Good day, ladies and gentlemen, and welcome to the Arch Capital Group Q4 2016 Earnings Conference Call. [Operator Instructions] 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 the 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 risk 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 are subject to the safe harbor created thereby. Management also will make -- management will also make reference to some non-GAAP measures on the financial performance. The reconciliation to GAAP and definition of the operating income can be found in the company's current reports on the 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 introduce your host for today's conference call, Mr. Dinos Iordanou, Mr. Marc Grandisson and Mr. Mark Lyons. Sirs, you may begin.

Well, thank you, Kevin. Good morning, everyone, and thank you for joining us today for our fourth quarter and year-end 2016 earnings call. We have a lot to talk about today. So let's begin with our completing the purchase of United Guaranty Corporation at the end of 2016. The combination of Arch MI and United Guaranty Corporation not only creates the world's largest mortgage insurer but, equally importantly, brings a culture of both leadership and innovation to the mortgage insurance industry that we believe will benefit our shareholders and customers for years to come. Merging 2 companies is no small task, but I'm pleased to say that the integration of Arch MI and United Guaranty Corporation is progressing smoothly. Across our companies, our employees are working hard to ensure that there will be no disruption to our customer base in both the bank and credit union channels. Now let me turn to year-end results. We had a good quarter despite noise from acquisition-related expenses and a few other items which we will discuss in a few minutes. Our reported combined ratio on a core basis -- Mark Lyons will define in a moment what core means -- increased by 2 points over the fourth quarter of 2015 to 88.8% as cat losses added 4 points to our accident year results for the quarter. For the year ended 2016, our combined ratio was essentially flat at 88.2% compared to 88% for the full year in 2015. The full 2016 accident year, excluding cats, improved to 93.4% on a core basis versus 94.4% for the 2015 accident year. Accident year results were roughly flat in both our insurance and reinsurance segments despite a softening market, while our mortgage segment improved its accident year combined ratio year-over-year to 64% from 84.2% in 2015…

Thank you, Dinos. Good morning to all. First, on this 14th day of February, I would like to wish my wife and daughters a happy Valentine's Day.

Such a great father.

Thank you. As Dinos mentioned, the integration of UG into Arch is going very well. Culturally, we are finding that the UG team is basically cut from the same cloth as the Arch team. They have been creative with capital solutions, and we share a pricing philosophy based on risk assessment and also a dedication to analytics and technology development. The combined entities' abilities provide us with a strong and, we believe, sustainable platform in the U.S. private mortgage insurance space. For the fourth quarter of 2016, Arch U.S. MI, excluding UG, had new insurance written, or NIW, of $8.8 billion, about the same level as the third quarter's. On a combined basis, we estimate our primary U.S. market share at approximately 25% to 26% for the fourth quarter, including UG, and -- which is in line with the third quarter of 2016. In addition, we continued to lead in the U.S. GSE risk-sharing transactions with approximately $2.2 billion of risk in force at year-end 2016. Our Australian mortgage insurance relationship continues to generate good volume. However, we have increased the level of our Australian quota share retrocession to 37.5% from 25% for those of you keeping track, which explains a healthy amount of premiums ceded in the segment this quarter. With the acquisition of UG, we have multiplied our U.S. primary risk in force by more than 5x, with over 87% of the exposure written up to 2008, a period in which the underwriting quality of the insurance written has been at its peak. The MI's data contained in the quarterly supplement reflects the quality of the combined primary portfolios with average FICO scores of 743 and a low 90s loan-to-value ratio. We continue to see favorable reserve development from both legacy MI portfolios. And at the end of…

