO
So Mike, it encompasses a bit of everything you've mentioned. The capital needs we observe involve clients seeking solutions and coverage, which indicates a need for new sources of funding. We would require a substantial amount of capital to offset that impact. Currently, we're witnessing acceleration despite the ongoing capital raising and new entrants considering entering the market. However, we are not seeing a decrease in the rate pressure we are experiencing. The demand for capital remains quite high. Some significant players who previously provided substantial capacity have stepped back, which creates a need for additional capital to support the industry. We are aware of the situation and are encouraged by our ability to raise more capital, along with others like us who maintain access to clients and relationships. This is a positive sign for the well-being of those companies. However, for any new entrants, it will take some time to get established. While it's certainly achievable, it's not something we are overly concerned about.
Operator, Operator
Our next question comes from Yaron Kinar with Goldman Sachs.
Yaron Kinar, Analyst
Hi, everybody. First question on MI and then a couple on the COVID losses. So in MI, I haven't really seen any significant pullback from that market. So I guess should I take that to mean that even with all the COVID economic uncertainty you still view it as a pretty attractive business?
Marc Grandisson, CEO
Yes, it is still very attractive. I would argue that the production in the second quarter and currently is actually better than it was six months or a year ago, with improved rates and quality of underwriting in the originations. There is a lot more activity, which is also driven by the refinancing market that was previously absent. The drop in the mortgage rate below 3% has generated more business in the market. As a result, there's a significant amount of prepayment and a higher churn in the portfolio. This reflects people moving away from their current higher mortgage rates to refinance at lower rates, which still makes economic sense. We are in a position to grow, leading to much higher new insurance written compared to what we would have seen in a more stable market.
Yaron Kinar, Analyst
Got it. That's helpful. And then with regards to the COVID losses maybe a couple of questions there. One when you talk about IBNR, do you include only events or losses from events that have already occurred or do you also include events in the future that are probable very probable to occur?
François Morin, CFO
That's a good question. As you know, companies might answer that differently. We need to be cautious with our wording. I would say that we can only reserve for incidents that have occurred before June 30, according to GAAP. Anyone claiming they are reserving for future occurrences in the third or fourth quarter raises questions. What we have done is set a prudent level of Incurred But Not Reported (IBNR) for both insurance and reinsurance based on events we know have happened or believe have happened. We have certain claims reported, but we don't have full clarity, especially with structured claims or in excess positions where there's more judgment involved. We have reserved for everything through June 30 and believe we have an ultimate best estimate of our exposure. Given the accounting rules and guidelines, we can't do more than that at this point.
Yaron Kinar, Analyst
Got it. And then final question also with regards to COVID, between first quarter and second quarter the increase in loss and COVID losses is some of that coming from IBNRs that you had already set up in 1Q, but then took a second look and realized they need to be higher or is that from really new lines of business and new areas that had not been not previously reserved for?
François Morin, CFO
I would say it's a bit of both. On the insurance side, for instance, in Q1 we primarily reserved IBNR in our international book, especially in the U.K. property market, where we believed there was exposure. We took action and booked IBNR accordingly. In the second quarter, we also reserved for national accounts where we had workers' comp exposure. To be precise, the incidents hadn't occurred by the end of March; they began to happen in April and May, particularly among healthcare workers. That's what we accounted for in the second quarter. On the reinsurance side, the situation is less clear. We're somewhat reliant on our conversations with our clients, especially regarding the property cat book. We initially booked some IBNR at the end of Q1, but after further discussions and file reviews in the second quarter, we increased that reservation, which also applies to trade credit. Hopefully, that clarifies things, but I would say it involves both factors.
Yaron Kinar, Analyst
That is helpful. And maybe one other one if I could sneak it in. On the BI front in reinsurance, the increases in COVID losses that you're reserving for today are those coming more from international accounts or more from the U.S.?
