Q1 2020 Earnings Call
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Good morning, welcome to the Argo group 2021st quarter Earnings Conference call. All participants will be no listen only mode should you need assistance. Please no copper specialists are pressing the star key followed by zero after todays.
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Please note. This event is being recorded I would now like to turn the conference over to Brett Shirreffs head of Investor Relations. Please go ahead.
Thank you and good morning.
Welcome to Argo group's conference call for the first quarter up 2020.
After the market close last night, we issued a press release on our earnings which is available on the Investor section of our website at Www Dot Argo limited Dot com.
Presenting on today's call is Kevin Rehnberg, Chief Executive Officer, and Jay Bullock, Chief Financial Officer.
As the operator mentioned this call is being recorded.
As a result of this conference call Argo management may make comments that reflect their intentions beliefs and expectations for the future.
Such forward looking statements are qualified by the inherent risks and uncertainties surrounding future expectations generally and may materially differ from actual future results involved in any one or more of such statements.
Argo group undertakes no obligation to publicly update forward looking statements as a result of events or developments subsequent to this call.
For a more detailed discussion of such risks and uncertainties. Please see our groups filings with the FCC.
I'll now turn the call over to Kevin Rehnberg, Chief Executive Officer of Argo Group.
Good morning, Thank you for the introduction Brett welcome everyone on the call I'd like to begin with a few words on the current global health and economic situation.
<unk> 19 pandemic has affected all of us either directly or indirectly, but like to express my appreciation to my Arqule colleagues across the globe, who have worked diligently throughout this period largely on a remote basis.
It's not an easy but you have continued to serve our customers and producers with the consistent engage service level that they expect I'm optimistic that we will emerge from this period isn't even more resilient and dynamic organization.
Pandemic has impacted our business, but I believe that Argo isn't a solid position to handle the effects, both the asset and liability side of our balance sheet.
We're obviously watching the developments closely and we'll adapt our businesses accordingly.
Situation has revealed that we are flexible organization.
And our focus on risk management has prepared us for external shocks.
Oh, that's more to say about this later, but first let me discuss some operating highlights from the first quarter and our views on the current environment.
Revenue perspective, our business was not impacted by the pandemic during the first quarter.
Touch on the claims impact of covert 19 in a moment.
Gross premium was up almost 9% for the group with a 16% growth in the U.S. and roughly flat in international.
But again to the U.S. results first we achieved accelerating growth in the period with strong new and renewal business production.
Racing continues to be itself and then was up again mid single digits on average during the first quarter.
Property and professional lines were standouts.
Rate increases in the mid teens, but the momentum is broad based [noise].
Across almost all areas of the U.S. business.
Additionally, certain areas are seeing tightening of terms and conditions or higher and shirt retentions all of which should benefit our underwriting results going forward.
Submission growth in the U.S. was strong during the quarter at around 20%.
Roughly the same level of growth we saw during the fourth quarter of 2019.
As the effects of the pandemic started to take hold in April we have seen the drop off in submission flow, but it's still positive.
Year over year, However, our renewal business has remained strong as well.
I've seen a mix of results so far with some businesses able to maintain growth momentum.
Overall gross premium in the U.S. was up modestly year over year for the month of April assigned that our customers continue to value Argo is a meaningful partner in their business.
The impact over the coming months will be based on economic activity and we will watch closely and react accordingly.
Total I'm pleased with our U.S. results in the quarter, we're excited about the market opportunities in the U.S. and the team we havent place to move us forward.
Turning to international.
We continue to focus on improving profitability of the book and selectively focus our resources on areas, where we believe there our long term opportunities generate an attractive underwriting margin.
As I spoke about last quarter. This is a uniform strategy across Argo underwriting profit is our priority.
Gross written premium and international was roughly flat in the first quarter.
With growth in liability specialty offsetting a decline in property.
GAAP wine results were impacted by our decision last year.
Yes, it's certain classes and our Lloyd's insurance business.
The first quarter showed a continuation of pricing momentum near double digits.
With areas of property liability and marine experiencing rate increases around 10%.
And in some cases much higher than that.