Great. Thank you, Marc. And as Dinos alluded to, we have a lot of ground to cover this quarter. So on today's call, I'm going to depart from the usual commentary structure and focus more on the unusual accounting impacts driven largely by the UGC transaction. First, I will highlight just a few items about this quarter. But as a reminder, the usual quarterly topics that we usually talk about and comment on can be found in the earnings release and the associated financial supplement. Okay. So now for some summary comments on the fourth quarter all on a core basis and as refresher and as Dinos alluded to earlier, the term core corresponds to Arch Capital's financial results excluding the other segments, which is Watford Re; whereas the term consolidated includes Watford Re. Okay. So losses recorded in the fourth quarter from 2016 catastrophic events, net of reinsurance recoverable from reinstatement premiums, was $34.1 million or 4 loss ratio points compared to 1.9 loss ratio points in the fourth quarter of 2015 on the same basis. The activity was primarily driven by Hurricane Matthew, the New Zealand earthquake and the Tennessee wildfire. We believe this continues to highlight our property cat underwriting discipline as actual reported losses on cat events continue to correlate with the exposure reductions that have been implemented over the last several years. As for prior-period development, approximately $55 million of favorable development or 6.5 loss ratio points was reported in the fourth quarter, led by the reinsurance segment with approximately $42 million of favorable development, insurance segment with about $8 million and the mortgage segment providing nearly $5 million of favorable development. The calendar quarter combined ratio on a core basis was 88.8%. And when adjusting for cats and prior-period development, the core accident quarter…

[Operator Instructions] Our first question comes from Sarah DeWitt with JPMorgan.

Now that the United Guaranty acquisition has closed, I want to get your thoughts on the potential for any additional expense savings or upside on the earnings accretion. I know the accretion of over 35% included some expense savings. But if you could provide any more exact numbers on that, that would be very helpful.

Well, we -- first and foremost, let me remind everybody that we didn't make the acquisition on the basis of expense savings. As you probably will know that with any merger of 2 companies, there is significant redundancies which we're going to experience over the next 2 years as we put the companies together. Our focus is mostly on making sure that our customers don't get disturbed. So we continue to provide the service together, bringing the 2 companies together with an eye that if we can improve the expense ratio by saving, we will do it, and we will continue reporting to you on a quarterly basis what those savings are. It's -- I don't like to make projections because sometimes when you make projections, you might make your predictions come true and make your own management decisions. I'd rather have our people free to make the right decisions as we bring the companies together on a week-by-week basis. And that's the basis we're going to run the integration. Marc, do you want to add to it? Or...

No. All set.

Okay. That's fair. And then also, how should we be thinking about the size of the combined premium base for the company, taking -- for United Guaranty and AIG's mortgage business, taking into account how much will be nonrenewed as well as the AIG quota share?

Okay. Well, there's 2 points here. One, there will be some actions on our part. Mostly, what we said in the past that I think -- probably our participation in singles will probably get reduced a bit over time. Having said that, there might be some action by our customers because they might feel that the combination of the 2 companies might create some overlay of significant exposure. Based on our analysis, the latter doesn't seem to be a problem. It seems that there wasn't a lot of overlap between us and United Guaranty. So I don't expect that to be much. And then I believe that long term, as we said before, we expect our market share to come down in the low 20s. It can be anywhere from 22% to 24% or at maybe 25%, 26% today. I don't see significant change in that it will be dramatic quarter-over-quarter. It's implementing our pricing strategies that we're going through now in combining the risk-based pricing of the 2 companies together. And don't forget, our mortgage business is more global in nature. You're only focusing on the MI in the U.S. So we take what -- how much we're going to write in mortgage from a global point of view, including the bulk transactions, our Australian business and our European business. So Marc, do you want to elaborate a little bit further?

I think I would echo on this is also that 2016 was a bit higher than the last half of the year because of the refinancing slew that we got. So the market overall -- expect a slower market in 2017. That's something you need to keep in mind. So generally, the way we look -- the high-level look at the premium that can be generated by the portfolio, you take the insurance in force, which we provide in our supplement, and you can ascribe a 50 bps, roughly, rate to it. And you can -- that sort of gives you the run rate as to what kind of premium you'd get for the year. And you could put some persistence here, I think, which you've heard on other calls as well, 75%, 76%. And then this is how you sort of get to the runoff of the portfolio, and then you ascribe to some new written for this year based on your view of the market, which really, at this point in time, is very, very difficult to see or have any clarity on.

Our next question comes from Quentin McMillan with KBW.