François Morin, CFO
We are definitely correcting more on the international front. As you know, we have exposure, especially in Continental Europe, where certain countries like France have more implicit BI coverage provided by the primary policies. Those are some examples of the policies or treaties we are currently reserving for.
Yaron Kinar, Analyst
Thank you very much.
Operator, Operator
Our next question comes from Josh Shanker with Bank of America.
Josh Shanker, Analyst
Can we discuss July and how it compared to mortgage defaults?
Marc Grandisson, CEO
Can you repeat the question please Josh?
Josh Shanker, Analyst
Yes. Can we discuss the comparison of May, June, and July regarding the notices for forbearance and defaults?
Marc Grandisson, CEO
Yes. From our perspective, the data might be slightly behind. However, it’s useful to look at the information provided by the MBA regarding their estimates of forbearance percentages. We saw that the forbearance rate was fairly stable as we moved into late May and early June, continuing through the first couple of weeks in July. Since then, it has decreased. Currently, we are at about 6.1% forbearance based on the GSE portfolio industry data, and as of July 13, it has dropped to 5.49%. We've noticed this decrease, but it's uncertain whether this trend will continue or reverse. Many people tend to pay their bills at the beginning of the month, so we expect to have a clearer understanding of July's data by mid-August.
Josh Shanker, Analyst
Thank you. Do you have any evidence regarding whether RateStar has made a noticeable difference in claim behavior, specifically in claim-noticing behavior, compared to how many of your competitors were pricing risk before you adopted your methods?
Marc Grandisson, CEO
Yes, I think it does. It has had an impact. I think when we talk about cycle management. We also were doing it possibly a little bit more under the radar screen and MI. I think that our RateStar approach with all the parameters actually took us away from a higher than 95 LTV, higher DTIs in certain geographical areas. So yes, we do believe if we adjust for all the variation. I mean, it's not a huge differential, but there is a slight improvement or a slight difference going to our advantage in terms of our delinquencies based on our portfolio and the risk that we underwrote for the last four, five years.
Josh Shanker, Analyst
All right. One last question. I believe you mentioned the change in AML, but I don't think you mentioned the RDS change, or perhaps I missed it. Can you tell me what RDS is as a percentage as of the end of the quarter?
François Morin, CFO
Still around 8%, remaining quite stable. We have seen a few shifts regarding contributions, but yes, it stands at 8% of tangible book.
Josh Shanker, Analyst
Thank you for all the answers.
François Morin, CFO
You’re welcome.
Marc Grandisson, CEO
Thanks, Josh.
Operator, Operator
Our next question comes from Ryan Tunis with Autonomous Research.
Ryan Tunis, Analyst
Hey, Thanks. Appreciate the MI guidance, I realize all this is like literally impossible to nail down, but I'll go ahead and I'll push on it a little bit more, because it is interesting. So when you think about the full year delinquency rate in your mind, what are you thinking the percentage of forbearances are going to be of I think you said what was it, 8%? How much of that is forbearance versus what you think of as like a real delinquency?
Marc Grandisson, CEO
The forbearance we will declare refers to delinquencies by definition. While I understand your question, it's important to note that forecasting forbearance and delinquency rates in this context is challenging. The data we have is difficult to obtain and often lags behind, making it hard for us to provide a clear answer.
Ryan Tunis, Analyst
My follow-up question is about how you plan to manage these delinquencies as they age. You are currently using a conservative incidence rate of 5%. As these delinquencies go past six months, will you maintain the 5% rate or do you anticipate a higher rate?
Marc Grandisson, CEO
There are two main aspects to consider regarding that 5%. One is our pre-COVID NODs, which was 7.9%, and we applied about a 33% discount due to forbearance. As we progress, that 7.9%, which refers to claims that are three months old compared to those that are two years or nine months old, may require us to raise those rates. However, if the forbearance programs improve, we may apply a greater or lesser discount. It’s quite complex, as you pointed out at the start of your comments, and it’s nearly impossible to answer definitively at this time. All we have is that 7.9% pre-COVID ultimate NODs as a starting point after applying some discount, noting that the typical forbearance program for hurricanes is currently very low at around 2%. We are trying to navigate through this situation while understanding that the delinquencies stemming from the COVID-19 crisis will take longer to resolve, given that the forbearance program will last for 12 months. Thus, it will require time to grasp the underlying fundamental risks. Additionally, we will have remediation programs implemented by the GSEs that should provide significant assistance, but it is still too early to make any conclusive statements.
