Good day, ladies and gentlemen and welcome to the Second Quarter 2015 Arch Capital Group Earnings Conference Call. My name is Krystal and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer towards the end of this conference. [Operator Instructions]. Before the company gets started with its update, management wants to first remind everyone that certain statement 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 assessment 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 statement 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 turn the call over to the host for today Dinos Iordanou and Mark Lyons. Please proceed.

Thank you, Krystal. Good morning everyone and thank you for joining us today. Our second quarter earnings were driven by solid reporter underwriting results while investment returns were impact by the recent rise in interest rates. On a group-wise basis our gross written premium declined by 8% in the quarter while our net written premium decreased by 10.5% as underwriting actions and rate decreases in our insurance and reinsurance businesses offset growth in our mortgage business. Changes in foreign exchange rates also reduced our net written premium on a U.S. dollar basis by 22 million or approximately 2.4% of our volume in the quarter. On an operating basis we earned $146 million, or $1.16 per share for the second quarter which produced an annualized return on equity of 9.9% for the 2015 second quarter versus 11.2 returned in the second quarter of 2014. On a net income basis Arch earned $0.88 per share this quarter which was lower than operating income primarily due to foreign exchange and realized investment losses. On a trailing 12-months basis net income produced a 10% return on equity. Net income movements on a quarterly basis can be more volatile as these earnings are influenced by changes in foreign exchange rates and gains and losses in our investment portfolio. Our reported underwriting results remained solid as reflected in our combined ratio of 87.9 and were aided by a low level of catastrophe losses and continue favorable loss reserve development. Net investment income per share for the quarter was $0.53 per share down $0.02 sequentially from the first quarter 2014 due to the short-term effects of share repurchases on investible assets during the quarter. Our operating cash flow was 232 million in the second quarter as compared to $254 million in the same period last year primarily…

Thank you, Dinos and good morning to all. As was true on last quarter's call, my comments that follow today are on a pure Arch basis which excludes the other segment that being Watford Re unless otherwise noted. As in previous call, I will be using the terms core to denote results without Watford Re and just on consolidated when discussing results including Watford Re. Okay, now with that said, the core combined ratio for this quarter was 87.9% with 1.9 points of current accident-year CAT-related events, net of reinsurance and reinstatement premiums compared to the 2014 second quarter combined ratio of 86.2% which reflected 1.8 points of CAT-related events. Losses recorded in the second quarter from these CAT events, net of recoverable and reinstatement premiums totaled 15.9 million versus 16.5 million in the corresponding quarter last year. This quarter's CATs primarily emanated from U.S. spring’s tornado and thunderstorm events and some Australian weather activity. The 2015 second quarter core combined ratio reflected 9.2 points of prior year net favorable development, net of reinsurance and related acquisition expenses compared to 9.4 points of prior period favorable development on the same basis in the 2014 corresponding quarter. This result in a core accident quarter combined ratio excluding CATs with the second quarter of 2015 of 95.2% compared to the 93.8% accident quarter combined ratio in the second quarter of 2014. In the insurance segment 2015 accident quarter combined ratio excluding CATs was 97.6% compared to an accident quarter combined ratio of 95.9% a year-ago. This 170 basis points increase was driven by 120 bps in the loss ratio and 50 bps in the expense ratio with the loss ratio increase reflecting higher large loss attritional activity than in the second quarter of 2014 emanating primarily from aviation more and offshore energy…

[Operator Instructions] Our first question will come from the line of Michael Nannizzi from Goldman Sachs. Please proceed.

One question I had on the Watford premiums, maybe you alluded to this in your comments. The premiums there were higher than the ceded premiums out of the reinsurance business. Did you -- did business come from somewhere else or was there some accounting there just to be aware of?

We did say that 40% of that was natively on your papers, so wouldn't have been ceded from any Arch affiliate. And there was a slightly higher contribution from the insurance group this quarter than the reinsurance group. And I think that answers your question.

And then in terms of the expenses, you talked about the G&A ratio coming up just from denominator effect of premiums being lower. Is there a level where you want that to be or you are comfortable letting the business, pulling back and taking appropriate underwriting actions and holding on to your infrastructure just for the potential for conditions to change and being able to leverage that infrastructure again down the road?

