Q2 2021 Argo Group International Holdings Ltd Earnings Call
Good day, everyone and welcome to the Argo Group second quarter 2021 earnings call all participants will be in a listen only mode.
Should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then 1. Please note that this event is being recorded on.
Now I'd like to turn the conference every day, Brett Sheriffs head of Investor Relations. Please go ahead.
Thanks, and good morning, welcome to Argo Group's conference call for the second quarter of 2021.
After the market closed last night, we issued a press release on our earnings which is available in 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 <unk>, Chief Executive Officer, and Scott Kirk 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 involving any 1 or more of such statements.
Are the group undertakes no obligation to publicly update forward looking statements as a result of events or developments subsequent to this call for.
For a more detailed discussion of such risks and uncertainties. Please see our group's filings with the SEC.
Also note that we will be referencing certain non-GAAP financial information.
More information regarding these non-GAAP measures are provided in our earnings release.
I will now I'll turn the call over to Kevin <unk>, Chief Executive Officer of Argo Group.
Good morning, Thank you for the introduction Brett welcome to everyone on the call.
I'm happy to be able to speak to everyone today about our strong quarter on many fronts.
Key areas I will focus on during the call are.
Our strong earnings accelerating growth results.
Tractive market conditions on our progress on reducing volatility as we got into these areas a little deeper we will describe how we are delivering on our objectives. We laid out earlier this year.
All of this is with a focus on our long term financial objectives and creating value for shareholders.
From an earnings perspective, we reported our best quarterly operating income in more than 10 years I'm.
I am pleased that we had strong contributions from both underwriting and investment results.
Our loss ratio of 57, 7% for the second quarter reflects lower catastrophe losses.
Favorable reserve development, and an improved underlying loss ratio.
The underlying loss ratio improved modestly from the second quarter of 2020, even though prior year was a particularly tough comparison.
It seems like the industry.
Benefited from a significant reduction in claims frequency at the beginning of the pandemic. If you look back to the second quarter of 2019 before the pandemic our underlying loss ratio improved 370 basis points relative to that period. So I'm very pleased with the quarter's results on the overall progress.
On the investment side, we reported very strong results with a significant contribution from our alternative that's.
We ended the quarter with 30% being.
Being returned.
Okay.
For the positive year over year change in gross and net premiums for.
Gross premiums were up approximately 14% in the second quarter.
After adjusting for businesses sold or placed into run off over the last 12 months, including aerial rate.
In the U S. We continue to see solid rate increases in the mid single digits on average this is a bit less than the increase that we experienced over the last couple of quarters, but.
But we feel very good about the rates, we're getting and direction of our margins over the last 3 years, our cumulative rate change on renewals is about 25% in the U S.
In the U S. Gross premiums were up 7% quarter, there was a meaningful top line impact.
Impact from our decision to reduce property exposure in a couple of our underperforming business units on a year to date basis. These actions have been a headwind of more than $50 million to our top line.
Performance across our remaining U S.
Strong and the 6 business units, we highlighted at our Investor update Argo Pro casualty construction environmental inland Marine and surety were up 25% collectively during the quarter.
These businesses now represent almost 2 thirds of our U S same day.
And most importantly remain highly profitable with a combined ratio comfortably in the eighty's with minimal catastrophe losses.
In terms of submissions, we have continued to see positive trends in submission flow, particularly in our focused business units, excluding businesses, where we have been consciously reducing our exposure submissions in the U S were up 8%.
Over the past month, we've announced new leaders in 3 of our U S business units Argo Pro construction in inland Marine. These individuals' included internal promotions and external hire. They also have strong underwriting Brown and then brought the effective as a new energy to the business. We are confident they will be able to take.
<unk> of our platform and market conditions to continue our growth and profit plans.
Turning to international gross premiums would have been up approximately 23% after adjusting for businesses, we have exited over the last 5.
Quarters growth.
Please.
Kris for.
Okay.
Yeah.