So far in the month of April we have seen some negative pressure on premium growth, but a continuation of positive pricing trends.
In addition to rates, we've also adjusted our risk tolerance and some classes, including reduced line sizes for example.
Bermuda Casualty book, which is less than 100 million of gross premium.
We have reduced our Max gross lines size from 50 million to 25 million, while maintaining our net retention at below 25%.
Given the positive rate increases our Bermuda casualty team is achieving this action is only expected impact the topline by roughly 10 million for the year. It's just one example, but we expect actions like this along with better rates will lead to less volatility and stronger margins going forward.
Our international business did have almost 20 million catastrophe losses in the quarter, which was primarily related to the pandemic.
Excluding cobot 19 charges there were minimal catastrophes in loss results were quite good and inline with our expectation in the quarter.
Reserved development for both our U.S. and international segments was modest in the quarter, you're always going to have a mix of positive and negative movements in our reserves, but I'm encouraged by this overall result.
Additionally, we employed and internationally recognized third party actuarial firm to perform an in depth review of our reserves across the company as of yearend 2019.
I'm happy to share that their central estimate was in line with our carried reserve total at December 30, Onest 2019.
This is not an indication of any future performance, but it does give me more confidence following the actions we took last year.
Our group underwriting results produced a combined ratio of one or 3.2% for the quarter.
Not a number we're satisfied with.
It was significantly impacted by covert 19.
Excluding the charges related to the pandemic, our combined ratio was squarely within our prior stated objective of 96% to 98%.
For the full year and our adjusted operating.
Our or we would have been 8%.
The pandemic has and will continue to impact industry results as well as ours some of our businesses like construction and surety have already started to feel the effects of the drop off in demand.
The severity and duration of any economic slowdown will influence the immediate and long term impact on the industry's premium growth.
I believe Argo as a specialty commercial insurance underwriter.
Well prepared to operate in this uncertain environment <unk> diversified product base strong operational capabilities and talented staff.
We have the teams nimbleness systems and tools to respond to market opportunities. Additionally, fortunate to be operating in a strong pricing environment that is not slowing.
It's too early to share a full understanding of power business and performance will ultimately be impacted by the pandemic.
Most immediate negative effects will be on our investment income net written premiums.
Well that's clear how the current situation will impact overall loss results across our book of business.
Regardless, we remain focused on controlling the things we can control that primarily means improving our combined ratio.
Overall, we made some positive strides as an organization during the quarter and remain focused on our long term strategy and delivering value for stakeholders.
We continue to focus on applying a theme of simplify reducing eliminate across our operations, while selectively investing for the future, adding an improving operations.
I'll now turn the call over to Jay for some additional detail on the financials.
Thanks, Kevin.
As most of you already know last week, we preannounced certain items related to our first quarter earnings as a result, I'll I'll focus my comments today on providing more detail on less on the losses specific to the cobot 19 pandemic and a few other key items impacting our financial results for the quarter.
Despite the impact of the unusual losses in the quarter Argo produced an operating profit of 12.6 million were 36 cents per diluted share not a bad result, given the circumstances.
In the first quarter as Kevin mentioned U.S. gross premiums were up 16% our growth was driven by a continuation of positive rate trends and stir treat strategic growth initiatives. The strongest growth was on our professional liability and construction business units net written and earned premium growth during the quarter in the U.S. came in at eight and a half and tenant a half percent.
Respectively for 2020, we expect net to gross written premium ratios in the U.S. to being below 60% range.
On the international side, our gross premiums year over year were approximately flat in the first quarter of 20, Twond as Kevin mentioned rates were up across all lines in international and we saw pockets of growth, but maximizing under underwriting profitability remains our focus.
In some business units, such as our Bermuda insurance operation positive pricing trends accelerated in the first quarter.
We will continue to push for rate increases where the market will allow.
As we disclosed last week, the first quarter included expected losses stemming from the cobot, 19, pandemic, which impacted our overall underwriting profitability.
For the quarter.
For the quarter, the combined ratio was 103.2% compared to 94.7% for the 2019 first quarter year over year, increasing the combined ratio was primarily due to a higher loss ratio that was driven by our catastrophe losses of 29 million, including approximately 26 million related to the pandemic.