Ryan Tunis, Analyst
Understood. And then lastly, Mark, this is purely hypothetical, but if you had $1 of capital for the next year or two years and you can only allocate it to reinsurance or primary insurance, is there a clear preference for which one you allocate it to?
Marc Grandisson, CEO
How many years?
Ryan Tunis, Analyst
Two years.
Marc Grandisson, CEO
Man, so to me you're asking me to choose among my kids. I got three kids, I love dearly.
Ryan Tunis, Analyst
I would divide it into three ways, or I mean, I would like to know which way.
Marc Grandisson, CEO
I believe it's not an all-or-nothing situation. Right now, the returns from reinsurance come in more quickly, but in terms of long-term value creation, insurance will eventually reach its potential. It simply takes more time to build business at a higher level. The issue with reinsurance is that while it can provide strong returns for a few years, there’s a risk of losing that business down the line. Therefore, I wouldn’t want to go all-in on reinsurance, despite its higher immediate returns, as it may come at the expense of long-term value from the insurance segment.
Ryan Tunis, Analyst
Thanks for the color. Appreciate it.
Marc Grandisson, CEO
Yes.
Operator, Operator
Our next question comes from Meyer Shields with KBW.
Meyer Shields, Analyst
Thank you. I wanted to follow up on that question, but in a different direction. You talked about reinsurance maybe recovering faster than insurance. How is the current hardening cycle playing out in terms of speed relative to past cycles? Is there any observable difference?
Marc Grandisson, CEO
Not really. I would say we may have had that discussion before. A hard market doesn’t happen overnight; it takes two or three quarters for losses to develop. The management team needs to decide on their approach and put pressure on their underwriting team. It’s not unlike what we’ve seen in the past. We were heading towards improving market conditions even before COVID-19, and I think COVID is likely speeding up the response and boldness we observe in underwriting teams across the industry. However, there are still areas where people seem a bit detached from what’s happening, and these are the areas where we’re not growing as much as we should. Every cycle is different, but I don’t see significant differences this time. One last thing to note is that we have yet to see the January 1 renewal for reinsurance, which is a critical renewal date. This will give us a better understanding of how quickly and how responsive the market will be as we move forward.
Meyer Shields, Analyst
Okay. No. That's very helpful. Thank you. In the past, we've been, I guess, targeting improvements within insurance that would get to a 95% combined. And when we look to the lens of current pricing, is there an update in terms of what that 95% can become?
Marc Grandisson, CEO
I hope it's lower. But seriously, Meyer, I believe the 95% was set as an aspirational figure two to three years ago, in a different interest rate environment. Currently, we're reviewing every line of business and assessing capital and return on investment, aiming to reach the appropriate level. So, viewing everything through the lens of 95% is overly simplistic. However, I expect it to be lower for the industry, which is also why we might see increased pricing pressure in the market.
Meyer Shields, Analyst
Okay, perfect. And then final question if I can just in terms of whether you've had to take into account whether it's COVID or something like that that's so remote or other pressures whether you've dialed up your overall last year numbers in insurance or reinsurance?
François Morin, CFO
Not in a meaningful way. I think we've been pretty cautious, and I've been realistic about the loss trends we've observed and what we expect them to be moving forward. As you know, we haven't solely depended on the last five or ten years of data. We have incorporated our own perspectives on what a more normalized view of loss trends is or should be. I believe we are still very comfortable with our position, acknowledging that COVID is somewhat of an outlier. However, at this point, we haven't factored in any significant changes in our loss trends when pricing the business.
