Q4 2019 Earnings Call

to be clear

We're an underwriting company first and we will apply increase discipline and accountability across our organization to drive profitability. So this is not just the top line story back on the recent. Most of our major base units in the US experience accelerating rate during the fourth quarter and on average rates were up in the mid-to-high single-digits across the u.s. Segment. I would highlight professional and brake lines as both approaching twenty percent submission growth is also positive story in the fourth quarter submissions were up nearly 20% from the prior-year in our core growth businesses, and then she has continued into twenty-twenty, but that growth rate holding steady through January.

Turning to the international segment what we are clearly disappointed with the continuing impact of prior-year development on the bottom line. We do see encouraging signs in a number of business lines were applying the same fundamental strategy and process that has worked so well in the US to the operations across our international business Grows written premiums and international declined in the fourth quarter off and we're roughly flat for the full year. This result reflects the remedial actions. We have been taking in several business units as well as in refining our risk appetite balancing out our very strong rate increases in several business lines, including property-liability and Marine overall rate increases across International continue to accelerate an average in the mid-teens for the quarter month.

But we were disappointed with our results for the quarter and the full year 2009.

I'm optimistic about our future and our ability to capitalize on opportunities in the market. I will now turn the call over to Jay to discuss our results for the quarter in more detail. Then I will be back to share some thoughts on my first quarter CEO and plans for the future before we open it up for Q&A.

Thanks, Kevin as most of you already know two weeks ago. We pre-announced certain items related to our fourth quarter earnings as a result. I'll Focus my comments today on providing more detail on the reserve actions taken off and other key items impacting our financial results for the quarter in the fourth quarter us gross premiums were up 9% Our growth was driven by positive rate trends and strategic growth initiatives with strength and reliability and specially lines however our net written in modern premium growth during the quarter in the US was muted. This was largely a result of additional reinsurance purchases and a one-time the premium adjustment. The negatively impacted net premiums the adjustment relates to updates to the amount due to certain third-party reinsurers along with estimated loss recoveries and commissions do from ranchers related to initial premium estimates a portion of which relates to 2018 balances notwithstanding the quarterly adjustment which modestly reduce the net retention ratio going forward we wage

net to gross written and earn

M ratios in the 60% range excluding the adjustment earned premiums in our us operations would have been up 8% on the international side are gross premiums were down 10% in the quarter and roughly flat for the Year. This was largely a reflection of planned reductions in certain lines of business as Kevin mentioned in his remarks. We are getting significant rate and certain business lines with International and despite the movement in top-line. We expect a smaller but more profitable book going forward.

Fourth-quarter underwriting Reserve results included Reserve strengthening of 76.5 million or 17.9 points on the loss ratio with Development coming from a national us and runoff segments. We like meeting the industry of experience changes in the Los environment We Believe The Reserve actions be taken during 2019 have captured the changes in the environment that could be seen today.

We conduct Reserve reviews of all ongoing businesses. Each quarter are reserving process has not changed and includes a feedback loop between reserving underwriting claims and reinsurance operations that enhances our ability to react quickly to the findings of the reserve reviews. We booked our reserves to best estimates and we believe that we have reflected the negative trends that have been packaged over the last several quarters much of the recent Reserve development has been a result of new information received relating to claims Trends across various lines of business as well as a claim severity that has been noted by several companies in the industry. We also continue to our review our international business currently and run off which has resulted in additional strengthening.

An international Reserve increases were related to our syndicate.

100 Bermuda Insurance in European business units at Seneca 1200 Reserve increases were primarily in library liability and Marine Lines and totaled twenty one point four million in class in that number are certain large losses and increased attritional losses on a program that was canceled earlier last year.

Bermuda Insurance development was the other large contributor at nineteen point four million and was primarily due to new information on a few casualty claims and recent court settlements that have in our opinion resulted in a need to adjust reserve for these claims. In addition to smaller portion of the movement was the result of adjustments in the professional book on accident years, 2014 and 2017 Reserve development in our European business units was related to a few specific professional lines claims and incur liability losses coming in higher than expected.

In the US Reserve strengthening was primarily related to liability property and professional lines liability development resulted from actual losses coming and greater than expected on accident Years 2013 through 2017. This liability business was related to the monoline casualty cover. We ride in our contract binding business unit and led to development of 24.3 million two things to note much of a claims activity was drunk for the need for this action is in certain contractor's business. We no longer right and during the quarter we brought back in-house the claims Management on this business, which we believe led to an increase in the level of paid in occurred activity that said we will continue to monitor this business closely.

properties

Development was due to an increase on priority or catastrophe losses from 2017 and 2018 events professional lines had modest development related to movements on individual claims offsetting these smaller favorable movements and other liability business and in our Surety business.