I would highlight that reserve development in the quarter was essentially flat much as it was in the prior year.
That's a welcome change on the last few quarters of 29 team.
We do our own assessment of reserves at the end of every quarter.
These estimates are also reviewed by our auditors who has an independent view.
Additionally, as Kevin mentioned, there was a group wide review completed by an independent third party not our auditor as of year right that third party works output was consistent with our carried reserves.
The charges in the quarter related to covert 19 reflect our estimated losses through March 30 Onest.
Clearly this is ongoing and it will take time to determine the ultimate losses associated with the pandemic. We do expect some additional losses in subsequent quarters, we have addressed known and expected exposures where coverages explicit.
The magnitude of additional losses will primarily depend on how long periods of locked down last and if future events are postponed or canceled.
Of the charges, we recorded for the pandemic most of the dollars specifically 18.7 million related to the pandemic were in our international segment.
These losses were roughly split between our contingency book written out of our written out of large that provides about cancellation coverage and property exposures, where we have some affirmative business interruption cover for communicable diseases.
In the U.S. the charge in the quarter reflects our expectation for additional claims related expenses and limited areas, where affirmative coverage exists.
Our direct.
Pandemic exposure is primarily in our property and contract binding units in the U.S.
More than half of our property policies provide any business interruption coverage at all.
And the vast majority of these have specific virus exclusions.
Where we do have affirmative business interruption coverage for communicable disease. There are specific limits that are separate and distinct from a lemon provided by the physical properties themselves, which also limits our potential exposure.
In total the vast majority of our business does not have affirmed of coverage for communicable diseases.
However, where we do have affirmative cover we have assess each policy individually and put up a specific provision commensurate with expected loss.
There will be indirect impacts of the pandemic as well for example reduced expenses claims activity tends to correlate with risk exposures and we believe risk exposures should generally be lower under our current living and working conditions.
We will have more to say on this in coming quarters.
Our loss ratio of 64.6 was up eight points from the prior year largely due to the higher catastrophe in pandemic losses that I already mentioned the current accident year ex cat loss ratio increased by 1.4 points year over year.
This was due to an increase in our U.S. segment as some of the current and prior year actions during 2019 impacted our current view of losses.
Additionally, we had a single large loss in the U.S. that includes the current accident year ex cat loss ratio by 30 basis points.
I would note that while the current accident year ex cat loss ratio in the U.S. was up from the first quarter of 2019 to the first quarter of 2020% to 58.4% we reported in the quarter was better than the 59% we reported for the full year 2019. We believe this is the best way to think about the underlying margin dynamic.
And our U.S. book and are in our book, particularly in the U.S.
Our reported expense ratio in the quarter was 38.6%, which was up 50 basis points from the prior year in the U.S. the expense ratio for the 2021st quarter was 31.8% and improvement of 2.6 points compared with 2019 first quarter.
The improvement in the expense ratio was driven by earned premium growing in excess of our expense base as well as additional ceding commission and some shifts in business mix.
The international expense ratio for tenant for the 2021st quarter was up substantially that 45.6%.
This increase from the prior year level was due to a couple of factors.
First.
We are supporting slightly more of the capital in our Lloyd's business in 2020 and with this we assume a higher share of the expense base.
In other words expenses allocated according to the level of capital provided and as we provided more capital we retained more expense.
These expenses are recognized from the beginning but it will take a few quarters for the higher earned premium base to catch up.
Second we had some nonrecurring expenses related to a reduction in personnel on the quarter.
And finally, we chose not to renew.
A major inwards reinsurance contract that was written on that basis.
We are aggressively focused on getting to a more sustainable expense ratio in the international segment, but we expect it will remain about 40% in 2020 as we continue to work to simplify our platform.
Turning to investments our net investment income was 35.5 million in the quarter.
Nearly 5% from the prior year quarter.
Financial markets experienced significant volatility driven by global response to the spread of the pandemic. The S&P was down 20% in the quarter and credit spreads were significantly wider in both investment grade and non investment grade fixed income markets. We all know this as a result, our portfolio was down 2.5% overall in the first quarter.
