Q4 2020 Argo Group International Holdings Ltd Earnings Call
Good day and welcome to the Argo Group fourth quarter, 'twenty and 'twenty earnings Conference call. All participants will be in a listen only mode. So do you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and Swift.
And all your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Brett Sheriffs. Please go ahead Sir.
Thanks, and good morning, welcome to Argo Group's conference call for the fourth quarter of 'twenty and 'twenty.
After the market closed last night, we issued a press release on our earnings which is available and the investors section of our website at Www Dot Argo group Dotcom and was filed with the SEC.
Presenting on today's call is Kevin Redbird, Chief Executive Officer, and Jay Bullock, Chief Financial Officer and.
As the operator mentioned and 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 Argo group's filings with the SEC.
Also note that we will be referring to certain non-GAAP financial information more information regarding the non-GAAP financial measures are provided within the earnings release.
I will now turn the call over to Kevin Redberg, Chief Executive Officer of Argo Group.
Good morning, and thank you for the introduction, Brett and welcome to everyone on the call. The last 12 months had been a period of dramatic change for all of US as we have had to adapt to new ways of working and living this.
And this has created a number of challenges and opportunities as we manage through this period. Despite these challenges and by embracing these opportunities and I'm proud of the Argo teams continued effective engagement with customers and producers reinforcing our position as a go to specialty insurer.
These challenges have not impacted our strategic focus on impeded progress as we have advanced on a number of our key objectives over the last 12 months first we streamlined and refresh the senior leadership team with a number of new hires and internal promotions and this work was capped off with Scott Kirk joining the team last week to take over the reins as CFO.
Excited about the experiences perspective and leadership he will bring to Arvind.
The leadership team today is better positioned than ever to serve the business under a refocused strategy and a simpler as we have been able to eliminate certain senior positions along with streamlining our strategy.
The team is energized and we are excited about the opportunity we have for profitable growth and the current market environment.
We executed on a number of transactions to exit underperforming and non strategic businesses and are focused on our go forward strategy.
And our primary strength U S focused specialty insurance these actions demonstrate our emphasis on deploying our time.
Resources and capital to businesses that we believe can have strong returns and can meaningfully contribute to our bottom line.
While there will be some lingering costs associated with these exits and transactions. These are necessary steps to achieve our desired outcome, which we believe will benefit our shareholders over time.
And third we announced the formal expense initiative targets over the next two years designed to drive a more efficient organization and expand underwriting margin. We plan to continue to invest and better systems and technology that will reduce manual processes and allow us to reduce staffing costs and we've already made progress on the moving.
And this is an area where Scott is valuable experience. So we're very excited for him to bring those best practices to Argo.
Lastly, the reconstituted board of directors is highly engaged and providing invaluable counsel to the leadership team. And addition, there have been a number of governance policy and compensation enhancements led by the board also ensure our goals and targets are closely aligned with enhancing value for shareholders.
These positive steps shouldnt be overshadowed by the impact of Covid and a highly active catastrophe season had on our financial results for the year, we did not achieve our financial targets and 2020, but I'm pleased with the underlying strength and our underwriting results and confident and how we're positioned for the future.
Our talent underwriting expertise and outstanding service will allow us to capitalize on the many market opportunities we are seeing today.
During the fourth quarter, we continued to push for improved rate terms and conditions.
For the third quarter and a row, we achieved double digit rate increases in price and was above 10% and both our U S and international segments.
And while terms and conditions are improving and we were able to reduce our average limits exposed and several business lines for example, and commercial D&O, we've reduced our average limit exposed on approximately 15% and 2020 versus 2019.
The reduction was even more dramatic and our U S and Bermuda excess casualty books, where average and limits were down approximately 20% and 30% respectively. During 2020 the.
The combination of these actions by our underwriters will lead to more premium with less exposure and risk. We expect this to produce better loss ratios as these changes earned through our results over the next several quarters and as claims are paid over the next few years.
And importantly market conditions have not shown any signs of cooling the macro environment.
<unk>, including the pressure that lower interest rates is having on investment income suggests that this momentum should continue and we plan to deploy our capital where we find the best underwriting opportunities.
In terms of growth our top line and the quarter continued to reflect our focus on strategic growth areas.
Overall gross premiums were up about 1% and the quarter U S growth was six 6%, while international and declined 10, 4%.
And international the topline results, primarily reflect underwriting actions that had been underway for the past 12 months to 18 months or longer we are carefully growing where we have confidence and our results and pulling back or exiting and other areas exclude.