I just wanted to talk about the mortgage business and the Australian contract that you had ceded. It looks like the net to gross in that portfolio dropped down the last 2 quarters in kind of the 60% to 70% range. And I'm kind of just curious whether that was sort of one-off because of the Australian contract. Or do you expect to sort of retain a little bit less of that business as UGC earns in? And potentially, would you look to maybe retain a little bit more of the Australian when it comes back up for renewal if the terms look attractive again next year?

Well, I mean, the terms, they're attractive in our Australian business; otherwise, we wouldn't be there. But our attitude is we look at all of our business. I don't care if it's its insurance, reinsurance, mortgage insurance. And we have a risk management perspective about aggregations, how much we want to have, either in a particular territory, et cetera, et cetera. The -- our desire or ability to reinsure a part of the book, it comes out of that process. When we sit down internally at the senior management level and we -- with our Chief Risk Officer and his team and we look at all of our aggregations, we make those determinations. So we've purchase, as Marc said, 37.5% quota share going back to inception for our Australian book. And that was the judgment that we made. That judgment might change in the future, but it's a decision we make on a lot of stuff here, including how much retrocession we'll buy on our reinsurance book, on our cat book, et cetera. It's part of our risk management methodology. So Marc, elaborate a little further.

Yes. The quota share goes back to May of '15 and is on for 3 years. So the panel has been set. And the reason we had more sessions this quarter was because of the catch-up. We went from 25 sessions to 37.5. So that's 12.5 additional premiums ceded to be retroactively ceded back to our partners. And this is exactly what we did this quarter. We have also good partners with us bringing some value in terms of knowledge of the market and capital, helping us, as Dinos said, just rightsize the overall risk on the balance sheet. At this point in time, there is no plan to change. If somebody else would want to take more of it or help us provide some structure, we are, as usual, always interested in entertaining such things. But right now, there's no plan to change.

And Quentin, let me -- just for clarity, given what Dinos and Marc have said, neither the third nor the fourth quarter of this year are indicative in a run rate basis. Both of them had the retroactive cumulative catch-up, as Marc alluded to. So on a go-forward basis, assuming there's no changes to that in the multiyear nature, any new premiums arising in 2017's first quarter, you should expect a 62.5% net arising from those out of Australia at 37.5% ceded.

It's very helpful. And then moving to the investment portfolio, I asked this last quarter as well. But you guys last quarter had about a 2% yield and were expecting the UGC portfolio to earn in at about a 3.5% yield. Is the assumption sort of similar now? And how much impact might that have? And what are your sort of expectations of what you'll do with the portfolio over the next couple of quarters as that higher-yielding book earns in?

Well, I think -- a couple of things. First off is the composition of that portfolio is markedly different than what Arch had natively. It was longer duration in nature. It was made up much more heavily of municipals and corporate credits and lower-rated corporate credits. And that will be changed over time. It's going to be a little bit -- in fact, some of that's already occurred in the beginning of this year. And that will take a little while to do because a lot of it's onshore. So there's tax consequences to everything, so you got to be mindful on how it's done. But I think over time, it will conform a lot more closely to the Arch portfolio in that regard. Dinos?

Yes. The only thing I will add is there is a tax component that we have to be mindful of it, especially having more income emanating from the U.S., which is taxable at a very high rate, depending what happens with the tax law. And we might not change the municipal component, which is giving us some tax relief. So all line is being considered. We have our teams in the investment department and our finance and tax people looking at restructuring the portfolio. But over time, it's going to look more like the Arch portfolio: high credit quality, probably shorter duration. But having said that, we got to take also into consideration the tax considerations.

If I could just sneak one more modeling thing in just to -- you gave a lot of guidance there. In terms of integration cost, do you have any updated estimate of what that might be for 2017?

Let me read what I just said before. Integration costs -- you have costs up-front, and then you have significant savings later on. We didn't do this transaction because we had some spreadsheet that says this is going to be wonderful and you're going to have all these kind of savings. We did it because it makes a lot of sense going forward buying a business that has tremendous potential for earnings. It fits the -- it's a specialized product that, I think, we can create value with it. Having said that, our teams, they're going to look at maximizing synergies, like I said, without affecting customers and volume as we go. So depending how much we do, we will have an expense up-front and then the savings that come commensurate to that. But I want our teams to have freedom to make the right management decisions, and we'll let the accounting take care of itself.