Reported gross premiums were down about 5% in the second quarter due to the impact of businesses sold or placed into runoff over the last 12 months.
<unk> continues to trough quarter with rate increases, averaging just above 10% and international and remained broad based.
Over the past 3 years cumulative rate change for syndicate 1200 has been 30% and approximately 90% for Bermuda insurance. These businesses are well positioned to continue to generate attractive underlying margins.
Very attractive market conditions.
Our platform.
And we're taking actions, we're deemphasizing business, where we're not getting returns we want.
Across the group, we have achieved 30% compound renewal rate increases over the last 3 years at.
At the end of the day and of greater significance, we continue to execute on limit reduction efforts to bring down gross and net lines. For example at Argo Pros commercial book, we have been able to reduce the average limit by more than 12% over the last 18 months more than 90% of the portfolio now has limits of $5 million or less.
Yes.
And our excess casualty portfolio, we have continued to increase attachment points and reduced limits during.
During the first 6 months of 2021 average attachment points are up 10%, while limits are down 10% and our U S excess casualty business and the Bermuda excess casualty book attachment points are up 15% and limits are down 8% during the first half of the year.
Not only is this continued prudent risk management for our balance sheet, but limit reduction protect us from potential spikes in social inflation.
And we expect it will help reduce volatility on our underwriting results going forward.
The market has allowed us to take these actions, while still growing our business and we have capitalized on these opportunities.
On the property side. We are also ahead of plan in terms of net exposure reduction as we outlined at our Investor update in March we have been focused on bringing down our average annual loss a L and probable maximum loss P&L.
This work has been through a combination of lower gross exposure and some changes to our ceded reinsurance program.
Back in March we outlined a plan to reduce our <unk> by 40% by the end of 2022.
Through our gross property reductions and some additional reinsurance purchases we have already completed this reduction as of July 1st.
More than a year ahead of schedule.
At the beginning of the year, we have also reduced our peak, 1 and $2.50 year PMO to less than 4% of our common equity. This is ahead of the schedule, we laid out a few months ago and it gives us comfort as we head further into wind season, particularly in light of all the other natural catastrophes occurring and the inflation already associated with those events.
In total I am very pleased with our results for the quarter and the progress we've been able to make on our strategic objectives I'll now turn the call over to Scott to discuss our results in more detail.
Alright, Thank you, Kevin and good morning, everybody.
As Kevin touched on we reported strong earnings during the second quarter of 2021, driven by continued improvement now combined ratio. In addition to a strong contribution from alternative investments.
Our operating EPS was $1.60 for the second quarter and marks the highest quarterly operating income more than a decade with both underwriting and investments contributing to the results.
Annualized operating return on common equity was 13, 1%.
Turning to our consolidated operating results gross written premiums increased 2% in the second quarter of 2021.
However, allowing for the impact of the sale of area, where in 2020 and the exit somewhere on Italian multis and U S grocery businesses announced over the last few quarters. Its premiums are up approximately 14% during the second quarter of 2021.
Yeah, well gross premiums increased 2% growth in net written and net earned premiums was higher at approximately 8% in the quarter.
And as we discussed previously there are a couple of key drivers of net premium growth.
First we retained very little of area, where each business on a net basis. So this is a relatively small impact on our net written and net earned premiums.
Second in 2021, we are taking a largest share of syndicate 1200 results, while we retain a higher portion of that business net.
And we would expect net premium growth to continue to outpace the China.
Gross written premiums for the balance for this year.
In the second quarter 2021, we reported a loss ratio of 57, 7% down on a 5.3 points.
63% during the prior year period.
The improvement reflected lower cat losses favorable reserve development, and an improved ex cat current accident year loss ratio.
Our cat losses totaled $11 million from 2.4 points of the combined ratio on the second quarter of 2021.
Of which 6 million related to natural catastrophe and $5 million related to the impact from Covid.