Excluding these businesses such as the grocery and retail business and the U S. A growth and the U S was over 10% and the fourth quarter, which we feel very good about.
We achieved strong growth and launch and we've been adding talent and investing and underwriting tools, such as casualty inland Marine and Argo Pro.
Premiums and all of these businesses were up by more than 20% and the fourth quarter and in some cases well above that.
We also saw encouraging submission trends and some of our focus growth areas. For example, casualty submissions were up 25% and the fourth quarter.
On the marine submissions were up more than 50% construction submission growth was also positive and had pockets of strength and the high single digits. These trends give us confidence and our growth outlook for 2021 and.
As I mentioned, our financial results for the quarter were impacted by several natural catastrophe events.
And we use windstorms and wildfires as well as additional catastrophe losses associated with Covid.
No single natural catastrophe event was a surprise to us, but the frequency of events was significant.
According to Swiss re 2020 was the fifth costliest year on record for the industry, including a record number of named storms and the U S.
One of our key initiatives in 2021 and beyond is to reduce our aggregate catastrophe exposure.
It started with our sales a very brief and we will continue with actions on our insurance portfolio as well, we are reducing property line sizes as well as exiting and large property accounts and certain wildfire prone areas Argo.
Sales to reduce the volatility of our underwriting results and allocate our capital.
Businesses with more stages and returns.
Be a gradual process as we see the impact of the actions over the next 18 to 24 months.
The impact of catastrophes pushed us to an underwriting loss for the quarter.
And the year, however on an underlying basis there were some very positive signs our current accident year ex cat loss ratio improved by more than seven points from the prior year quarter.
The fourth quarter of 2019 included some current accident and you're strengthening so the full year comparison is more representative of.
Improvement at three four points.
The better result, which was seen in both the U S and international segments was primarily related to rate and underwriting actions I spoke about a minute ago.
The expense ratio improved two two points and the fourth quarter to 49% as we noted in our earnings release, there were a number of items related to strategic actions and other nonrecurring items added approximately three points to the expense ratio for the quarter and about one point for the full year. This total includes professional fees for.
Transactions, we announced during the quarter and severance cost to rightsize some of our infrastructure platforms.
These costs are part of our expense initiatives, we have discussed and are expected to lead to future savings as we continue to make progress on our expense targets. So on.
And the actions we took in the fourth quarter are important steps towards continued expense ratio improvement.
We exited several businesses during the quarter, including the sale of ore already pending sale of our Italian business run off operations and motto and our U S grocery and retail business.
These decisions will allow us to exit certain high cost areas and focus our resources on better returning businesses and as I mentioned last quarter, our expense improvement will not be linear due to some of the extraordinary costs associated with our actions.
Last week, we announced that we are hosting a virtual investor event on March 12, we plan to use and time to dive deeper into our go forward strategy and highlight certain businesses and a four and where we are not also trying to explain the movement of a single quarter.
We look forward to clarify on Argo looks like as we trade forward. After a number of changes we have announced in recent months low.
And also give you some more detail on where we're heading with expenses and introduce additional members of the team. So please join US if you can.
I'll now turn the call over to Jay to discuss our results in more detail.
Yeah.
Thanks, Kevin I'll spend a few minutes going over our results and.
And then we'll take your questions for the fourth quarter of 'twenty and 'twenty Argo reported a net operating loss to common shareholders of $18 2 million or 52 cents per share and improvement from last year's result, and a loss of $2.15 per share for the full year. Our operating loss was 64 cents per share compared to a loss of <unk>.
<unk> per share and 2019.
The factors driving our financial results in each period are much different with 'twenty and 'twenty being driven by external factors, namely significant natural catastrophe activity and COVID-19 related losses and materially lower investment yields while 2019 reflected a number of internal challenges.
Importantly, the issues we faced in 2019 have not resurface. This year as reserve development was very modest and less than half a point in 'twenty and 'twenty.
And the underlying results for 'twenty, and 'twenty and provide a lot of optimism for the future and with a more focused strategy there should be a renewed confidence and Argos outlook.
First on the top line.
We reported gross premiums written of $718 million and the fourth quarter. This was up approximately 1% from the prior year quarter.
As has been the story for much of the year, we have seen good growth and our targeted areas primarily in the U S, which is being offset by business that we have been pulling back from for some time, primarily and areas and our international segment.
Also have been a negative impact and certain lines from lower and short exposures and payrolls as a result of the pandemic.
And the quarter and the fourth quarter U S. Gross premiums were up just under 7% with the strongest growth and professional launch. This is a lot and that continues to benefit from favorable market conditions as rates were up approximately 20% for the third consecutive quarter.