At a high level though, it's a timing issue really. As Dinos pointed out, we will hear some synergies that we'll be able to extract some costs from. But I think the best thing I can tell you is, depending on the glide path that you think we'll be able to execute on, the long-term rate -- ratio of rates of expense of a typical MI company is 25% to 30%. So that's probably what I will use as an endpoint depending on where that endpoint is for -- in your mind as to how well -- quickly we connect it to. But again, the speed of execution is not going to come at a cost of losing customers and losing culture and losing the spirit of our companies.

Our next question comes from Kai Pan with Morgan Stanley.

Thank you so much for providing these 2 alternatives to operating EPS estimates. I would add another one or ask what the third one is actually. What would be your -- sort of pro forma earnings would be if you're including both the financing cost as well as UGC earnings in the quarter?

I don't have that because we did not have UGC's earnings in the quarter. So that's stuff that we don't have readily available, Kai.

So it didn't report to us. I mean, we don't have the United Guaranty numbers.

Okay. Just want to give a try to see what's ongoing sort of going forward run rate earnings for you guys.

Yes. Be patient. First quarter, we'll give you a lot of disclosure. We'll try to make your jobs as easy as possible and -- be patient. Another 3 months, and we'll be there.

Okay. And then on capital management, you said no buyback in 2017. So I was assuming the priority would pay down some of the debt and. Also I have seen -- like, what's your comfort level in terms of debt-to-capital ratio? As well as if you go into 2018 when buybacks come, would you prefer to do the buyback in sort of the common preferred or more in the open market?

Well, let me start with '17. '17, we did say to the market and to the rating agencies, we will not buy back shares. So '17, it will be a year for us -- we're going to take the earnings, we're going to retain those earnings, and basically, we're going to start rebuilding some firepower on our balance sheet. Having said that, I don't know where '18 is going to be. When I see the year-end '17 numbers, we'll make some decisions. We want to maintain very good relationships with the rating agencies. They have been very fair with us in analyzing not only the transaction with us but the future plans and what we will need to do over the next 3 years. From our past history, you will know that we try to maintain a conservative balance sheet without a lot of debt on it, so we can have firepower in case markets change so we can take advantage of it. So that's the overall strategy now. With that, I'll turn you over to Mark Lyons who has more of the details. He does that analysis for all of us on a day-to-day basis. So Mark, go ahead.

Sure. I think, Kai, on an overall basis, we said this publicly, is that over a 3-year period, we expect to be south of 20% on Moody's adjusted leverage ratio, which is, as you may recall, our preferred capacity treatments of 50% equity credit. So when you go back and noodle it, you can see how we're thinking. But that's going to be accomplished by a shrinking numerator and an increasing denominator. So both of those are going to go. And because we pulled $400 million out of the credit facility, which has more flexibility, that's likely the target area that if we're going to differ and have the ability to pay back sooner than planned, it will go to that area.

Okay, great. Lastly if I may is on the U.S. tax reform and just want to get your guys' perspective on [indiscernible] corporate tax rate and the border adjustability and also the Neal Bills in the Congress. What -- how would that impact your business going forward?

Well, I mean, it's -- first, let me start with the first one, the -- a lower tax rate, it's good for business. I mean, we -- at the end of the day, I'm in the minority here, but I strongly believe that the corporations should pay 0 tax and let their shareholders pay the tax when, eventually, corporation has to distribute it through dividends or through shares, funds to their shareholders, and they're all full taxpayers, so let them collect the tax on that basis. But put that aside, a reduction in the corporate tax rate is positive. Especially with the United Guaranty Corporation acquisition, we're just going to increase our domestic or U.S.-earned income. So that's a positive. The other 2 hypothetical -- the border adjustment tax, I don't know what's going to happen and if you will influence transactions between reinsurers. To me, a reinsurance transaction cross-border is more exporting risk rather than importing capital. So at the end of the day, without knowing the details, it's very, very, very hard to project as to what the effect is going to be. But the Neal Bill has been around for a long time. I don't know what's going to happen, but we have alternatives to that. We're multifaceted, and we're global in nature. So at the end of the day, I -- depending on this hypothetical, we'll react to it if and if it happens.