Well Dinos and I both have an opinion on that I'll go first on it. It's a balance beam, if there is thing that you need to be mindful of and be efficient and you make there right tough decisions and there is other areas you have to recognize you might be going into bone and muscle and as Dinos said our business is to make decisions. You don't want to lose that decision making ability. So there is some level of carrying intellectual property we’re willing to have irrespective of what it does for the expense ratio.

And no company went bankrupt or had significant problems because of expense ratio. Most of the companies they have difficulty with results it’s due to launch ratio. So in echoing what Mark said, anything that is dear to us and dear to is our underwriting capability we have as a corporation, we’ll protect that. Of course we’ll be prudent managers and try to manage expense with that parameter. So at the end of the day if it comes to what we call muscle, which is underwriting capability and knowledge is that it might not be fully usable at this point in time, we’ll retain that because we make decisions for the long-term, not for short-term. And when things we can eliminate and they don't have a long-term or short-term effect to what we do we’ll be prudent managers too and do so, so we can get a more reasonable expense ratio. So that's our philosophy and that’s what we’re going to practice as a management team.

As far as reinsurance concerns is then your view there still at this point and changes that are taking place in market are cyclical, so you'll make that sort of bone muscle decision according to that as sort of a baseline?

Absolutely. Because at the end of the day there is wonderful things you can do in a good market in reinsurance, but you need to have the capability. And I think we've proven that our reinsurance team is one of the best in the industry over the last 12 years, 13 years, all you have to do is look at their performance.

And if I could just one quick on one the MI. Is it possible to breakdown what the underlyings were or what the loss ratio was even on a stated basis between the MI reinsurance and the flow business the U.S. MI business or they relatively similar?

We can do that. And let me dig Michael.

He is going to give you specifics, but I can tell you the reinsurance business was slightly better than our own MI business for the reason most of our reinsurance business that we wrote is in the very best years in the business. This is 2011, 2012 and 2013 commitment. So we want to get more specific markets.

I'll do more directional than magnitude, but the U.S. operation continues to improve per our comments with the good improvement in delinquencies. The reinsurance was lower still, and lot of that is due to a calendar quarter effect of recognizing favorable results on reinsurance treaties issued a couple of years ago. You don't have gigantic earned premium numbers coming through a calendar so you make a change on a prior treaty on an inception to date basis and it can move the numbers.

Any impact from the PMI quota share reinsurance program in 2Q results or is that embedded in the reinsurance discussion you just gave?

There was no real impact from that.

Our next question will come from the line of Sarah DeWitt from JP Morgan. Please proceed.

On the mortgage insurance business you showed some nice growth in the quarter in terms of the U.S. risk-in-force and now you have all the key bank approvals, do you expect a positive reflection point in risk-in-force in the second half of the year? Or could you just talk about how we should think about the trajectory on the growth?

Well it will be a steady improvement. Not only you have to get -- to sign up the banks, but eventually you got to make sure that from an IT point of view on the pipes, they are open, was starting to receive that. So I wouldn’t say you are going to see an abrupt change in that trajectory but as you know with the mortgage business as the quarter adds, you know -- and we're pretty happy with the progress that our sales force is doing and also the business that we're receiving. We had received from 270 banks applications to write the business. We still working, we are not on optimum pace yet. I'll be happy when I'm receiving from all 700 or so and I don’t how long that will take because these projects they get into the IT department and sometimes they take six weeks, sometimes they take six months, so I can't predict that.

Okay. Great. And just some on high level in U.S. mortgage insurance. How are you winning? What is your view as your competitive advantage there?

With one of the highest rated MI paper. So from a credit point of view we should be -- and we have a terrific reputation on service with everybody that we have done business so far, we are getting very, very good comments about our responsiveness and our service capability. So the combination of those two I think it fairs well for us for the long-term.

And Sarah [ph] I would also add we have Arch’s mortgage guarantee, which I tended kind of phrases like E&S carrier for the mortgage space. In that we'll do jumbo loans and other things that are nonconforming.

That’s an additional service we give to all these banks for loans that they might repaying on their books and they won't go to the GSCs. We have that capability. We did very -- let me reemphasize, very highly rated paper.

Okay, great. And I'd like to give one more and, on all the consolidation we’ve seen in the industry. Could you just talk about what the implications are of these for Arch from our competitive standpoint? And what innings do you think we’re in the consolidation risk?