This result compares favorably to catastrophe losses of $28 million or 6.4 points from the prior year quarter, which included $17 million related to COVID-19 pandemic.
Yeah.
Favorable reserve development totaled $1 million on 3.
3.2nd quarter for 2021 with modest favorable development and growth.
U S and international segment.
The prior year quarter.
$2 million or north.
For points.
Adverse reserve development.
The ex cat current accident year loss ratio came in at 55, 6% in second quarter, which represents a 60 basis point improvement.
For the prior year quarter.
<unk> reflect the impact for continued rate increases as well as the benefits from our underwriting actions.
Turning now to expenses our expense ratio was 37, 7% in the second quarter of 2021 and was up 80 basis points from the prior year quarter, but a slight improvement on the first quarter of this year.
The main driver of the increase in our expense ratio was an increase.
<unk> expenses.
Our acquisition ratio increased by 130 basis points to 17, 4%, which was driven primarily by changes business mix.
Conversely, the general and administrative expense ratio of 23% improved when compared to both for Q2.2020, and the first quarter of this year as we continued to focus on managing expenses.
As we said previously we expect to draw on the expense ratio low off through a combination of higher earned premium and identified expense savings.
As expected earned premium growth is driving the better G&A ratio at the early stages on that program.
We are making good progress against reducing future G&A expenses, and we should stop the some of the benefits emerge in the coming quarters we.
We have said this improvement was not going to be linear and we remain committed to the 36% expense ratio target in 2022.
You will notice that we also incurred $11 million of note on my part non operating expenses in the second quarter of 2021.
These costs, primarily related to certain initiatives around reducing our expense base longer term.
For example, during the second quarter, we took action to proactively reduce on real estate footprint and we expect the benefits to begin to materialize in 2022.
Turning to our segment results in the U S. Gross written premiums were up 7% can pay for the second quarter of 2020.
March was primarily driven by liability professional lines, while premiums and property lines declined.
Adjusting for the impact of exiting the grocery business and targeted underwriting actions to reduce probably focused and certain underperforming businesses of course your premiums are up 20% during the second quarter.
The U S segment reported underwriting income of $25 million on a combined ratio of 92% on the second quarter of 2021 low.
The ratio was 58, 3% compared with 56, 8% in the prior year's second quarter.
It is worth noting that the loss ratio in Q2.2020 benefited from a reduction in claims frequency due to the broader economic slowdown.
For the current quarter client activity was more in line with our expectations.
The expense ratio of 33, 7% was up 2 points from the prior year quarter. This.
Primarily driven by a higher acquisition ratio while low.
<unk> ratio was broadly flat.
The increase in the acquisition ratio was primarily driven by changes in business mix.
Yeah.
Turning now to our international segment gross written premiums declined 5%.
On the second quarter of 2021 due to the previously announced business exits with the largest decrease in property line. Excluding the impact of these actions gross written premiums would have increased approximately 23% in the second quarter of 2021.
The increase was largely driven by our increased participation in syndicate 1200 results. In addition to rate increases.
Net written premiums increased 15% versus the prior year quarter, mainly to the file there.
We historically retained on the a small portion of this premium on a net price.
Yes.
As we continue through the year, we expect the net to gross retention in international will continue to increase relative to prior year credit.
In the second quarter of 2021, net premium retention was up at 58% compared with 48% in the prior year quarter.
International reported underwriting income of $8 million on the second quarter of 2021 compared to an underwriting loss for $27 million in the prior year quarter.
The reported combined ratio was 95, 1% and reflects a significantly improved ex cat accident year loss ratio reduced cat losses.
Verbal development and a low expense ratio.
Okay.
Current accident year ex cat loss ratio was 51%, which decreased 830 basis points from the prior year quarter.
Premium was largely due to improved rights, earning through the result, and debt reduction and large loss frequency compared to the second quarter of 2020.
Our cat losses during the second quarter of $2021.9 million on 6 points for the combined ratio is low.
Since did include some strengthening to our loss estimates related to winter storm.