Our next question comes from Charles Sebaski with BMO Capital Markets.

So just like some thoughts on -- you talked about risk management. I think in the past, you guys have talked about mortgage now really filling up kind of 3 legs of a stool. But mortgage has got a different risk profile than us, P&C people, who are used to thinking about what PML and maybe greater exposure to economic risks. As we think about the mortgage business here, what's your -- how do you think about it from a risk perspective on what's the ability to grow, be it globally, be it from GSE transactions, is there still capacity to expand it? Or do the other legs of the stool need to expand some further? Just how the relativeness between the 3 divisions and the relative size on a risk basis on how you guys are thinking about that.

Well, let me start with the premise that our brains work in a fashion that I don't care what you do, you have to understand what your PML is, and you got to be comfortable on the basis of the balance sheet you have and are you comfortable with the setting of how much PML you can take within the balance sheet. The fact that historically, MI companies might have not looked at it from that perspective is not relevant to us. We -- so the tasks that I have assigned all of our teams, and I personally work with them because that's a significant bet we're making in another line of business, we should have a methodology of calculating PML, and we do -- we're in the third iteration of the model that calculates the aggregation of risk, including both underwriting risk within a mortgage business and also macroeconomic risk, change in unemployment, housing prices, et cetera, et cetera. And we stress that to see as to what kind of outcomes we have and how much of that we are willing to take within our balance sheet. Now we have also brought other tools that they were not traditional, and some of the other in my company, they're starting to use them as well. You don't have to retain all the risks on your balance sheet. There is reinsurance transactions you can bring. There is capital market transactions you can bring to bear to manage the risk. So that's the concept that we have. We use it with our cat business. We use it with our P&C and our reinsurance business. We [ph] in different segments. It could be marine. It could be aviation. It could be -- so we use the same approach because that's our DNA. Our DNA is bring in the risk, understand how much you're taking, risk-manage it to the point of comfort and see if you have more than what you want than either reinsure it out or use capital market transactions to bring it down to an acceptable level. It's the old saying. I used the expression my father taught me. He said, "Son, I don't care how good the meal is. Don't eat too much because you'll get indigestion." So we're not a company that is going to over line on risk to the point that I can't sleep at night or Mark and Marc cannot sleep at night. We sleep like babies.

Will you guys be willing to provide -- so in your traditional P&C businesses, you talked about Tri-County; you talked about Northeast. We think about wind exposure and PMLs on 1 in 250 or 1 in 100. Will there be some kind of basis for you to explain to us how these metrics are if it is unemployment or on GDP or on interest rates so that we can have comparability on risks?

Yes, we might do that in the future. The reason I'm hesitant is not because we don't like to disclose to you guys a lot of stuff. We do, but we don't want to wake up our competitors to understand what we're doing either. And to tell you the truth, we're still in the process of -- with the rating agencies of going back and forth in them understanding all of our methodologies and all the good work we have done. So -- and we haven't come to a complete agreement with them as of yet in those discussions. So we're hoping this year, maybe sooner than later, we will get to some understandings in sharing our thoughts and our methodologies. And some of the methodologies, actually, we're using, we've taken from them, right? We look at how they look at mortgage risk, and we try to bring it in. But the basis of our PML analyses, it goes to both: one, things that we can control, meaning underwriting quality of the mortgages we insure and the pricing we apply to them and what those potential outcomes are; and second, macroeconomic factors that what if the unemployment rate goes to 15%, what if housing prices collapse by 25%, by 30%, and how rapidly they collapse. And we model all that, and then we come up. And there is a lot of other factors. We might share with you maybe some of our methodologies at our investor conference. This way, you'll know our deep thinking into these issues. But I'm not ready yet to be stopped putting our PMLs out for our competition to know.

That's fair. I guess, just a follow-up on the mortgage. I guess, any thoughts on new Treasury Secretary commentary about getting Fannie and Freddie out of government ownership? Would the expectation for you guys be that the speed of GSE derisking would accelerate for those companies to come out? Is that how you guys think about that? Or...