The answer on your [indiscernible] question, I have no clue. I don’t see you know how, they come out of the blue and you know there is lot of dating and lot of marriages and all that. But I don’t know. From on a assess point of view, let me give you our view, our view is that, by consolidating on the primary side you have less buyers, or more concentrated buyers for reinsurance. So I think that will put some pressure probably through the pressure on the reinsurance purchasing because the bigger the buyer, the more they buy, the more the leverage they have and also they can use even alternative structures as we have seen with some. On the insurance side, I view it as opportunities for the simple reason that history tells us that never in a consolidation or insurance operations one plus one equals two plus, it’s usually one and a half to one and three quarters, and there things are fall off the table, it could be people who want to make change in their careers, it could be over lining of lines and depending on coverage's and the clients says I don’t want to put all my eggs in a bigger basket now. So we're ready and willing and we have instructed our underwriting units to be a participant in that activity when it occurs. And some of that will occur.

Our next question will come from the line of Charles Sebaski from BMO Capital Markets. Please proceed.

I wanted to just talk about the ROE profile on a consolidated basis for you guys and how that plays into -- if more capital needs to be returned. I guess Dinos you talked about for some quarters now that the current business return profiles been in the 10% to 12% range and we have appeared like this and I realized it's only basis points below that double digit level, but at the low end of that range in a period that’s relatively light on CATs and relatively strong and favorable development. How should we think about how you guys managed to the consolidated ROE profile? And how much capital you need to hold and whether there is capital in MI that’s kind of affecting that? That would help.

Well let me take you back a little bit, because I think based on your question I think, you might be confusing underwriting ROV versus calendar reporting. We don't pay any attention to calendar reporting because that's kind of accounting and underwrite -- we allow accountants but they don't pay lot of attention to it. The ROE that we calculate is on underwriting basis, meaning, how much capital I need to support this business and what is the return when I ride a new piece of business that's the way we've based those numbers. So, prior year reserve releases or additions will not affect that, et cetera. They 10 to 12, we calculate based on our pricing model that comes from pricing actuaries, the mix of business we have and just to give you a little flavor is that we are very happy with our insurance business especially on the small to medium size accounts, they are producing good ROEs. We are not so happy but you can illuminate all of some of our larger accounts or ROEs. On the reinsurance sector, the ROEs have been very good for many years, but they coming down as the pressure continues, including a big component of good ROE was the CAT business, with that now is not producing what we fully expected for the high volatility line in ROEs and then we are very, very happy with the ROEs and the mortgage insurance. So, we put that all in a hamper, our actuaries go through that and that's how we estimate the underwriting ROE. I'm not telling you that every single thing that we do has a double-digit ROE component. If that was a case, we would have better than 10 to 12. We got businesses that they running may be 5, 6 or 7. And the question is should we get out of it or not and that's not an easy question. But usually we'll look at what the prospects are over a longer period of time and some time you’ve got to stay in those accounts and in those classes for a while at a lesser return on order for you to be a player when things to get better. So, that's the way we think about it and so underwriting ROE calculations not calendar year ROE.

Okay. No, I appreciate -- I just was thinking and I realize you guys look at it that way. I guess I was thinking of it in the view of if the underwriting ROE profile is 10 to 12 over a three or four year basis, it ends up mirroring up with the calendar year, no? If you are always writing 10 to 12, over time, the calendar year and the underwriting year should mirror each other, I guess. But I do appreciate the color.

We view as a steady 10 to 12 for all times, so that I can tell you the underwriting ROEs in the O2, O3, O4, O5 years. They were in the 20s plus and that helped us to have mid-teens ROEs for some years when actually the underwriting ROE was in the low teen. So, we look at it both ways but I can tell you from underwriting decision making and viewing the healthiness of our business, we religiously looking at underwriting ROE. We allocate capital to treaties, we allocate capital to a primary business by sector and then we have an expectation of return out of that based on our pricing and then we calculate the ROE on that basis.

And I guess just one additional -- and into the business, you mentioned that a couple of the programs were terminated this quarter. I'm just wondering what programs and how many programs are left and what was going on that's kind of said? Was it an ROE, was it just people? What happened, because that has been one of the growth drivers for the insurance business and a couple of quarters where it's kind of slowed down a little bit? Thanks.