Rates on average across the U S segment were up just over 10% with professional lines casualty and property continuing to lead the way.
Gross and net written and net earned premiums and the U S was stronger at approximately 15, and 12% respectively and is amplified by an adjustment to ceded premium that impacted the prior year quarter.
On a gross net and earn basis the full year growth figures presented more representative pattern.
On the international side gross premiums declined 10, 4% and our fourth quarter and acquire.
And was primarily and specialty and property lines.
Partially offset by growth and my dog race.
The rates on average across the international segment were up and the high teens and strength was the strength was broad based.
Our combined ratio on the quarter was 110%.
Compared to 126 point and seven in the prior year period.
And the 'twenty and 'twenty result included a 11.1 points of catastrophe losses, which drove us to on underwriting loss for the quarter.
About 75% on the catastrophe total was related to natural catastrophes and the balance was from Covid related losses.
I would note that a portion of our natural catastrophe losses, and a four quarter reflect updated loss estimates related to events that occurred late in September, most notably hurricane and Sally and certain wildfires and the.
The timing and nature of these events and the nature of the losses made the initial estimation process difficult for everyone. But we believe were you fully capture these now.
Our COVID-19 related losses were $12 7 million and our fourth quarter and were primarily related to event cancellation exposures and our international operations throughout the year on losses from Covid have declined and magnitude and we expect this pattern will continue into next year with a much lower level of losses anticipated and subsequent quarters.
With regards to prior year development overall, we're very pleased that the fourth quarter and a row on that.
For the fourth quarter on a row net prior year reserve movements have been modest.
On an underlying basis.
Excluding catastrophes and prior year development, our loss ratio and combined ratio showed strong.
Year over year improvement, our ex cat accident year loss ratio improved 7.2 points from the 2019 fourth quarter.
As Kevin mentioned and the year to date improvement of three points four points is it better marker of our performance and profitability improvement during the year.
As you recall and in the fourth quarter of 2019, we adjusted some of our accident year ratios and international to reflect pressure from recent accident years. Additionally, as noted previously we completed a reinsurance to close transaction and 2017 and prior years and our Lloyds insurance operation, giving us reason for confidence and 2018.
And forward.
Our expense ratio and the fourth quarter was 41% and improvement of 2.2 points from the fourth quarter of last year.
For the full year, our expense ratio was roughly flat at 38, 3%.
As Kevin mentioned during the quarter, we incurred cost related to some of our strategic transactions.
Personnel and severance expenses and the accident of certain office facilities.
These and other non recurring costs negatively impacted the expense ratio by roughly three points during the quarter.
And one point for the four year.
And the nonrecurring expenses impacted each segment, but primarily reside and the international and corporate segments.
One final thought on the consolidated operating results.
At the beginning of last year, we established a combined ratio target for the business of 96% to 98% for 'twenty and 'twenty.
No doubt it was a challenging and most unusual year.
And we missed this range and much higher than anticipated catastrophes, both natural and and Covid related.
However, if you remove the COVID-19 losses and adjust for white, what might be unexpected year of natural catastrophes and take out the nonrecurring costs related to certain transaction and other expense initiatives.
And what's performing and that range.
We are pleased with our underlying performance and feel even better today than we did 12 months ago about our underwriting prospects.
Perfect ability potential.
Turning now for a moment to our segments. Despite the heightened catastrophe activity reported a small underwriting profit and our U S operations with a combined ratio of 99, 3%.
International photo and underwriting loss and reported a combined ratio of 122, 1%.
And both segments underwriting results improved from the prior year period as higher catastrophe losses were offset by relatively small prior year reserve movements compared to some significant prior year strength thing in the fourth quarter of last year.
And on a year to date basis and.
International segment has reported favorable development.
And the U S. Our ex cat accident year loss ratio was 63% improved one point.
Nine points from the fourth quarter.
Included in this.
Our two large excuse me improved 1.9 points during the fourth quarter and including in this.
Results are two large losses and added approximately three points to the ratio.
On a large property accounts, we've already non renew and the other a larger than expected liability loss and our public entity business.
And international we reported and ex cat accident year loss ratio of 55%.
And the fourth quarter and 54.4 for four year, both strong improvements from 2019 levels. Overall, we're encouraged by what we're seeing in terms of underlying margin trends, particularly as market conditions appear to have strong momentum for some time and Chicago.
Turning to investments our total investment income, which was down just one 5% to $33 7 million and the fourth quarter. This reflected strong performance from our reduced private equity and hedge fund investments offset by continued pressure on our fixed income portfolio.