Well, there is 2 constants that I think -- and our thinking is, first and foremost, there is pressure by Congress to put mortgage risk to the private markets. So that's a constant. The other constant is I think there is a recognition by our elected officials that securitization without the ultimate guarantee of the federal government is not possible. So those things we don't believe they're going to change. Now are the GSEs privately owned and/or controlled by -- I don't think those 2 factors, they're going to change. So at the end of the day, it -- for everybody who is involved in the mortgage guarantee business, it's positive because there is -- independent if you're Republican or Democrat, there is a movement to put more risks into the private hands and eliminate the taxpayer who have being the guarantor of these mortgages. The exception to that is the FHA who -- still, I want to remind you guys, there has probably between the FHA and the VA, they got more than, what, 55%, 57% of the market. So in essence, we do have the taxpayer-funded facilities competing in the private market. So that, to me, is more of a concern than what we do on the private side. But I think the future is pretty bright. Marc?

The indication that we get from talking to both the GSEs, and certainly, there's various projects and various products that you've heard that were initiated this year, and there's more on the horizon, clearly, the mandate from the GSEs is to be utilizing more of the private market actions. We've heard that the new world order in the GSEs for 5 or 6 years now, I guess, we'll get to a landing at some point. But I echo what Dinos has said, there's clearly no stopping them trying to leverage their new positioning and utilizing the third-party private capital to help make that a vibrant market. That's clearly pointing in that direction.

And Chuck, I would just say it on the GSE because you were asking a pretty broad question. On the GSE credit risk transfer side, when you look at the balanced scorecards that are out there and what the Congress expects of the GSEs, there's no dropping off of that. It's a good signal of continued transfer.

Our next question comes from Jay Cohen with Bank of America.

Two questions. The first is on the tax rate. That was very helpful to give the 2017 number. I know you're not giving an '18 number. But directionally, okay, let's assume for a second that the corporate tax rate doesn't change. So kind of on as-if basis, as you get into '18 and '19, would you expect the tax rate to come down because of things you will be doing internally?

Well, that's loaded. If I could forecast the P&C underwriting cycle, I'd be a gazillionaire. But keeping everything constant, if there is no change at all, there should be minor drift in the aggregate effective tax rate because there should be incrementally more mortgage income associated with it. But that is a very rough and lack-of-confidence number. To the extent that there is changes in any submarket, we're going to allocate [ph] capital there, and that won't change our effective tax rate. And if it's cat, for example, it's going to be very Bermudacentric, which is going to drive it down. So that's the best I can say.

That's helpful. I just didn't know if there are things you will be doing internally to affect that tax rate just structurally, internal reinsurance or something.

It's the -- there might be a few things we do on the investment side. I mean, it's all -- it's part of the restructuring of the portfolio. Maybe there is little more municipal exposure on the investment side because it eliminates some of U.S. tax. But that doesn't move the needle that much. You're probably talking about a point or so. It's different between '11 and '12 or '12 and '13, so...

Got it. And the other question was -- one of the things the new administration did was they suspended the price cut on the FHA premium. This wasn't a big deal when they were proposing cutting it. But how do you see that affecting you?

Well, it affects the market in general, right? The FHA is -- and the VA is competing with the private markets. And don't forget, they have a tremendous advantage. Their capital requirement is 2%. So in essence, they're writing 50:1 where we're at 15:1 or less. So it's very, very tough sometimes to compete with Uncle Sam. But to us, that's positive because that reduction, in our view, we would have put more pressure on eventually the taxpayer and -- by, yes, reducing the cost to the consumer, but also, I'm not so sure that those rates for those kind of risks, it was sufficient to cover the exposure.

There is some movements here right now that the GSEs are sort -- the FHA's purpose is really to give home ownership to people that otherwise wouldn't have access to. So there's clearly a response in the GSE with Home Possible. There's a couple of programs that they're putting in place and are starting to implement that will hopefully try and attract and address that specific segment. So a little bit away from the FHA trying to get into that segment as well, which is again good news for us because it would be -- most of it would be conforming and needing private MI attached to it. So overall, that -- to echo again what Dinos just said, that moves was seen possitively by us. But again, we want to caution everyone that we're always one decision away from one of these directors to yet again put some other rate decrease. But that's the nature of the business that we're in.