As well as losses related to COVID-19 on hail event cancellation exposures.
The expense ratio of 39, 4% was down 4% from the prior year quarter with improvements in both the acquisition ratio and the G&A ratio.
Yes, because your expense ratio was 21% was down 50 basis points can pay for the second quarter of 2020.
We've previously spoken about exiting business with higher acquisition costs and the benefit of these actions continue to true.
The G&A expense ratio decreased just under 4 points from the prior year quarter to 19, 3% and this was largely attributable to growth on premiums.
Moving on to investments, we reported net investment income of $53 million on the quarter.
Results included $30 million of income from alternative investments, principally mark to market guidance on our private equity and hedge fund investments.
Although we're certainly pleased with this result, I would caution that the last 4 quarters have included elevated returns from these investments.
Now net investment income from the remainder on our portfolio was 23 million.
In dollars in the quarter, which was down 8% from the prior year call on.
This decline reflects the derisking actions on the last 18 to 24 months as well as low overall yields available in the market.
And finally al book value per share for $50 on 34 cents at June 30 increased 5%, including dividends from the end of the first quarter of 2021.
The increase was driven by strong retained earnings and modest net unrealized gains on our fixed income securities.
This quarter provided to notch gross to net balance sheet and capital position.
We continue to see attractive uses for that capital in the business to die as evidenced by a targeted growth and solid underwriting margins.
Now while this remains our top priority in terms of deploying capital. We currently have approximately $50 million remaining share repurchase authority under the 2016 share repurchase program.
Subject to market conditions and other factors, we may begin repurchasing shares prior to year end.
Operator that concludes our prepared remarks, and we are now ready to take questions.
Thank you.
We'll now begin the question and answer session.
I ask a question you May press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then 2.
Our first question today will come from Casey Alexander with Compass point. Please go ahead yeah.
Yeah, Hi, good morning.
My question is related to the expense ratio were already answered, but just 1 question for Kevin in the segment of the business, where you discuss the increasing the attachment point and lowering the limit.
What's happening to right inside that business.
Because of rate is staying the same why you're increasing the attachment point and lowering the limit it sort of works as a de facto price increase even though youre not getting an increase in rate.
If I understand that correctly.
Yeah good morning.
That is.
However for the Red zone.
So in the commercial.
Right.
Doug.
Sure.
Pricing.
And on our excess cash.
Yes.
Hum.
On them.
For sure.
Moving on some of them.
In the U S International.
It is.
Just bear with me on that because youre asking.
On the night.
I had expected.
International.
No.
Hum.
Hmm.
Oh, sorry.
I do.
Hey, this is Kevin, but you're completely breaking up on us I can't really understand any part of your answer.
Okay.
Yeah.
Can you hear it now.
Are you still breaking up quite a bit.
Uh huh.
Yeah.
Yeah.
I'd tell you what you guys can come back to me off line with the answer that's the last of my questions. Thanks.
Thank you thanks Casey.
And our next question will come from Greg Peters with Raymond James. Please go ahead.
Yeah. Good morning, so just to to Taiwan.
Taiwan, Kevin if you're calling in on a cell phone or wherever you are calling from your.
You're definitely fading in and out it's virtually impossible to understand how you're answering so maybe you can pivot the answer.
For someone else here, but the question for the the only question I will have you know today would be focused on.
The legacy <unk>.
Accident years, where there've been prior period reserve development and of course on speaking to.
London, Bermuda professional liability with a domestic and I guess, what I'm looking for is any color around you know our new claims closed claims open claims on resolve claims where we are in that spectrum because.
Really you know the stock is.
There's concerns out there that you know there might be some more legacy charges at some point. So maybe you can help us understand that thank you.
Scott since I'm breaking up do you want to take this on and try and dial back in thanks.
Yes, thanks, and thanks, Greg low.
I'll get back to the fact that we had by robust reserving process clearly we look back.
At all of the trends what are they.