Fortunately we ended the quarter, we entered the quarter with cash balances high after reducing risk assets in the fourth quarter as stated on our last call. Our de risking efforts helped cushion the market's impact on the portfolio in March.
Alternatives were reported up two and a half noise in the quarter and included our investment and included in our investment income totaled.
I would note that our private equity fund performance.
Is reported on a quarterly by hedge funds are reported on a monthly whack.
We have provided additional disclosure in the tables.
In the first quarter press release.
On balances in each of these allocations.
Based on market performance, we expect some negative marks on these holdings. When we report second quarter results. This has the potential to have a measurable negative impact on our reported and investment income in that period.
We've got a solid recovery in the portfolio during April and have started by.
Additionally, we will record again in the second quarter related to the closing of our previously announced sale of Trident.
Combination of investment portfolio recovery and the sale Trident has already helped us recover approximately half of the decline in book value, we experienced during the quarter.
Operator that concludes our prepared remarks, and we're now ready to take questions.
We will now begin the question and answer session, who asked a question May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
At this time, a pause momentarily to assemble the roster.
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The first question comes from Greg Peters Raymond James.
Good morning to Tom.
First focus on your disclosures around coal that.
I was listening to your comments and I think you said in the U.S. business the vast majority.
Interruption business interruption had a pandemic exclusion, but I don't want to put words in your mouth and I assume that's the case.
In case for.
International but can you confirm that and then can you talk about how.
How event cancellation surety business interruption losses might involve for you guys over the course the next several months.
Oh, yes, good morning, Greg It's Kevin.
Let's start with the first part of your question.
Yeah, we did say that the.
Well there is some specific grant of business interruption covers the vast majority of that coverage does have.
Virus exclusions on it.
In international a lot of the property coverage we have is.
On to shared and layered programs so that the I cover on that tends not to have those exclusions.
But we don't have as much of it and it can each instance, we specifically looked at what the exposures were and made.
Appropriate adjustments based on what those exposure specifically were.
Relative to like a small to SMB type business, we've got very little of that and there is some coverage for it but its.
Such a small exposure.
You know it falls into the category of there.
It's some coverage and in some places is excluded but it's like I said very very small exposure shifting gears over to the.
Surety question you had can you repeat that part of it it was surety, yes, Kevin I'm just you know as we think about as we think about how I know we realize there's a lot of unknown variables going on just curious how you think.
You know the second third fourth quarters might be affected by business interruption claims event cancellation claims surety Alain yes, and im not asking you to identify what the cat loss numbers I'm, just trying to get a sense of the cadence of how these things will evolve within the company over the next several.
Yes.
Yeah, Thanks for the clarification.
So with respect to event cancellation by the end of March we had a really good idea. There was a lot of things that were had been announced that they were either.
Postponed or canceled with many being canceled so in our event cancellation book, which is underwritten out of the syndicate.
In the international operations, the exposures were known and as those play out in terms of how the ultimately settle out there will be some mix of.
Results in that given that there were only two weeks.
In the quarter for surety there weren't any.
Any any losses that came in early on but there the ongoing effects of the economy will obviously make that business.
That's different than it was in previous quarters, right, but trying to evaluate that is difficult at this point.
From a property standpoint, I think we've seen most of the.
Claims come through where we do there were specific coverage and.
There there will obviously be more claims coming forward, but.
We expect the magnitude of that to be lower than it was in this quarter.
Okay. Thanks, Kevin.
Kevin if I add just on on the shortage side Bob.
Yes.
We've talked before about.
Surety and the fact that we underwrite some energy business there that's less than 17% of the overall surety portfolio.
And it's regularly stress tested and as you've seen oil is back in the mid 20 range. So so we've we've we've been through periods like that before and it's been it's like I said less than less than 17% of the portfolio. The other thing that I would notice.
On the and the surety business most of our surety is commercial surety and a lot of the businesses that are associated with that would be essential businesses. So I'm, not saying that it won't be impacted but but those are.
Actors that but we think about when we're thinking about surety business.
Excellent clarification.
And in if you can just follow up you you mentioned that you're seeing just on new business you're seeing.