Meyer Shields, Analyst
Okay, fantastic. Thank you so much.
Operator, Operator
Our next question comes from Brian Meredith with UBS.
Brian Meredith, Analyst
Yes, thanks. A couple here for you. First one, I don't think you mentioned it, but was there any benefit at all in the quarter from just lower frequency of economic activity kind of from a claims perspective in any lines of business?
François Morin, CFO
I mean there are some indications that in some places yes, there's lower economic activity which will translate to lower losses or claims. We really haven't reflected that yet. I mean we want to take a cautious approach on that, so I'd like to think that maybe there's some to come down the road but for now we haven't factored that in anywhere in our numbers.
Brian Meredith, Analyst
Great. And then second question I'm just curious Marc as you look at I guess the HEALS Act here there's a component into it of kind of liability call it indemnification. As you think about it if that doesn't go through is that a potential issue here for you and the insurance industry? And how do you kind of think about it from an underwriting perspective here going forward?
Marc Grandisson, CEO
I missed the word you said Brian. Could you repeat the early part of your question?
Brian Meredith, Analyst
I'm curious about your views on protections related to the economy reopening and the potential liabilities associated with COVID-19. The HEALS Act or CARES 2 Act includes provisions aimed at granting businesses immunity. What are your thoughts on this, and are you considering it in terms of insurance?
Marc Grandisson, CEO
Well, it's not good. They're going to allocate more liability to us or presumption to us is not good. But I think in this sense these laws are always there. There's always things that are happening. We're going to have to react to what we see when we see it. That's all I can tell you Brian. It's very hard to sit here and go through what impact it is. If we were to react and do this full drill about everything that goes and a bill that's proposed it would take a lot of our time. So, we'll react to it when we'll react to it, right?
Brian Meredith, Analyst
Yes. Marc, I believe you misunderstood my question. I'm asking about your insurance policies as the economy begins to reopen. There are certainly EPLI and GL exposures, among others, that could arise as potential benefits. How are you approaching this from an underwriting perspective?
Marc Grandisson, CEO
We have established policies that cover EPLI and GL exposures, but we are not a major risk writer. We do not underwrite large insurers, which is an advantage for us. We believe that many of the larger claims and the attention from lower risk plaintiffs will be directed towards larger insurers with deeper pockets. Additionally, we have a solid amount of reinsurance, so we are not too worried about minor fluctuations.
Brian Meredith, Analyst
Okay. Got you. Okay. And then another just quick one here. Your travel insurance I'm just curious how big of a book is that? And obviously we're probably going to see some continued pressures there for the rest of the year.
Marc Grandisson, CEO
Yes, it was originally about a couple of hundred million dollars in premium, and now it's down. You can see the numbers; you can multiply by four. I actually mean 250 for the year. It's taken a significant hit, and that also explains why the growth was more challenging this quarter than it could have been otherwise.
Brian Meredith, Analyst
Great. And then one other just quick one here for you. I know you guys launched the sidecar guesses in the first quarter. Any thoughts about additional kind of alternative capacity here to potentially capture some of the good attractive opportunities in reinsurance?
Marc Grandisson, CEO
That's an interesting question, Brian. You're trying to get us to disclose something we prefer not to, and we won't be discussing that. We are always looking for opportunities to raise capital to work with third parties, and there are numerous discussions taking place. We will provide more updates as developments occur and communicate with you as appropriate, but the specifics of how much more we can raise is clear.
Brian Meredith, Analyst
Great. Great. Great. And last one just quickly any updates on Coface?
Marc Grandisson, CEO
Coface strategically is still something we really very much think is valuable for the shareholders. There's a lot going on. We're still going through the process of approval process and we're keeping a keen eye on what's happening. I think they reported results yesterday which were better than expected. So, hopefully if that goes. It's also there as well a developing situation with them.