Yes, there are always going to be ups and downs across various lines and across.
Various years.
The reality is is that you know what.
We remain very comfortable without with average that I think position as it stands I mean.
Yeah.
I think that's the best way to answer that question.
Well I mean honestly you didn't answer the question because we're just you know the legacy reserves.
The legacy accident years that resulted in all of the reserve charges, it's been several quarters since we've seen anything like that.
But you know if we could have some and maybe you don't have the information available right now, but if we could have some information about you know just where we are with those legacy claims are they on.
We are.
Are they I mean, 90% of the way through the open claims are there no new claims on those accident years things like that would be very helpful on and I understand if you're not prepared to answer it right now, but you know in the context of just gaining confidence on the go forward picture that would be very helpful and.
And that was my only point.
Yeah, Hi, Greg look I.
Your I get your point there I mean, clearly you know obviously, we have our I T. C that was in there that we completed last year I think that's that's for.
For 2017 in prior years so there's.
Quite a certainty or suddenly around volumes from for my own international business, but low.
Leave it leave it with us and and we'll come back for you for for some greater clarity around price.
Yeah, Thank you and on the on.
Do you see I mean, you raised a good point that's in there but is it capped out I mean, 1 on the risk when we see things like that as you flow through the top of it on legacy and then it comes back to bite I'm not sure. If those accident years are completely closed out through the our I T C. R.
Or maybe I'm misunderstanding it altogether.
Yeah look we can we can get you some details on that for sure and I can come back.
Got it thanks, Thanks for selection and congratulations on the quarter.
Yeah. Thanks, Greg appreciate it.
And our next question will come from Jeff Schmitt with William Blair. Please go ahead hi.
Good morning, everyone.
Could you talk about the Covid losses in the international book, they're around $5 million on a quarter on.
Are you see claims sort of continue to roll in from the pandemic or is that.
Stopped and you're really just settling past claims at this point or is this sort of delta emergence kind of resulting in some new claims I mean, there's been restrictions put back on in various places. So can you just help me think about think through that.
Yes, it's Kevin can you hear me all right now yeah, yes, yes.
Yeah, Yeah, yeah, okay. So.
I apologize for that before I'm now on a cell phone I was not on a cell phone before price.
So as we had mentioned when we first started going through the Covid losses that we expected that they would decline by quarter in the last 2 quarters have been relatively flat, which isn't surprising since the pandemic has taken longer. These are things that are associated with our contingent.
Contingent liability book and you know as an example deal on.
Things around the Olympics.
Or <unk>.
Concert.
Festivals that were moved out and moved on some have been moved on and cancel some of them on people on.
Unfortunately died theres a number of things that have happened so.
We will continue to see probably some very small numbers there, but like we said in the beginning we expected it to decline and it's only the further extend on the pandemic related to that book that we're seeing at this point.
Okay.
And then the underlying loss ratio in international obviously down quite a bit at 51% hasn't been that low on a long time.
Can you help us sort of quantify the drivers of that I mean, how much that's driven by the business mix changing how much is is really rate in excess of loss cost.
And I guess why not.
Why not just play it safe for their at this at this point until we get a little farther.
Past the pandemic.
Yeah. Those are that's a good question, we've been re underwriting that book since 2018 in some circumstances right. So you're into the fourth year of underwriting actions and.
Removal from.
Clearly getting out of certain lines. So.
When it comes to playing it's safer we've got to be realistic about what the actual losses look like they are ratios.
Ratios range depending.
Depending on the product lines, but we have gotten out of things that were.
Significantly problematic for us.
And we've reduced our overall exposure so we.
Yeah, we we started highlighting the underwriting losses underlying loss ratio improvement there in that book going back to the.
The second half of last year, where it started to get on an adjusted basis for what we were remaining.
Into the low 50, so it's just.
In line with what we've been saying and we're.
We're happy to see it continue.
Yeah.
Okay. Thanks for the answers.