With anything that we do, everything goes to an underwriting review once a year. I don't care this programs or D&O division or E&O division, et cetera. At that point in time, there is an actuarial indication as to, what rates we'll charging, what is the profitability of that book of business and then there is what we will call the rate indication. Then there is a discussion with our partners. We are approached with our program business is a -- we wanted to be a profitable. But also we want our MGUs to be profitable. You don't have a partnership, if one makes money and the other one doesn't and vice-versa. We want all of our MGAs, MGUs to be profitable and we want ourselves to be profitable. And then there is a discussion, this is the market, this is what we believe, we should be charging and sometimes there is disagreements. If the disagreement is large enough and we don't believe we can achieve that partnership going forward that both of us will make money then we'll make the hard decisions and then we decide to part companies and unfortunately it did happened for two of our programs that our rate indications and what we wanted to file and price that business in the marketplace was not in agreement with our partners and they chose to go elsewhere.

Just a little extra color. Those two programs annualized for about 45 million of gross written premium. We keep high nets on that, so apart from a net written premium number, firstly. And secondly, and it is pretty much even in terms of -- they’re both 20 in each. One thing to keep in mind though is that this quarter one of those programs is very heavy in the second quarter. So it was 250% [ph] of the total program. So the loss of that program is going to be more felt in this quarter than the any other quarter for the balance in the year from that program.

What kind of products were these programs?

Fast food was one, prefer not to really get into. But the underlying products themselves are really package policies.

Our next question will come from the line of Jay Gelb from Barclays. Please proceed.

On the M&A front, do you know -- you are very clear about focusing on adding teams of people and renewal rights transactions. And then seemingly third -- way third down the list is acquisitions of businesses. Since -- going back to even the recap of Arch in 2001, I don't think the Company has ever issued shares for acquisitions. Is there any circumstances where you could see that occurring in the future, given the massive phase of M&A in the industry?

Yes. We care a lot about our shares, it's our shareholders value. But if the transaction is large enough and our cash capability even though there is not significant leverage on the balance sheet. So we do have borrowing ability to a certain degree depends on how big the transaction is, we’ll consider issuing shares but that’s the last consideration not the first. We try with all of our decisions not to dilute our common shareholders. We don't like a lot of dilution.

And as a follow-up to that the way -- targeting back to Dinos's comments, I think about this way, that the recruitment of any goodwill or any excess premium you pay relative to what we do in share buybacks. So if we’re looking for three paybacks and share buybacks where we know our operations, we know it's going on versus something that Dinos mentioned with a lot more uncertainty, the three year payback is in upper bound for recruitment of tangible book value hit towards and acquisition. So we’re very mindful of that.

Okay. That's in line with what I would have thought. Mark, with regard to that buyback comment, you are in an enviable position of having a high multiple. The stock today I think is right around 1.5 times book and I think that's starting to bump up against your tipping point on whether Arch does buybacks as opposed to special dividend. Can you give us your perspective on that?

That’s exactly Dinos's comment about us being prudent in how we do it. One side, I’ll be honest with you, it’s more of the stretch to do that unless you could find that profitable bock trades out there.

But based on recent transactions has achieve stock.

Our next question will come from the line of Josh Shanker from Deutsche Bank. Please proceed.

So two questions. First of all, Mike Nannizzi asked a question about mortgage reinsurance versus mortgage primary. And you said in the margin, the reinsurance was more profitable because of the good accident years. If I think about reinsurance in general, companies have been bumping up [indiscernible] commissions. And when I talk to reinsurers, they say, our book, we use a lot of local players, so we get better deals. Clearly, the large companies are going to ARBU out. When it seems that mortgage insurance is so profitable these days, how is mortgage reinsurance so profitable? Why aren't the large players charging to cede that risk?

For the simple reason that when these transactions are taken, then we get, in the mortgage phase you make a transaction in a particular year and you have a stream of revenue that comes over the six years, seven years. At the time that these transactions took place we were providing very valuable capacity to people that they needed capacity. And for that reason I think we had equally negotiating leverage as they did. They needed our capital as much as we needed the business, so that’s a good combination and for that reason we got terms that are not disadvantageous to them, but they are not disadvantageous to us either.