Some pressure and construction surety when I think about the reporting segments. The reporting lines that you guys have.
And your income statement B b it in the U.S. or an international.
Which areas do you think we'll see the most downward premium pressure from this catastrophic level, one employment and whats happened to the economy's here and elsewhere.
Yeah.
Kevin again, that's a good question Greg.
In the U.S. side.
And this applies to the company broadly part of the reason that.
Being a specialty company is helpful. In times like this and other times is that you have a real broad spread of risk and.
By industry classes and geographies. So some of the areas, where you'd expect unemployment to have an impact our with say payroll related.
Businesses, we're Comping, an example, or the type of work comp. We write is associated with essential businesses. So while we're going to see some impact it's not going to be the same. It's also relatively small portion of what we do as a group I'm just using it as an example, as I mentioned in in April.
We were.
Up 5.6%.
GWP in the U.S. the drivers of growth will not necessarily be what they were.
In previous years right does that happens all the time, our with 15 discrete businesses in that segment, there's a shift from time to time so.
We're seeing opportunities where the market is contracting and we're also seeing premium growth through not only this increase in year over year submissions, but through some great.
Internationally, it's a different story right because that's a lot of that is driven by.
Well, some larger accounts and things that are coming through.
The various countries in some of those were affected.
In Europe before the U.S. business was effective so you know that business.
Has been affected more from topline standpoint in terms of either you know, where we were last year or what we may have expected, but the rates are still strong I think opportunities are there. So I'd look at the impact initially to be more on the international side than directly in the west side.
But again I'm not going to try to figure out how that may play out.
Two quarters.
Got it.
For the color.
One other important question I guess to ask at this juncture considering the need unprecedented times brand would be you know some comments around the company's capital position.
Liquidity of the company, how you sit with the rating agency ratios et cetera.
Jay you want to provide haven't color here.
Yes sure.
So.
From a liquidity standpoint, I think as we mentioned we had as I'd mentioned in my remarks, we had moved to reducing risk assets at the end of the year that was designed to put capital back and they.
Bob.
Into some of our underwriting businesses.
We continue that in the first quarter and you'll see.
That our cash and short term.
Could it is is quite high.
It was hired into the air and it remains high after the first quarter.
The capital standpoint that that first quarter.
It reminds me a little bit.
The Unfortunately, maybe it was March of 2009, when financials were published perhaps at the bottom of cycle in March 30, Onest was pretty close to the bottom motorcycle and as I said, we've recovered quite a bit of capital.
From that point as have as have most companies I would I would presume and so.
I think everybody lost capital in that from.
From the market conditions, we feel like our capital position remains strong.
And then the question becomes the permanence if you will.
Of the dislocation how long does it last and and what does the recovery worldwide. So we have.
Lots of alternatives as well.
If we if we needed to strengthen our capital base, but at this moment you know we feel like our capital position is strong.
Got it thank you for the answers.
The next question comes from Mark Carletti JMP. Please go ahead.
Hey, guys good morning.
Just wanted to follow on actually Gregs question, there kind of the next step on capital in kind of asking a little different way, but kind of capital priorities here and kind of trying to balance you know everything going on in the environment. So yes, there could be some reduced exposure is pricing good a lot of change.
You know again.
So a stock that's trading at 60 cents on on the dollar and and that's pretty easy math in terms of.
Book value accretion, so just help us with maybe to help us gauge to what extent there may or may not be excess capital in the business and then to the extent there is.
How you view or assess kind of underwriting opportunities versus.
Buying back stock at the upstream valuations.
Kevin won our first part of it and then and then why don't you touch on their underwriting opportunities. Okay, Alright, I Yeah. I appreciate the question, but I just given the given the.
I would say given the economic and political environment that we're at right now.
The the repatriation of cash.
Capital through share buybacks as.
Probably not.
A high priority for any company right now.
And that said we came into this year very excited about the underwriting opportunity and sort of our Kevin handle that but I think that remains our top priority.
Yeah. Thanks, Jay for that that is a true statement and remember that the.
Vast majority of what we have.
Certainly in the U.S. business, where the best opportunities are.
He is in the casualty business right from a both policy count premium standpoint so.