Operator, Operator
Our next question comes from Phil Stefano with Deutsche Bank.
Phil Stefano, Analyst
Yes, thanks. Just a quick one on the Bellemeade transaction. I'm thinking about the potential for these moving forward. I guess it seems like the Bellemeade deal that was done in the past quarter just given its attachment was probably more for S&P capital credit than PMIERs. When we saw an MI pure play come out with their own ILN transaction which is in my mind more of a traditional attachment point in the low single digits but the spreads on that and the pricing was significantly higher. How are you thinking about the managing of tail risk that Bellemeade provides versus just the capital credit that could be from playing I would think something that could be considered well above the working layers for the MI reinsurance coverage and the capital relief that something like that might provide?
Marc Grandisson, CEO
Yes, it's a valid question. We continuously assess when and if we should explore the options available to us. You are right that this last option attaches above the PMIERs credit, but we have a healthy PMIERs ratio, so it wasn't a major concern for us. It's possible that in the future, we might consider a lower attachment point. The focus has been on this being an available source of capital. From the perspective of rating agencies like S&P, it does provide us with coverage. We believe being the first to access the capital markets before the GSEs sends a strong message. I've mentioned that the quality of our book and the investor base remain strong, showing significant interest and appetite for our product, and we were pleased with the placement. It's true that the costs are high, and we would prefer to see prices decrease in the future. However, given the current economic conditions, we feel that it was a good decision on our part.
Phil Stefano, Analyst
Got it. And to the extent that you guys have a disclosure wish list that you keep in the background, I think it might be helpful to see the USMI disaggregated from the international and the mortgage reinsurance book just been the significant differences in how those businesses are reserved for? Thanks for appreciating.
François Morin, CFO
See you, back. Thank you.
Operator, Operator
Our next question comes from Geoffrey Dunn with Dowling & Partners.
Geoffrey Dunn, Analyst
Thanks. Good morning. I guess first just a quick number question. Can you quantify the impact of the accelerated singles in the quarter?
Marc Grandisson, CEO
Did we do that? I think it's about $50 million.
Geoffrey Dunn, Analyst
$50 million, okay. And then let's think forward past the end of new forbearance so early next year, so given what you know about the economy now obviously very different from a couple of months ago. How would you think about claim rates on new notices without forbearance? Because again you pointed out it's very different with home prices remains to be seen if we're going into a recession or not. And I think Marc last quarter you suggested, we might be looking at 13%, 14% given what you knew then. So what do you think about that type of number as you get into early 2021 based on what you know today?
Marc Grandisson, CEO
I think the 5% is probably related to new notices or are you referring to the ultimate claims rate for the portfolio?
Geoffrey Dunn, Analyst
On NODs. So new notices coming in forbearance goes away.
Marc Grandisson, CEO
Yes, I believe we were at 7.9% before COVID. I think the forbearance should help bring it up, though not quite to the 13% or 14% mentioned earlier. My gut feeling is that we will see a slight increase for a while until things stabilize and return to normal. If the forbearance program unfolds as intended, the situation remains uncertain. It's possible that it may stay elevated for some time, around 12% or 13%, but I expect it to decrease at some point, likely next year.
Geoffrey Dunn, Analyst
Okay. Alright. So you do think given what you know about the economy and built-up equity that you could still see 12% type of incidence assumption?
Marc Grandisson, CEO
Yes, regarding new NODs for the regular piece and not for the forbearance piece, we did provide a discount for the forbearance segment. So, yes, I understand. Congratulations.
François Morin, CFO
Quick, I mean before you go on to the next one, Geoff quick update for you. The actual impact of the singles was $27 million in the quarter. Just correction to Marc $50 million.
Geoffrey Dunn, Analyst
Thanks, again.
Marc Grandisson, CEO
Okay. Go with $51 million.
François Morin, CFO
You’re welcome.
Operator, Operator
Our next question comes from Jimmy Bhullar with JPMorgan.