Okay, that makes sense. Number two, Mark went through in detail on the expense ratio for the insurance business. Mortgage insurance has grown dramatically over the past 12 months, but expense ratio really hasn't come down. When should we think that's going to occur and why isn't that proportional with the growth rate of the new insurance written?

The growth is starting to show, but don’t forget also we had an acceleration of expenses because we were building these marketing teams that is out there. We added in the last I don’t five quarters some 60 people, purely in the sales and marketing area. I think now we are on a steady state. So when it comes to that is not going be a significant addition in personnel, in a mortgage business, but as the volume starts going up you're going to start seeing the reduction in the expense ratio.

And one last MI question. How should I think about growth and capital? Do you need dividend money down into Arch Mortgage US in order to fund for your growth?

No, we gave you that number Josh, I think now we're operating at around 10, 9.7 I think is the exact number.

And you can get to 15 if you want.

As I'm getting older I don’t like to be exact because I forget things but -- and we got a lot of room to go to 15:1. So I don’t see us requiring to downstream capital into those operations for a couple of more years until -- I think I use it size 3 shoe to a size 9 foot, you know we still got the opposite, foot is size 3 and the shoes is size 9. We got a long way to grow to fill it.

But if you’re are asking more mechanically there is money in the U.S. holdings company that is there when anyone needed that’s the mechanism through which you'll get it.

Okay. Well thank you for all the answers. And good lack in the back half.

Our next question will come from the line of Ryan Tunis from Credit Suisse. Please proceed.

I guess my first question is probably just for Mark, it's a quick one. Just on the E&S MI, you were talking about the jumbo loans. Is any of that showing up in the insurance in the mortgage NIW yet?

It's very, very tiny. It's really part of the value proposition that helps us. But as of yet it does not have material lines.

And I guess maybe looking out over the next couple years, do you have a view on how much that type of stuff could make up of the total US MI business?

No, it's a real crapshoot of what's going happen in macro economically.

And how these banks that going -- is really hard, the fact that we have that capability though. It opens towards and it allows for a better conversation as to what can we do for these banks beyond that odd are you going be cheaper than somebody else.

Okay. And then I guess for Dinos, just on expenses, I guess, and primary and reinsurance. Just trying to think about a level -- is there may be a level of growth that you think you need in the medium term to support your current expense growth profile? It doesn't seem --.

We never really run the company in any segment with the exception of MI because we think it's a very-very good time to grow on a growth prospect. Now, having said that, you’ve got to match revenue with expense as long as you don’t cut muscle and I will expect one or two points higher expense ratio than normal, as long as I'm not losing underwriting capability because that underwriting capability can produce what it will cost you to maintain for a year, two or three in one quarter. Then we remind you guys that in the 2002 year our reinsurance operations produced on an underlying basis $790 million worth of premium and we had 22 people, right? And you it can come and I can tell you the profit coming out of that was significant. So at the end of the day it's the balance and you got to make those more judgments, but I can tell you if I got good experience underwriters they don’t have to worry about their jobs as long as with us. We’ll find things finds for them to do and if they don’t, we'll have to ask them to play golf until the good market comes.

Got it. Thanks guys.

Our next question will come from the line of Meyer Shields from KBW. Please proceed.

Mark, you mentioned that you can't necessarily infer anything strategic from the shortening of the portfolio duration. So can I put that as more a direct question? It also could reflect something. Is there anything that we should read from the second-quarter change?

No, let me expand on it, a bit. It is a point in time estimate as I've mentioned, but we continue to have the same exact process, where we look at the liability stream and with duration match it and however the assets underlying shareholders equity are shorter. So, there is no fundamental change to the overall philosophy, the overall approach of matching losses of duration, which I think is most important type. So, there's going to be tactical moves that happened from quarter to quarter. So, I wouldn't look for some big theme.

Okay, that's helpful. And then just a quick numbers question. When we look at the other expenses -- and I mean this on a consolidated basis -- it came in at $17.4 million, up almost 17% year over year. Was there anything unusual there or is that a new good run rate?

I would say, you have a slight increase in overall stock related compensation expense. For old dogs like me that are retirements eligible, there is different accounting treatment of a quicker recognition of those kinds of things. And it's a series of bunch of tiny things. So, it's not like an asterix for you if that’s your main driver.