Prior year losses also include the conclusion of Argos annual review of runoff reserves which resulted in a $10 Reserve increased primarily related to Asbestos and environmental exposures month. We have commented on the process around a solution for the run-off business on prior calls. This continues to be a work in process.

In addition during the fourth quarter. We reported higher current accident year losses, excluding catastrophes of approximately Thirty million the higher current accident year loss ratio impacted both the bulb and international segments in the US the adjustment related to small movements in a number of units, including public entity professional liability and property and in some cases was specific to certain charge losses the increase in the current accident year in the international operations was driven by increases too large and nutritional losses across most divisions in Seneca 1200 and increases in a casualty in Europe due to a reassessment of the current loss ratio, give an experience on prior years.

All in our current accident year X cat loss ratio was up 2.8.

Points from the prior-year during 2019. We believe that the combination of current rate increases and remedial underwriting actions taken will lead us to Stronger underwriting margins going forward. In other words. We believe a portion of the two point eight point increase has been moderated are reported expense ratio in the quarter was 42.3% This reflected a number of items that impacted both expenses and premiums which drove the ratio higher as I mentioned previously earned premiums were impacted by seated Premium Adjustments or $22 billion for the quarter on the box outside. We had additional costs associated with or reduction in Workforce and allowance for doubtful accounts related to our European business unit and adjustments to underwriting expenses based on certain costs previously allocated to investment functions and trade Capital providers together. These expenses represented over ten million dollars of non-recurring items in the quarter.

The combination of the previously mentioned premium adjustment and expense items negatively impacted our Consolidated expense ratio by approximately four hundred basis points during the quarter in one month basis points for the full year turning to Investments our portfolio continues to perform well with net investment income up 16% during the fourth quarter and thirteen and a half percent for the wage in the court of the portfolio return to positive 1.1% and year-to-date total was 6.9% This compares favorably the 2018 when we were down Point negative or 6% for the year.

During the 4th.

Or an end to the new year. We have moderately reduced our exposure to risk assets this change in strategy reflects our desire to simplify our Investment Portfolio and allows us to deploy more of our cap to the underwriting business at a time. When we think that the opportunity opportunity is as good as it has been in years. This shift in approach could be a slight headwind overall investment in them and returns going forward depending on conditions in the investment markets.

I will now turn the call back to Kevin to share some thoughts on our business going forward.

Thanks, Jay over the past few months. I've taken time to assess our goal as a whole and with the executive team and our board have been conducting a broad review of all of our operations off the sharp focus on overall profitability and positioning our goal for the future. The last few months have included a great deal of activity at Argo and I want to recognize and thank everyone in the organization for the 5G and speed with which they have adapted to the change in leadership. Our employees have been resilient through the transition while maintaining and expanding key relationships with our customers and producers.

as a specialty under

We provide solutions to customers that value our underwriting claims and risk management expertise. Generally, these coverages are not afforded by Middle Market and small commercial carriers. This provides an opportunity for better returns for specialty insurers. And for our go we have built a solid foundation as a US Centric specialty insurer with deep expertise and a reputation for both service and value we are and will continue to focus on us domicile risks this represents 80% of our premium today regardless of it being under written in the US or national markets and it's where we expect to find most of our opportunities going forward. We know this Market that is our strength and I'll continue to be our focus. Our current business is still have plenty of runway for growth. There are also many segments of the market that we don't yet serve

Both of those factors represent untapped growth potential for the future. We're studying and we'll consider entering certain markets such as Healthcare ocean marine and Technology to name a few. However, we will approach the new markets and the products with discipline and a focus purely on returns. We must attract the right talent and have conviction that we can generate an adequate return in a three to five-year time. This is the same urgency and results-oriented focus that has led to the success of our us segment in the US. We have constantly been evaluating returns and opportunity in all business units month since 2012 our us operations of exited or rationalized approximately $650 in premium while nearly doubling in size and keeping overall Staffing levels flat during same. This focused approach has allowed our strongest us business units to receive additional resources for growth, which has resulted in 11% compound growth rate since 2013.

And helped us to achieve.

91 combined ratio over the same. Those are very compelling numbers and I'm optimistic. We can apply the same principles across the organization.