Those opportunities exist. There are people that are retreating for a variety of reasons summer capital related somar results related but.
Our ability to attract new folks to the organization to leverage the systems and.
Relationships, we already have and to continue to expand areas, where we're making.
Good headway and profit in the US market is certainly there whether we do it from the platforms in the U.S. Bermuda or.
The syndicate.
Great. Thank you for the color I figured that that would be the answer and I think it's the smart smartphone can thinking thank you.
Yes.
Thanks, Matt.
As a reminder, if you have a question. Please press star one. The next question comes from Jeff Smith, and William Blair. Please go ahead.
Hi, good morning.
What type of exposure do you see I guess just didnt.
In the workers comp book Dino book was there much is much the workers comp provided to first responders healthcare workers or anything like that.
And do you know I mean are you see.
Are you seeing any uptick in claims there I guess just with the market movement.
Yes, so thanks, Jeff for that question.
The as I mentioned, we are in some essential businesses, while we well we right.
Reasonable size public entity business, we actually have very small work comp book within that but then that business, especially on a primary basis.
So.
There hasn't been much activity. We also don't expect a lot just given what our position is there a the largest area. We have is through rockwood on the work comp side with the second largest be in Argo insurance, which is really a focus on.
A more grocery stores that.
Restaurants relative to.
The comp exposure so while there is some in those areas. It is not significant and it's a relatively small portion. The total comp writings of the company that where we are actually retaining risk is less than 25 million.
Okay. Okay. So we're not we're not really seeing that that there and I'm sorry, you had a two part question I apologize I forget the second half.
The the de notebook Oh, yes.
At this point no I mean is a lot to talk about it but at this point we haven't seen.
You know a significant increase in CNL relative to this.
Situation.
Okay.
And then just looking at.
Growth in the U.S., obviously still strong I think you said.
Submission activity went from 20% down to it'd be remain positive I don't know acumen.
You know not connected digits, yeah, I was talking year over year, sorry to interrupt, but I was talking year over year. So it was it was 20% growth in the fourth quarter submissions year over year. It was 20% in the first quarter.
In April it was positive it was less than 5%, but it was positive.
Okay.
Just written premium was up 5.6%.
Okay. I was curious if that had if you're starting to see that recover.
And then maybe you could just talk a little more broadly about the.
Growth dynamics in the DNS market what type of rate are you seeing there are you seeing.
Standard insurers just given.
The risks out there moving away from some business that may be borderline pushing it to the mass market what are the dynamics, you're seeing out there you know yeah. So the first part of your question about what are we seeing after April it's way too early to tell for met but what I will say is that the tools, we have put in place over.
The past years have allowed us to become a lot more efficient at.
Attracting submissions that are.
More likely to.
Translate into written premium so it's not just about submission flow, it's about the quality of submissions and as we continue to refine the appetites and.
Work with our producers on that.
The percentage growth may not be a complete indicator of what the written premium growth maybe.
And then the second piece is.
I'm, sorry repeat the second part you want it.
Well just the dynamics of the either gas market Oh right right. So what what's happening. There is there are areas, where we may be committed to a customer base.
Where there's contraction in an area I'm thinking of construction at the moment, where.
Even though there may not be a lot of construction going on in a particular region or there are needs that business has that are ongoing and they're not necessarily being met and our ability to create products in any ines environment is allowing for growth in an area that is somewhat hampered economically it demand.
But what we're hearing that adds is the opportunity to go get product in the hand of customers, who expanded our customer base. During this time and eventually.
They are going to need the covers they had and we're hoping that with a relationship. We're solving problems now that will lead to future growth.
Aside from that we are seeing.
The increases in the in this area more so than in some of the standard errors.
Got it okay. Thank you.
As a reminder, if you have a question please press line.
Well I'm sorry.
There appears to be no further questions.
I would like to turn the call back over to Kevin Rehnberg for closing remark.
Okay I'd like to thank our employees again for their commitment to serving our customers and working through what's been a difficult personal situation working remotely.
So the producers that are giving a lot of business to us and share the same issues to our shareholders into all the interested parties who payments morning. Thank you very much never good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.