Jimmy Bhullar, Analyst
Hi. I just had a question on pricing and just how you think about the interplay between the decline in exposures if the economy remains weak and how that could affect demand and pricing? And relatedly what else is out there that you think could potentially derail the momentum that you've seen in pricing both in insurance and reinsurance?
Marc Grandisson, CEO
It's difficult to foresee the future. If everything works out positively, I believe the momentum we experienced in late 2019 and early 2020 would still persist to some extent. The question would be how much higher rates could go. I am confident that there was already momentum for a turnover in the market even before the pandemic. COVID-19, as I mentioned earlier, intensified the demand for a rate increase and hastened the necessity for it.
Jimmy Bhullar, Analyst
And then there's been a lot of talk about sort of ILS and trapped capacity and what do you think about when either some of the capacity gets relieved or potentially gets absorbed? And once there's clarity on that do you think by this time next year like a lot of the trapped capital would actually be out?
Marc Grandisson, CEO
It's a possibility, assuming no further catastrophic events occur this year. However, this is a long-lasting catastrophe, making it less straightforward than a quick event like an earthquake in March. Looking ahead, it's still developing, but there is more clarity about the willingness to release capital. This situation will take longer to resolve. For example, legal disputes and challenges to the insurance industry's ability to process claims in the property market could extend resolution by another one and a half to two years. Therefore, there's significantly more uncertainty regarding the timing and ultimate pricing outcomes, making it less likely to resolve within just a year.
Jimmy Bhullar, Analyst
Thank you.
Marc Grandisson, CEO
Sure.
Operator, Operator
Our next question comes from Jamie Inglis with Philo Smith.
James Inglis, Analyst
Hi, good afternoon. I wanted to continue our discussion about forbearance programs and how delinquencies might transition into claims. I understand that there's uncertainty about the future, but could you share what insights you gained from past forbearance programs and how that influences your perspective on your current portfolio? Also, did you discover anything regarding loan-to-value ratios or specific geographic areas, and how does that relate to your existing portfolio today?
Marc Grandisson, CEO
I believe we have previously analyzed reserving while taking all the factors into account that you mentioned. The advantage of having past hurricanes and events is that we can refer back to those experiences. This allows us to set some limits on what might occur, but this situation is unique due to the extended forbearance program and its widespread impact. Additionally, we should consider the $600 per week unemployment benefits and the effects we discussed, as some areas are more significantly impacted than others. Everything plays a role here. What we have learned is that we can utilize historical forbearance experiences to estimate a range of potential outcomes. However, we are currently focusing on refining our understanding of forbearance-specific programs, like the one we are dealing with now. It's possible that we may not need to apply this knowledge again, but we are in the process of readjusting our development claims model, known as ARMOR, and it is an ongoing effort where we are continuously learning.
François Morin, CFO
I want to add two quick points. As Mark mentioned, historically, most delinquencies in forbearance tend to resolve themselves. Our 2% claim rate is a very positive indicator, though it is more localized and a short-term issue. It’s reasonable to expect that most of these delinquencies will resolve. However, on the other side, it's important to note that many of the loans in forbearance—up to 40%—were current until recently. In the early part of the second quarter, many loans entered forbearance but continued making payments. Recent data indicates that this percentage has decreased. As a result, we will see more loans that have transitioned from being current to delinquent, which is something we're monitoring. This isn't necessarily a cause for concern, but we need to understand it better to refine our estimates going forward. The ultimate claim rate of 2% may not be realistic or achievable in the current context.
Jamie Inglis, Analyst
Okay. Thank you. Appreciate it. Good luck in the future.
François Morin, CFO
Thank you, Jamie.
Operator, Operator
I'm not showing any further questions. I would now like to turn the conference over to Mr. Marc Grandisson for closing remarks.
Marc Grandisson, CEO
Thanks for joining us this quarter. Please stay safe. Have a nice rest of the summer, and we'll talk to you in the fall again. Thank you.
Operator, Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.