A primary objective is to offer competitive products and services for our customers and earn an adequate return on capital for shareholders. We're not there today and it will take some time to achieve that goal. But Thursday, I believe that we have the foundation in place and a plan to improve our returns across the group over time. I'll have more to say about this throughout the year understanding we need to deliver near and long-term improvements for 2020. We anticipated combined ratio of between 96 and 98%

Our Enterprise today is especially focused free ensure and insure underwriting and claims. Excellent. Excellent the core of our DNA and will continue to be what sets us apart as an organization that foundation will not change under my leadership. As I mentioned. We have many attractive businesses today that have been achieving returns in excess of our Target. Unfortunately, we also have businesses that have not performed at an acceptable level. There's far too much capital and too many resources tied up in these underperforming businesses and we will execute with timely decision-making to repair them or reduce the size of underperforming or non-core businesses. Some of this is already underway going forward. I expect the organization to be more focused and efficient every decision large or small that we make will have our financial objectives in view.

To achieve it we will.

Buy a theme of simplified reduce and eliminate across all operations. We have already taken Swift action in a short period of time to adopt these principles over the last few months. We have exited underwriting operations in Asia and most of the whole business within Syndicate 1200. We've discontinued the regional underwriting operations in Latin America. We've sold corporate aircraft and put certain corporate real estate up for sale and canceled marketing and sponsorship contracts.

We also announced an agreement to sell tried in public Risk Solutions Trident is a good business for us. It's a Better Business for our partner and together provides better growth opportunities for both of us off. We estimate that these actions as well as other expense related decisions in the last few months will reduce our non underwriting related expenses by approximately 10% or Twenty million dollars off to clarify. It is not underwriting claims or the operations supporting both of them that were dressing there. And this is just the first step in the journey to achieve better returns. It will help simplify organization reduce non-core businesses that were detracting from our overall performance and eliminate some expenses from our organization.

we've also begun to

A plan to deploy our Capital more effectively as Jay mentioned during the quarter. We reduced our exposure to equities and high-yield securities on our Investment Portfolio. We will shift our strategy to simplify Life Investment Portfolio mix which will reduce investment expenses and resources will also allow us to deploy incremental Capital to our underwriting activities where we see the best returns and an opportunity to grow.

We'll have more actions to report on and future calls as we continue our review of our operations, but this is in no way means that we are not focused on growth. I believe argue is a growth company took significant opportunity to pursue growth primarily in US markets. We operate in a competitive environment. And as I know you appreciate what we will continue to report tell you what we have accomplished and what our data is telling us rather than broadcast our strategies.

So it'll be identified savings will be invested back into the business to enable our growth and make us more efficient organization. That's the best way we can drive growth and deliver an appropriate return home equity for our shareholders over the long term.

Greater we can now open the line for questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at anytime your question has been addressed and you would like to withdraw your question, please press * then two.

The first question is from Greg Peters from Raymond James, please go ahead good morning. A lot of comments to unpack off. I'm going to focus on three areas your top line or combined ratio guidance and investment income.

Lots of moving pieces around your top-line you specifically called out businesses that are being discontinued or are discontinued in them. Then at the same time. We're hearing of growth opportunities. Can you give us an idea of what you expect the top line to look at look like for the full year 20 in the context of how it look for the full year 2019.

Yeah, so let me just address the first part of that question first, which is that we did get out of some businesses. They tend the ones we've exited so far have been small Trident as I spoken to some people about earlier has been is a business that while we have a strong franchise there. We have grown no opportunities when it's operating as an MGA that we didn't have and we have a new partner that has new opportunities for us. So the overall growth

For the top line is yeah, I think Greg when you factor in the large business units in the US like professional liability Surety construction. I think we expect the Top Line will continue to show Positive Growth my comment about the international business the smaller but more profitable business office, you know, that's not a dramatic reduction in that business a lot of the actions that you've seen that we've taken the right size that business are already flowing through the Top Line in twenty years. So I would expect further growth in the US and I would expect kind of a flat outcome internationally.

Affected it's excellent. And then on the second segment of questions or question would be around the combined ratio. So you said about a hundred basis points the non-recurring charges accounted for about a hundred basis points in your Consolidated expense ratio for the full year 2019. So should I infer from those comments that off your expense ratio on a Consolidated basis improved by approximately 30 basis points or one you reported 38.5 and so then take away the whole basis points at 37. 5 vs 37.8 last year and how should I think about that in the context of all these moving non-recurring charges for $20?

Thanks for that.

That would be the math and that would be the outcome of that math. And I think it's not an unusual. I sorry. I don't think it's not an unreasonable extrapolation to where we expect that particular ratio to be home and in 2020, if if I saw trying to answer your question directly. Yeah. Sure. I did. Yeah, I guess it's 37 years you're saying 37-5, but I would is it is it well, all right. I'll leave it at that. Is there a in your 96 to 98? Is there a cat load assumption that you're building in there?