Our core portfolio continues to reflect lower yields and tighter new issue credit spreads and investment income excluding alternatives was down approximately 30% from the prior year to $23 5 billion part of this decline also reflects repositioning decisions. We've made and the last 12 months as we continue to vote to focus our capital to.
Appointment deployment on attractive underwriting opportunities.
Note for the year, there was a sizable foreign exchange loss and throughout each quarter of the year, we've seen the deterioration on the U S. Dollar against several other currencies a portion of this was offset by gains and the value of assets held on these currencies, which is accounted for group book value.
Finally on capital we continue to be active during 2020, and completing $150 million of preference share refinancing and the second half of the year overall, we remain well capitalized to take advantage on the market conditions and continue to grow.
The portfolio.
Book value per share ended the year at $49.39. This was roughly flat with the September with September.
September 30, when adjusted for dividends pay.
While on a tangible basis, we saw an increase of almost a dollar as a result dollar per share as a result of the area on sale.
In closing I'd like to say thanks for all the support from my friends at Argo.
I wish everyone, the best and expect good things to come.
Operator that concludes our prepared remarks, and we're now ready to take questions.
Thank you we will now begin the question and answer session.
Ask any question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing and the keys and flip your all your question. Please press Star then two at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Greg Peters with Raymond James. Please go ahead.
Good morning, everyone I guess before I.
Our launch on to the couple of questions I should just.
Wish you the best Jay you know.
And you've done a good job on behalf of the company and now it's been a tough times and good luck and your future. Thank.
And I appreciate that.
So the first the first question is gonna be a tough question and your board is not going to be happy with this but I know you set upfront Kevin that you you know the board is actively engaged you guys are resetting everything one of the the observations I had this debt.
And the Argo boards compensation.
Seems to be running at a much higher level than many of its peers and I'm not sure I've seen anything out of the board.
Looking at that I don't know what you can comment on that or not but I just wanted to make that statement and see if there's any feedback.
Well good morning, Greg and I always expect the tough questions right out of the gate from you. So that's fine.
We have engaged.
Independent third parties to do overall review of.
The.
Compensation for the board and.
They looked at it on a relative basis with our peers and that's where the compensation was reset so we used to independents.
And advisers for best practices.
I see and okay, So I don't need to and so.
And so theres been a reset there and.
And and so I guess, that's a good thing.
And pivoting you know, it's a lot of moving parts, you've announced disposals, you've announced and reinsurance transactions. If I just look at your full year 'twenty numbers. So let's look at U S. First Hmm you know.
1.994 billion of gross written premium of one point to two three.
Billions of net written premium if I.
You talked about the grocery business.
Debt, how would the 'twenty and 'twenty results look on a pro forma basis with all the changes you've made or is the is this kind of what we see is what we get.
For U S and the same question of course would then I would apply to the international one 2 billion of growth 585, net you've you've announced several transactions that market. If I look at 'twenty and 'twenty. How did these numbers look with all these adjustments. So I can use that as sort of a base just on top line to think about.
'twenty, one and 'twenty two.
Yeah that is a good question and we will certainly come back with more detail on that on the Investor day.
I can tell you I can tell you that some of the places where we.
And we're out of in terms of the size of those books. So if you think about.
Cyber, which we were moving out of her and we ended the year at.
$6 8 million there.
And let's see.
No.
Hi.
First of all the retail and grocery business and we ended the year.
We ended the year at.
$30 1 million right.
Alright, but some of these some of these things arent going on the earned premiums will be there and.
And then the ability to get off some of these things is not always.
And as easy as one right we didn't sell the book.
So there may be some more written premium and there, but do you think about it as a baseline at 30 million skull and away there.
Okay and.
And then international and there's also Greg there's always on the re underwriting that goes on and so last year, we did a bit.
Re underwriting of the property book and to shrink the P&L switch.
Obviously helped but hurt us as well with what we still have left and we don't.
But we're still on the property business right and then and it's hard to quantify exactly how much of that went away as we write new stuff and get right. So.
I'm going to take that question on board and we'll come back with some specificity and <unk>.
Couple of weeks weighted.
Got it.
And then on the international side do you have any you want to give us any markers there.
Yes, I don't have the color right here for that but we will make sure.
Get that out.
Okay, and then I guess you know the final although Greg we did we did highlight in the third quarter call the amount of growth and net premium that was coming out of the businesses that we were exiting.
Right.
So if a if you go back to that.