And our next question will come from Matt <unk> with JMP. Please go ahead.
Hey, Thanks, good morning.
On the larger picture questions I was going to ask have been answered I just have a couple kind of.
More specific questions relating to syndicate 1200, those are 1 I was hoping you could.
Got it.
Tell us what the funds at Lloyd's requirements or I'm, just trying to sort through kind of the moving pieces. There in terms of the big <unk>.
Mix of business as well as the increased retention.
And then also where has that been running on a combined ratio basis, either Q on Q2 or 6 months whatever kind of metric.
Patrick you may have.
Alright, so on 1200, we are.
As we mentioned we took a larger.
Retention last year. So we kept more of the business with less third party and we are effectively.
Keeping that business flat and expect to do so as we go forward, but the underwriting results for improving as we continue to get rate through various line.
Market conditions remain favorable we are exiting the businesses you know.
We.
Uh huh.
Wanted to exit so we feel good about where that's going at the moment.
Yeah.
Okay. Thank you.
Yeah.
And once again, if you would like to ask a question. Please press Star then 1.
Our next question will come from Ron Balkman with capital returns. Please go ahead hi.
Thanks, a lot a good report and welcome to the call Kevin.
It's good to hear you back.
Back portion.
Thanks, So you didn't really explicitly answer.
Matt.
On the last question about is 1200 profitable from an underwriting perspective, either on the half year or second quarter.
Yeah. It isn't on it is on both sorry about that it is okay.
Okay.
And Oh hang on hang on hang on X Yuri right the underlying stuff.
So from.
From a chat standpoint.
It was costly there.
But the underlying business ex cat, we feel really good about.
Okay.
Sure.
Alrighty.
And then I had a question about the U S insurance business, what portion of that I guess from a G. W. P perspective is.
It comes by way of a program manager or underwriting manager.
Oh the percentage of the total.
Roughly what percentage of growth coming through sort of some degree of Delhi.
Delegated authority, whether it's a program manager or range, Yeah, alright. So so we highlighted that in the investor update and I don't remember off the top of my head right now.
But the what looks like it where it looks like it has grown in the last year is because tried to move from in house to a program manager so that would've been the large increase and those are folks that worked here for so.
We'll get you the exact numbers, but I believe it it would be in line with what it was for.
Where we highlighted it as a percentage from the bank.
Okay.
Under would be on what we call spec.
Specialty programs.
Okay I'll circle back after afterwards too.
To get in the ballpark on that.
And do you have a funds at Lloyd's figure for 1200.
Hi.
So you have that.
And we're on there's a couple of pieces to this right because there's like a 100% for the syndicate all day. They all share of the syndicate and you have to be cash.
Careful of that because we don't have a 100% ownership, but low.
I'll give you a ballpark it it's not it's not going to be hugely different it it's around the 300 to 300.
Okay, but youre at 90% of the syndicating on a rate isn't that the.
Thanks for that yes for the for the 'twenty 1 year, yes, but you do have a blend and blah blah blah.
Ownership levels across severity as she is so.
I would point you if you ever want to go on and have a look at the syndicate results I think.
They're out there.
We can we can.
If they're not.
Well I'll have to check whether that they're out there, but I think it's around the 350.
Okay, No I read the on the Lloyd's report, but I didn't see the FAA on number in there and then the 3 to $3.50 pounds ballpark, that's the amount that covers.
Really 18, 1920 and year to day 21, it's sort of supporting all of those years right.
That is correct yeah. It does support all of those years, Okay got you alright, thanks for the help mhm mhm.
Thanks, guys.
And this will conclude our question and answer session I would like to turn the conference back over to Kevin Redbird for any closing remarks.
Yes, thanks, everybody for your interest and support thanks to our employees and producers for continuing to do it.
Been doing and I would also welcome anyone on the call back for any pieces where I.
Broke up earlier in the call I apologize for that.
And look forward to connecting with you soon thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Yeah.
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