Our next question comes from Ian Gutterman with Balyasny.

So my first question for Mark is as much as a comment actually is I think you need to come up with a better term than alternative income because I worry, if you stick with that word, Melissa McCarthy is going to be reading your script next quarter.

Well, as long as you're an English major, Ian, I'll listen to you.

So first, just a couple. Number one is the other underwriting income was higher than normal this quarter, mostly in the reinsurance. What was driving that?

Yes. It's -- as we kind of talked about in the past with Watford Re, underwriting and investment fees are put together into a pot and they're shared equally, and it was just a reflection of better performance.

Okay. So is that like a year-end true-up? Or is that just a good quarter?

No, it was a quarter...

No, it's a quarter performance.

Got it. Okay. And then the amortization, you said, $110 million for, I guess, this year grading down. Can you just give us some sort of sense of the slope of that?

Well, I gave -- did give you 2 data points.

You did. You did, and I try -- it's just that -- can I linearly do it? Or is there -- or is that parabolic?

I remember, it's exponential.

Just do a downslope exponential, and you'll be good. I think you can get $480 million -- $480 million of it, at the beginning, that's amortizable, right? As long as you're $110 million in the first year, 75% out of year 5...

You can figure out. You're a math major.

I can get my junior high school daughter do...

So I took a shot. I just want to make sure there wasn't some curvature to that rather than a slope, but the...

No, there is some curvature. There is some curvature. It -- think of it as -- it actually varies by which intangible asset [indiscernible] versus the other. But as I said, after 5 years out, it becomes insignificant. I'll give you one more data point. At year 6 is pushing $20 million area. So that gives the greater falloff, so...

It's becoming a math exam for you.

Yes.

That's okay. I can handle it. I'll compare notes with you next time. You can see how good my guess is. You can grade me on it. I do sit in the back of the room, but I take good notes. The -- just on that topic we're talking about disclosures for UG. Would it be possible to give us sometime before next quarter's earnings, say, a 4-quarter trailing pro forma mortgage insurance segment? I know it's possible. I guess I'm asking, is it realistic? We could discuss offline if you like, but that's...

Well, clearly, it's the starting point because of debt and the preferred that we had to issue the -- for the prospectus has the actual UGC information that you can use as a baseline because, as you know, the segment on the prior owner reporting was beyond UGC. You took the tape out, [ph] the share. So that, I think, is a useful starting point. Yes.

Okay. And then just lastly on the comment on the tax of low to mid-teens, should I assume that -- does that assume that you will have a 50% quota share on the entire U.S. MI business, including UG?

It does.

It does.

Okay. And so...

Forward.

The forward.

Okay. And I guess, this is an issue for '17, but if you want to go out to '18 or '19 or whatever. If there were a change in U.S. tax rules, where something like the Neal Bill happened, any sort of sense of what the sensitivity of that tax rate is?

Well, without knowing what the bill is going to say, I can't model it for you. But tell me what the bill is going to say, and then I'll model it.

Fair enough. Fair enough. Okay. I guess, I wanted to -- are there the same opportunities that I think you printed out with the P&C business? Could they be applied to the MI business as well? Or was that really something that only would work on the P&C business?

I don't totally understand the question. What do you mean? It's sessions from P&C versus MI?

Right. I mean, are there other places you can send stuff to, I guess? Other balance sheets you could use, things like that.

Believe me, believe me, my door is broken down by people. They want to get a piece of our MI businesses, reinsurance. Depends how -- what kind of terms you negotiate. Do you share on the profit or not? It's a lot of alternatives. So without me knowing exactly, we react to what the actual law is, and we abide by the law, and then we maximize for our shareholders the potential outcome. So not knowing that is so very hard, but there is alternatives. Yes.

Our next question comes from Elyse Greenspan with Wells Fargo.

Just a couple quick questions. First off, the intangibles that we were just talking about, the $110 million, are those going into net or operating earnings?

