Marc Grandisson: One thing I would add to this, our reserving approach at a high level is to typically recognize bad news quickly and good news over time. So again, our philosophy hasn’t changed at all in all those years.
Andrew Kligerman: Maybe if I could sneak one quick one in. You mentioned during the call that one of the growth areas in insurance was national accounts. What type of limits do you write on national accounts?
Marc Grandisson: Well, it’s statutory, right? So — and it’s on an excessive loss basis. And these are loss. There’s a lot of sharing of experience, plus or minus business with clients. They tend to be larger clients. The national account is 95% plus workers comp. It’s really a self-insured sort of structure that of sort, we provide the paper and actually the document to allow people to operate in their state because you need the required thing to be able to demonstrate the workers comp insurance as a protection. This is statutory, so it’s unlimited by definition. We have some reinsurance that protect some of the capping. That’s really what it is.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Jimmy Bhullar from JPMorgan.
Jimmy Bhullar: Hey, good morning. So, first, just a question on the casualty business. We’ve seen significant growth in your property exposures with the hard — since the hardening of the market, or significant hardening the market since early last year. What are your views on just overall market trends on the casualty side, and are you comfortable enough with pricing in terms to increase volumes in that area?
Marc Grandisson: Yes, I think our comfort — great question. Our comfort on the casualty, on liability in general, more general liability, right, if you exclude professional lines, I think we’re — the market is turning or has more pressure on the primary side. So I think that our focus right now is really on the primary, as you can see on our reinsurance, what we did in reinsurance for the last year, we think the reinsurance market is a little bit delayed in reacting to what happened, as in some of the development that we see and some of the increase in inflation. And of course, for your point that we mentioned. So I think that we’ll probably see first an insurance market that really takes it to hard, like I mentioned, all the remediation that they need to do.
And I think the reinsurance market will probably follow suit with their own — possibly their own way to look at this, if the prior hard markets are any indication. On the reinsurance side, one thing that’s a little bit beneficial at this point in time, and there’s a reason why reinsurers are not reacting possibly as abruptly as they probably should as in regards to city and commission is that we collectively understand as an industry that our clients are trying to make those changes, so we’re trying to go along with them and help them, support them in their efforts. We’ll see whether that’s enough. Our team is a little bit waiting to see whether that develops, but I do expect this to also come around and also provide another opportunity for us to grow.
Jimmy Bhullar: And then on mortgage insurance, I would have assumed that reserve releases would moderate over time, and they’ve actually become even more favorable. And I think there’s a shift in what’s driving that. It used to be COVID reserves last year, and now it’s stuff written post-COVID. As you think about, just want to get an idea on what are you assuming in your reserves that you’re putting on the book right now? Are you assuming experience commensurate with what you’re seeing in the market or is it reasonable to assume that if the environment stays the way it is, there’s more room to go in terms of reserve releases?
Marc Grandisson: Great question. I say reserve releases this year in general were somewhat driven by our — the views we had on the housing market at the start of the year, right? So if you rolled back the tape a year, we were more concerned about home prices dropping fairly rapidly, recession, no soft landing, et cetera. So those reserves we set, call it a year ago were very much a function of those assumptions, and they just didn’t materialize throughout the year. So throughout the year, we saw very strong or very well performing housing market. People are hearing their delinquencies much higher than we’d actually forecasted. Home prices are holding up. Unemployment remains relatively low. So you put it all together, I mean it’s really, what transpired in 2023 is very much a function of the reserve releases reflect kind of how things — how much better they played out relative to what we thought a year ago.
Where we are today at the start of 2024 is certainly a bit more, I wouldn’t call it optimistic in the sense that we see good home prices and a solid housing market for 2024. So on a relative basis, the reserves that we’re holding today are not as high as they were a year ago. So if you extrapolate from that, is there room for as much in reserve releases going forward? Probably not, but we just don’t know. I mean, the data will again play out as it does and we’ll react to it, but hopefully that helps you kind of compare and understand how, where we sit today versus a year ago.
Jimmy Bhullar: Okay. Thanks. And just lastly, your comfort with the reserves in your casualty book, despite all the industry-wide issues, does that apply to the business that came over from Watford as well? Because that company obviously had a decent amount of exposure to casualty.
Marc Grandisson: That’s an easy one. Watford, really the underwriting is managed by our team here. So the reserving and approach [Technical Difficulty] okay.
Jimmy Bhullar: Thanks.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Zaremski from BMO.
Michael Zaremski: Hey, good morning. First question for François on capital in regards to mortgage specifically. So my understanding of the mortgage reserving rules is that after a decade or so, you can start releasing a material amount of reserves. And mortgage obviously isn’t growing now, so — but you also have a Bermuda, I think some captives there too. So just curious, is there a material amount of capital coming or expected to come from releasing from the legacy mortgage or old mortgage business?
François Morin: Well, I’d say the short answer is yes, in the sense that the contingency reserves. You’re right, we will start releasing a bit more progressively, starting in 2024 and 2025. That will be — and we already had some of that in the fourth quarter this year. So if you look at our PMI’s ratio, why it dropped in the quarter, the fourth quarter was very much a function of a dividend that we were able to extract from our regulated USMI Company to the Group. So that we think, well, should the plan and is scheduled to keep, we should keep having dividends in 2024 and beyond. But the one point I want to touch on is, and we touched on it in the past is while on a regulatory basis, yes, it’s released, we would argue that capital is already somewhat being deployed in the business.
So it’s not — that it’s just sitting there not being deployed in the business. It’s already been used to other sources because the regulators and the rating agencies look at the aggregate Arch Cap Group kind of level of capital. So yes, on the statutory basis, the goal here is to put the capital in the better location. But overall, it’s somewhat not as big an impact as you might imagine.
Michael Zaremski: Okay. That’s helpful. And sticking with capital, when Elyse asked about you mentioned the S&P Capital model, but I don’t think you actually gave any quantitative or answers on the benefit, because when we — on paper we see that Arch appears to be one of if not the most diversified. Any help there on how much of a benefit or how to think about how much of a benefit the model offers Arch?
François Morin: Yes, you’re right. I didn’t put a number, and we’re not going to start putting a number, but it’s a net positive. No question that, yes, mortgage charges, diversification benefit were reductions in capital requirements, but we also — the final rulings on debt was not as favorable, right? So S&P and their new rules, they no longer treat $1.75 billion of our debt as being capital. So that’s a significant offset. But all things considered, all in, it’s a positive. But again, what I want to remind everyone is it’s not the only thing we look at, it’s just one thing among many and other rating agencies matter. And more importantly, again, is how we think about the capital we need to run the business.
Michael Zaremski: Okay. And lastly, since everyone else is sneaking in a lot more questions, based on the remarks you’ve made it, unless I’m understanding it incorrectly, it sounds like the growth might be you’re more excited about the primary insurance segment. Can primary insurance potentially grow just as much in 2024 as it did in 2023?
Marc Grandisson: It’s a great question. I mean, again, the way we talk, we don’t provide guidance because I don’t know, we don’t know what the market conditions will be this year. But in terms of capabilities and capital and talent and everything else in between, absolutely, we have — we could do more. Yes, we could. If the opportunities are there, we’ll do more, both on insurance or reinsurance for that matter.