There is it's not that.

Actually different than it's been in the last couple of years. Okay. So just use an average of the last three or four years. Yeah. I mean, yes, you know.

Last year was I think some of the actions that we took post Seventeen and eighteen showed up in in nineteen? Of course, it was the lower-wage Petit industry-wide, but I think if you look back at the at the average of some of those years certainly not Seventeen, I wouldn't I wouldn't extrapolate from that but probably the average of 18 and 19 would be a reasonable wage. All right, great. And now the final piece on the investment income. So you're moving out of some of the areas and sort of repositioning the portfolio some of the areas that you're pulling out of had positive Returns on investment income. So I guess what I'm looking for is some perspective on what you think investment in life is going to look like for the full year 20 because if you're pulling out of some areas, it had a positive effect on 2019 that might suggest a lower investment income result for 2020.

It might that.

Is a really hard one to predict, I think yesterday as I was watching markets move and saw the the 10-year back down. I think it was back down below 1:30 or something. It was 140, but it's telling me it makes it very difficult to predict, but bear in mind that some of the shift might actually have that all things being equal and all things aren't equal some of the shift were. We, you know reduce some risk assets sold some equities, that would be reinvested in income-producing. Those equities would have been showing up as you know through the realized gains and losses that said overall the rate environment is still extremely anemic, so I don't see a lot of growth and investment income in in in 20 in in 2020. Have a number of other questions, but I'm going to wreak you. Thank you.

again, if you

Please press * then 1 the next question is from Jeff Schmitt from William Blair Company, please go ahead.

Hi, good morning question on the international book. I received a ton of change going on there. But I guess this broadly do you feel the issues there or really more related to limit than price and can you maybe just kind of broadly discuss your limit profile there and if there's no changes that you're making to that yeah, good morning Jeff. Thanks, it's Kevin. We we have really seven or eight different segments within International and the only place that the limit profiles were large were in the Bermuda Insurance book and in some of the property businesses and all of those have been home like many in the market. We've been reducing our exposures on the property on PML basis on a on the excess casualty and on the professional lines on a wage

Straight up limit basis. We've reduced the offerings.

Size as well as what the enforce totals are as well as getting rate. So there's a lot of re underwriting going on where the claims have come out out of the excess casualty Market those were off limits, but a lot of the stuff that came out of Europe or twelve hundred were smaller accounts that were just the volume situation Andre underwriting. So it's a bit of everything across the board.

Okay, okay and then a follow-up on expenses and it seems like the one-time items, you know the downsizing and software issue related to the international. I guess it was surprised to see the US expense ratio flat after it drops how much an eighteen, you know a lot of discussion of the changes that you're going to make sure if they'd been put on hold or should we expect to see that to continue to clining on twenty-twenty. Yeah. So I had a discussion with the board over the summer about you know, what we were doing on the expense ratio while I was still running the US and I was happy where it was because the returns we had a good and I wanted to keep investing in the technology platforms for the business and in terms of the resources that were available to hire in for some of our growth businesses and some leadership positions.

so I'm

Fine with that where it is. Ugh, it's the areas that were not performing well in that we want to make sure we really address and areas where we have duplication some of those still do exist in the US were a mosaic of Acquisitions and sometimes they haven't been completely integrated. It's more acute outside the US than it is inside, but we can take some of the opportunities to use those learnings across the organization the other the only other thing I would add is is as you think about the business a couple of things that have been influencing that in the last eighteen to twenty-four months strong growth in the sure the unit and perhaps a surprise from where we were a couple of years ago would be good for a and in Rockwood and those two business units have just by nature of their design a higher expense ratio. So all things being equal that you know, yep.

you get more margin, but you have a little bit higher, uh

expense ratio

got it. Okay. Thank you.

Next question is a follow-up question from Greg Peters from Raymond James, please go ahead.

Great. So, let's Circle back on the reserve charges and your commentary about some of the runoff. Can you give us an idea of what the outstanding claim inventory looks like on in the areas where you've you discontinued businesses, especially on the international side just to give us a sense that we're making progress and there is positive light at the end of the tunnel.

Yeah, Craig, I don't have that. I don't have that claim inventory on those businesses at my fingertips, but we've been out of businesses long enough and when we saw the The increased information increased reported claims really started in the second half of ugh, well in the in the South Quarter of 18 and in 219, which which led us in during eighteen and early nineteen to cancel many of those programs, so I don't think I don't have the I don't have the the correct account handy, but but I think things have leveled off and I'm not expecting that. I'm not expecting a large increase in Flames there.