Our next question will come from Brian Meredith from UBS. Please proceed.

A couple questions here for you. First, Mark, when you talked about rate on the portfolio, the minus 0.8%, you said that's net of reinsurance. What does it look like on a gross basis before reinsurance? And I'm wondering the advantages you're getting and how that has looked over the last year or two so we can get a sense.

Yes, it's a little worst. But it's converting -- now it was really the benefit of property CAT really and some other debt that really grows the differential. So, but I can’t get into exact numbers, it's a little bit worst on a gross basis, but that's exactly why you protect yourself with an effective ratio.

Got you. And then the second question, looking at Watford Re, I'm just curious. Obviously, a lot of growth there on a year-over-year basis, it's relatively new. But are we getting to a point in the marketplace where even Watford is going to potentially have to pull back a little bit, given the rate competition out there?

Well, it will depend. If the same underwriting process that we have for everything else we do, the only difference between what Watford will do versus, what Arch will do is we believe that they've ability as they take a little more risk on the investment side to produce a higher return on the investments gets factored in, but they can be -- they’re turning down business tool. So, without having something in front of me, an account to go through is very hard to predict and that's why we never predict volumes because the market can be very fickle, it can churn on a dime either way, you can get much worst quickly and you can get much better quickly depending on what happens Our projection is that -- probably getting worse before it will get better and for that reason, we're very, very careful in our underwriting processes. So, we don't have these kind of feeling that we get too optimistic on the basis that things will change quickly and then we can make it up in the future. We tried to write accounts that in our view will produce an adequate return and that's why you saw a volume gone down a bit.

Right. Is there any business that you perhaps would have kept on Arch's balance sheet last year that now all of a sudden is going to Watford's balance sheet because of what's going on with rates? Are we seeing that?

Yes, there is some of that, yes, absolutely, that's why -- and that was the purpose of us, creating Watford instead of throwing that business totally ours, at least -- we can go to applies that we get participation. We have on investment in it, they keeps us aligned in that and also we can benefit from the -- on sharing some of the course because if you discard the business you have no revenue at all, where if you riding it, you're getting reimburse for the cost of riding it and then potential that you have also the profit, sharing in the back end. So, yes, there is some of that business that otherwise would have been lost by us, but it has gone to Watford, yes.

Brian, Watford has its own management team and they have the ability on yea and nay on contracts but let's move forward in year, it's possible Watford forget Arch and Watford. So, Watford itself may decide to not renew something that they've found in the prior year because of ongoing rates separation or yields nothing realize -- something in that nature. So, it's not just an Arch chances, it's completely on Watford sense in their evaluation.

Our next question will come from the line of Jay Cohen from Bank of America. Please proceed.

Most of my questions were answered. Just one question on the mortgage segment. The accident year loss ratio jumps around quite a bit quarter-to-quarter. It's a relatively new business, I understand that. At some point, should we expect that number to settle down into a more narrow range going forward?

The answer is accident year in mortgage business doesn't make much sense. It's after all the function of the delinquencies and then claims emanating from the delinquencies, until there is claim we can’t put a reserve of body, you can't anticipate performing loans becoming non-performing or having claims M&A from it. So we railed against the accounting proceeds statutory accounting in that business. So started jumping around.

I'll focus most on the delinquencies. It's the better measure than anything else.

Our next question will come from the line of Ian Gutterman from Balyasny. Please proceed.

So I actually was going to ask something similar to Jay, so just to follow that up. Mark, can you just walk through a little bit -- you mentioned it was mostly the reinsurance loss issue that came in lower and it's not like there was some contracts that were reviewed. I guess can you sort of walk through that process? Is that sort of an annual review or was it just you got new information in the quarter and you reflected that?

Ian it's no different than any sector of our business. There was reserve reviews by the business unit actuaries that occur every quarter. And it just happened that those particular treaties had enough information and forward review that it was going to develop more favorably and it was recognized.

It's their reporting from the clients. When they are showing significant improvement you can’t ignore it and they have shown significant improvement.

But just like the PC reinsurance side, it's completely analogous.

Well, that's what I was wondering. Was it reports from the client -- it was a little bit different market.

Report from the clients showing significant improvement.

Got it. So it wasn't that you guys went in and looked at the contracts on your own and decided to lower the roll rate or something like that. It was that incoming information was significantly better and that you had to adjust to that.