It gives a sense of what those things were on and on an annual basis.
And again there'll be some some debt carries forward.
Work our way out.
Due to timing.
<unk> area will be a little bit easier to figure out.
So I guess then.
And my second question, and then I'll I guess I'll, let others ask questions, but just be on the international and the expense ratio and international.
Clearly your U S operations are chugging, along at reasonable expense ratios that you look at you know like for the full year international on the 43.
<unk> four and you know it's just.
It's just borderline obscene how high these expense ratios are I'm sure, it's driving me crazy, but.
And when when do we think about maybe not 'twenty, one and do I think about 'twenty two 'twenty three what do you think the expense ratio on international should look like you know when you get finished with all the changes that you're you're going through.
Yeah, again, I think we'll give more clarity on that on the <unk>, but I will say that the expense ratio where it is right now there were.
On the international segment, almost half of that $14 million came out of stuff that was related to actions. We took there so and some of the things we got out of where more and some.
We consumed more overall expense and the organization. So some of the expense savings, we will see out of there or coming in.
A couple of years time, so you'll see some of the benefit and this year, but the majority of it would be in 2022.
It goes away and again, we'll give you some good clarity on that.
On the 12th.
Got it and I guess I can't I want to throw a question a J here.
You know when you think about the capital structure of the company. You know you mentioned the offering and the second half of last year, you know your topline and start growing can you give us a sense of where what the excess capital looks like for the consolidated company.
And and.
And you know how you think about that at least you know.
Where we are based on how the numbers closed out the year and.
Well.
Greg and I.
And that too is a challenging question and there isn't some challenging question as excess capital is what I would what I would call in the eye and it would be hold on right. So we pay a lot of attention to capital ratios as defined by the rating agencies and as defined by our regulators.
And try to maintain what we would consider strong levels of capital.
Against those ratios and that I think as you know was.
More important.
Even more important as we move through 2019, and and through 'twenty and 'twenty because of some of the external things that we were dealing with I guess and simple way to put it is we looked at our plans over the next several years and through both the capital that we have today and the capital that we generate internally we've got that we've got the capital.
And meet the market opportunities that we see I don't I don't think I want to quantify what would be and arbitrage my word on arbitrary measure of cash.
Net capital.
Okay, well I thought I'd try and get a get an answer so anyway, it's best of luck.
Thanks.
Thanks, Greg.
Again, if you have a question. Please press Star then one.
Yeah.
Again that is star then one.
And our next question will come from Bob Farnam with Boenning and Scattergood. Please go ahead.
Yeah, Hey, there and good morning.
<unk>.
And I know Kevin you you mentioned the.
And with the the expenses you can still going to have some lingering costs can you can you quantify how much going forward do you think that the expense ratio might still.
And I would be higher than expected because of the non.
And that's continuing expenses.
Okay. So let me sort of dissect the question I guess, if youre wondering in 2021 and what it might be if we're looking at a targeted and a 30.
2022, and 36 is that roughly.
Yeah, I'm just trying to think I know you say, it's it's not going to be linear, but I'm just still kind of curious how much of these costs might still be out there and so.
And it's a fair to think about it being and sort of the mid 37% and 38 range for the full year this year.
Okay.
But don't just [laughter], we'll get there right.
Some of these things come up that maybe lease buyouts.
There's other other things that occur that are worth it over the two year period to do but they may in a particular quarter will be expenses or look expensive right.
Right.
Okay.
And J I'm not sure. If this is a detail that you have but you you mentioned there was some cat losses that were related to development from the third quarter could you have an idea of how.
How much of the fourth quarter's numbers came from the third quarter.
Yeah on the natural catastrophes, Bob about Uh Huh were incurred in the fourth quarter and half were literally right at the end of the third quarter. That's on the natural catastrophes.
Right right Okay.
And that's it for me.
And the same statement Peter.
Just oh, Gregg and I should say best and best of luck Jay.
Okay, Thanks, Bob and I appreciate it.
Yeah.
Thanks, Bob.
This concludes our question and answer session I would like to turn the conference back over to Kevin and Brent Berg for any closing remarks. Please go ahead Sir.
I would personally like to thank Jay. This is his last call as everybody knows but we wish him well on his new endeavors and I appreciate the counsel and advice and partnership we've had as we've worked together.
I wanted to use the time and welcome Scott again, and he will be at some of the conferences that are occurring over the next couple of weeks, so people get a chance to interact with him. Thank.
And thank the investors for your interest and continued support and all of our employees.
And all the other interested parties and so thank you very much and good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.
Yeah.
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