Well, since that's a 2017 item, in all honesty, we are debating the alternatives. But I believe you can count on us being more transparent as more likely having it itemized in a way to let you flip it however you choose to look at it.

So when you guys talked about the deal like as the accretion, 35%, was that including or excluding the amortization?

It was including.

Okay. And then in terms of the PMLs. I know Dinos you had mentioned how you guys are talking about kind of calculating the aggregate risk, including the mortgage exposure. So as we think about, potentially, a harder market on the cat side, obviously, it doesn't seem like that's anything you guys are expecting. I guess, the right assumption would be that we would never really see 25% of your capital going to cat business because now we have this greater mortgage exposure that you're also counterbalancing against your capital. How are you guys kind of, I guess, thinking about how that kind of all comes together?

Well, my authority as -- and the senior management authority from the board is we can't expose more than 25% of our equity capital on any line of business that will include MI. So that's the maximum we can take on a PML basis. If we want to take more, we have the opportunity, but it will be, I bet you, a very, very long discussion with our board. And then jointly, we'll make a decision. And if we make a decision to be something different, we will tell the market about it. So right now, that's what we are operating under.

Okay. And then one last question on, I guess, the pricing side. As we think about higher inflation just overall for the industry, I mean, kind of where you guys point it to, it seems like it's still kind of deteriorating on the primary insurance side. Do you see people starting to think about pushing for more price as we think about higher inflationary levels? Or thinking it will kind of be like what we've seen in prior cycles where we get companies pushing for price after inflation shows up within our margins?

Yes. Unfortunately, we don't see price increases. I'll give it to Marc for more color, but I think there is a time delay. Then basically, I think it's the other metrics that usually cause us to bill the industry. I'm not talking specifically, but the industry [ph] change. It's when loss cost inflation, which does not always correlate with the economic inflation, starts showing up in the numbers. How well the reserves are behaving? Those are the kind of things that cause adjustment to pricing. For now, I'm not sensing any adjustments to pricing. You saw we reported that. For some of our business, we're getting some price increases, but for a lot of them, we get decreases. So -- and in the aggregate we're negative, not positive. So Marc?

I think that the difficulty that we're running right now is most people are looking at our portfolio, and we've had a very benign trend for the last 5 or 6 years. And a lot of your projections or the way you will price your business going forward is dependent on the historical, not on the forward looking. It's very, very hard to predict what the future inflation will be. The tendency for an underwriting unit or an underwriting company to sort of assume the same old trend will carry on for a little while. That explains why it has a delay in the lag in recognizing trends. And it's especially acute if you are on the excess of loss, if you are excess of a certain threshold, say, $3 million, $4 million, $5 million or $10 million, is where we further delay. So unfortunately, we're seeing -- we're not seeing no big reactions to this. I would also add that a lot of people are expecting yields to pick up and interest rates to increase and more -- possibly more investment income in the future. So there is sort of buttressing a little bit that rate deterioration that we're seeing in the moment.

At a least, I'll just throw something in as well. We're more concerned with loss cost trend. Sometimes that's frequency driven; sometimes that's severity driven. Your question was more severity driven. And if you can say that, that cross-rated business is in primary, frequency tends to drive it, and you can sharpen your pencil a lot more and start with the competitors. What is the long-tailed, long-duration excess in Mark's example, rationalization takes over, and it's not necessarily correlated as much.

And don't forget, don't forget, traditionally, the markets don't turn on these technical analyses and evaluation. The market turns when you have more fear than greed. It's the 2 emotions that determine the market. We have excess capital. There's a lot of people accepting mid-single-digit returns. They view that as acceptable for the risk business, which I think is insanity in my view. And at the end of the day, I don't see fear in the market yet. When you start seeing fear in the market, that's when you're going to see rates moving up, and we don't see it yet.

Okay, great. And congrats getting the deal done at $11.59.

We appreciate that. I had a glass of champagne celebrating the new year and the closing. So I was -- it was very economical. I paid for one glass, and I celebrated 2 things.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Dinos Iordanou.

Well, thank you all. We're looking forward to the next quarter. Have a good afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may all disconnect.