Yes, pleasant surprise for both them and us.

And do you get that information on them quarterly or is that once a year thing or?

Quarterly

Got it, okay. And then just on M&A, one of the things that gets speculated upon is the ability for you or some others on the island to help sponsor an inversion of someone who wants to get offshore. A, just is that a meaningful rationale to do a deal that is -- meets your criteria on other metrics, but maybe not as strongly as another deal that was better strategically and so forth? And did it have a singled [ph] to it? And then I have a follow-up on that.

Like I said price and financial is the fourth item, so if the first three meet criteria, we would get into the forth and by the way our view is both in us purchasing something or somebody purchasing us because, unless your my wife who says the house is not for sale, you are going to have the right price, the house is for sale, I’ll sell my house if somebody gives me the right price. So no emotion here. Our view is we’re employed by the shareholders to do the best job for our shareholders and there is nothing more to think about other than that.

Got it. And then specifically just to follow-up on the inversion specifically -- I don't know how closely you guys have followed this. But I guess my understanding is that when Treasury made those changes last year that if a company like Arch were to buy a company in the United States and invert them that depending on how it was structured, there's chance Arch could lose its tax status. Is that your understanding? That essentially inversions are kind of on hold until Treasury clarifies that language?

I have no idea because we haven't studied that and I don't have any more insight to it, it's highly a legal question than a structure question, if you want more, I'll do some research on it and offline we’ll share our thoughts with you. But it hasn't come across my desk as a situation that I have to focus on.

That topic we really just focused on that fact that we recapitalized back in 2001 and all legislation and all proposals really had a grandfather clause. So I know you are asking a forward view but our look and the evaluation of that has been the preservation of what we have.

Yes, I'm asking if you wanted to do a transaction, there's no issue. There was some language I read about -- I can follow-up with Don off-line. But if you were to buy something, it could affect the status possibly, so I didn't know if that was a hang up. That's all I was wondering, but I'll follow up with Don.

It does as part of the mix. Would you think I'll do something stupid for my shareholders?

Of course not, just seeing if I was reading the language right, but you are not familiar we can follow-up offline.

And our final question will come from the line of Kai Pan from Morgan Stanley.

So first question on the underwriting margin going forward. It looks like the last price spot on long-tail casualty primary business, the pricing now below the cost trends. So are we expecting -- so on the reason basis, the underwriting margin will deteriorate. And anything in your power you can alleviate that or control that deterioration?

Yes, the answer is yes to both of them. We always talk about the mix of business, these guys are active cycle managers, whether it's within reinsurance or within insurance and when you see it going negative, you can either drop something your -- attempt to drop some of in front as volume but perhaps, as Dinos talked about earlier the reinsurance market is in a place where we can get attracted terms. And get some benefit on that on net basis. So the insurance group will be looking for that change in mix, frontend and change in reinsurance ameliorate some of that. So, and mix alone could change that guy. So, on the written basis, in a quarter or two from now even with no changes in reinsurance related programs by the cycle management that one could be a plus 2 or plus 2.5.

Okay. On the reinsurance side, and it looks like this quarter, you said actually, the accident year loss ratio X CATs improved a little year over year. It's just because of lower level of losses or anything there?

Well that was the insurance comment. The insurance probably where you control for the large threshold was really the same loss ratio second quarter -- accident quarter, second quarter last year to second quarter this year. The reinsurance group it did go up a bit, but that’s the function of the mix to businesses because we’re not writing the property CAT. And we are near to the levels we used to in the past which has a much lower expected loss ratio.

Okay, that's great. Then last question on the recently proposed IRS rules on Payflex [ph], I just wonder if any comments, what are you seeing about Watford's status on that?

Like I said, I mean we will -- you know Watford is an active insurer. It assumes the tremendous of amount of reinsurance. Their proposed rules are a working progress, so we don’t know the final rules but we will continue to monitor that processes and we have no -- we don’t believe there is problem for us complying with whatever rules they come up, because lets go back to the first thing, Watford is an active insurer that assumes a significant amount of reinsurance and it has significant of reserves.

I'll now like to turn the call back over to Dinos for closing remark.

Well thank you all for and we are looking forward to talking to you next quarter. And it's time for lunch.