I guess.

What I'm let's come out at a different way. And I I appreciate the fact that you're not going to have some some of the detail in front of you. You said the reserve process really hasn't changed and so in the three the last three quarters, you've taken Reserve charges for some current business and also from some business that's been discontinued. What point do you look at the fact that you're not staying in front of the the the reserve development and say we got to change the process so we get to that point where we no longer have this adverse prior-year development or prior current year development.

Well, when I say that the process is hasn't changed. I mean the sort of fundamentally, you know, the the structure of the reviews that we do and who's involved and and and so on and so forth as long as the Actuarial methods that we use that said a lot of lot some of what you see in the fourth quarter is an extrapolation of that data is that we might have thought in the second quarter back was not a permanent change in pattern and so for example in in Syndicate 1200 that number is larger in part because we can be extrapolated and assume that the that the the the tail if you will on certain of those businesses is in fact longer than we thought it was going to be good news is some of them that's mostly business that we've that we've re under written, you know some time ago, but but that gets reflected into into the number which then increases the size of the Dead.

So I don't want to suggest that we're not.

Changing the approach. We're just not changing the processes and the methodologies the other thing I would say and you know, perhaps I'm as frustrated as anybody and that is we really have been getting additional information. Each quarter that has surprised us Syndicate 1200 is perhaps the best example of that when we looked at the data in the first quarter of this year, we were sort of spot on where we thought we would be and that's gotten incrementally worse That's Not Unusual in the perhaps is unusual, but it's not any consistent with what other people in the office in London have been experiencing can't really explain it in in in great detail as to why it would be happening that way but that is what we've seen and so Monday we're we're reacting live as the information comes in and you know on certain circumstances for example where we took action in the US wage.

Yeah, we think that part of that is.

I'm going to use the term self-inflicted, but it but meaning it was our own now. We got our hands on the claims in that in that contract book deciding that we need to put up reserves. Perhaps a bit more robustly and perhaps pay some claims. So they're paid was increased as well that led us to react, you know in that in that particular business. So we're we're I think we're I think we're reacting in a timely fashion to the information as we receive it.

Two other questions one is going to be the US operations and then I'll I'll just close out with question on the perks and that you know ongoing review page first on the operations, you know, you know as we look through the press release and the announcement and some of your shareholders and they'd talk with some of your shareholders, you know, there was some concern with you know, they're the the the higher accent are combined ratio on a year-over-year basis, you know going from 90 to 95.4. You know, when I think about son jumps like that. I have a tendency to revert back to just the full-year number which is only ninety basis points higher. How should we be thinking about Thursday that that, you know calendar the the current accident year combined ratio, especially in light of what happened in the in the fourth quarter.

well

I think we already addressed the uh, I hope we did. I'm happy to talk about it again, but I think we addressed the expense side of the equation. So right if I go back to the if I go back to the current accident in a cat loss ratio, and as I as I said in my remarks up two point eight points over for the year, and I think that's really the the way to look at it cuz there's enough moving Parts in any given quarter of that. You know, it's it's hard to extrapolate that quarter but we think that and then and then that I would refer back to Kevin Page comments almost 20% in some really big businesses for us in terms of rate increase and then a lot of a lot of underwriting action that's been ongoing not just in the last 90 days before that last 18 months. So we think a portion of that 2.8 will have been recovered if you will or will have been moderated by birth

rating and by-and-by underwriting

So put those two together you kind of are back to a I think answering your question of of where the current accident here. Combined ratio should be I don't think you should take to 4 nor do I think it should take 2019 as the starting point for 2020 on the current accident. You're not cat lost Richard got it. Final question for you should be you know, the ongoing review of any perks compensation et cetera. I believe the money involved. Obviously, you're not going to announce something today. But maybe you can give us a sense of how that process is evolving are we, you know closer to the Finish or you know, any any any comments on that would be appreciated.

Yeah, it's the investigations ongoing and we are fully cooperating and that's all I can say at this point. I mean are we closer? I finished yes closer than we were six months ago. But you know the time frame is not ours to decide.

We have a good violin.

Sorry, I was just going to say Greg. We will we will be filing our proxy in the next couple of weeks. And I think you'll be able to you'll be able to gather some additional information. I would I would think from them.

Okay fair enough. Thank thank you for your answers.

Thanks, Greg.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Kevin renberg for any closing remarks.

Thank you. Like to thank everybody participated on the call. Those that listed later those that were asking questions and to all our shareholders employees customers life partners and producers for your continued support and ideas. So we'll look forward to talk to you on the next call. Thanks.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.

Thursday Thursday

Dead dead dead.