Q2 2022 Argo Group International Holdings Ltd Earnings Call
year over year improvement in underwriting income, which more than offset the decline in net investment income from the alternative investment portfolio.
In our ongoing businesses, top-line growth was strong through six months, with earned premiums increasing approximately 16% from a year ago.
I am particularly pleased with our efforts to reduce cap volatility and manage expenses, as demonstrated in our underwriting results.
Catastrophe losses of $2.5 million in the second quarter marked the fifth consecutive quarter of year-over-year improvement and is Argo's lowest level since 2019.
The reduction in our cap losses is in contrast to the level of these losses the industry is continuing to experience. Year to date, catastrophe losses were $11.2 million compared to cap losses in the first half of 2020.
2020 and 2021 of 57 million and 59 million respectively.
The success of our strategy of reducing volatility through exiting non-corp business is evident in these results.
The expense ratio improved by over 2 percentage points for both the second quarter of 2022 and on a year-to-date basis.
reflecting the effectiveness of our ongoing cost reduction efforts. We are steadfast in our commitment to further reduce costs and remain very confident in our ability to continue improving the expense ratio.
We feel good about the rates we are seeing and the direction of our markets. We continue to see strong levels of both rate and premium growth in many business lines, with particular strength in casually, environmental, and inland marine. Overall, consistent with the first quarter, rates increased in the mid-single digits across the vast majority of our businesses.
Importantly, the average rate we are achieving continues to trend at or above loss cost inflation expectations.
We continue to explore a wide range of potential options to maximize shareholder value and take advantage of opportunities in the market. Consistent with that objective, we are entering into a lost portfolio transfer with N-STAR, which covers the majority of our U.S. casualty insurance reserves, including construction, relating to accident years 2011 to 2019.
While Scott will give more details on the transaction shortly, I would like to note that this gives us protection against reserve volatility and provides us with additional capital flexibility.
We remain focused on pursuing profitable growth as a U.S. specialty insurer with leading positions in very attractive specialty lines.
I'll now turn over to Scott to suggest the results in more detail.
Thank you Tom and good morning everybody. The current quarter's performance reflected positive underwriting income and increased fixed income returns, while perhaps as expected there was a lower contribution from alternative investments.
Operating earnings of $31 million decreased from $56.1 million in the prior year's second quarter. However, through the first six months of 2022, operating earnings increased nearly 4% from a year ago.
We reported a net loss attributable to common shareholders of $18.9 million for the second quarter of 2022. The difference between our net loss and our operating income is primarily attributable to pre-tax, net realised investment and other losses of $40.4 million, which included a net loss of $21.3 million associated with the sale of the company's Malta operations Argo global holdings.
It's worth noting that our Malta operations were owned by Argo Re and Bemida, and the realised loss on the sale of the business was not subject to corporate tax, and this resulted in a higher effective tax rate for the current quarter.
Turning now to our consolidated operating results. Reported gross written and net earned premiums decreased 10.2% and 3.4% respectively from the prior year's second quarter. This was driven by a business the company has exited.
Gross written and net earned premiums in our ongoing business grew 3.5% and 12% respectively.
As we've said on previous calls, we are retaining more risk net on the business we feel is most attractive, resulting in net earned premiums outpacing gross written premiums on both a reported and ongoing basis.
Now this is evident in our retention ratio, calculated as net written premiums divided by gross written premiums and this increased 3.6 percentage points to 64.1%.
It's worth noting that after adjusting for the fronting business that we write in the US, our attention ratio increased 5.3 percentage points to 68.3% in the quarter.
Our loss ratio increased 3.1 percentage points to 60.8%, driven primarily by net adverse prior year reserve development of $16.3 million or 3.6 percentage points on the loss ratio.
The net adverse prior year reserve development of $6.7 million in the US operations was primarily attributable to losses from business we have exited.
In our international operations, net adverse prior year reserve development was driven by a reassessment of potential losses associated with large excess claims in our Professional Lines business and our Bermuda operation.
The adverse development in our Bermuda business was partially offset by favorable development from Syndicate 1200.
The loss ratio benefited from year-over-year lower cap losses which total two and a half million dollars or 60 basis points on the loss ratio in the second quarter of 2022.
This result compares favourably to cat losses of $11.1 million in the prior year's second quarter.
As Tom mentioned, the successful implementation of our strategy to reduce property related exposures has resulted in a meaningful reduction in our cat losses.
The current accident year XCAT loss ratio of 56.6% increased 1 percentage point from the prior year's second quarter.
It is worth noting that this quarter's current accident year X-Cat loss ratio is in line with Q1 of this year and the full year of 2021, and I'll provide some more colour on the segment loss ratios shortly.
turning to expenses.
Our expense ratio was 35.4%.
A 2.3 percentage point improvement compared to the prior year's second quarter.
Our G&A expense ratio improved two percentage points versus the second quarter of 2021, while our acquisition ratio also improved slightly.
The year-over-year improvement reflects our ongoing cost reduction efforts that we began implementing at the back end of 2020. Now this is evident in our expense dollars which continue to decrease as general and administrative expenses were down from $95.6 million in the second quarter of 2021 to $83.2 million this quarter.
Now moving on to our segment results.
Our US operations generated underwriting income of $28.2 million, an increase of 13.3% from the prior year's second quarter.
The combined ratio of 91.5% improved 50 basis points from a year ago. Gross written premiums in our ongoing business increased approximately 5% in the second quarter of 2022. Net written premiums and net earned premiums in the US ongoing business increased 9.9% and 14.5% respectively versus the prior year second quarter.
The loss ratio increased 2.5 percentage points to 60.8% in the current year's second quarter. The increase was primarily driven by the net adverse prior year reserve development.
The current accident year X-Cat Loss Ratio increased marginally but was offset by lower cat losses.
The current accident year XCAT loss ratio of 58.5% increased 60 basis points in a prior year second quarter. And this variance is primarily attributable to the prior year second quarter including frequency benefits from the economic slowdown during COVID-19. In addition, the loss ratio in the current quarter reflects our response to anticipated inflationary loss cost trends.
The current accident year X-Cat loss ratio is in line with the current year first quarter and full year of 2021.
The expense ratio of 30.7% decreased 3 percentage points from the prior year.
This improvement was due to a 2.4% point reduction in the G&A expense ratio and modestly lower acquisition expense ratio.
The reduction in the G&A expense ratio was driven by a 9% decrease in general and administrative expenses coupled with a 5.8% increase in net earned premiums in the second quarter of 2022.
Turning now to our international segment.
We reported an underwriting loss of $4.2 million compared to an underwriting income of $7.5 million in the prior year quarter.
The underwriting loss in our international segment was attributable to our Bermuda business.
Syndicate 1200 however generated another strong quarter of underwriting income as indicated by a combined ratio of 89.5%.
Notably, this result marks the fifth consecutive quarter of year-over-year improvement in the combined ratio for the syndicate.
While growth rate and premiums in the international ongoing business were broadly in line with the prior year's second quarter, earned premiums increased 5.3%, primarily due to Syndicate 1200.
The loss ratio increased 3.7 points.
to 59.4% in the second quarter of 2022.
This was driven by net adverse reserve development in our Bermuda business that I mentioned previously, partially offset by lower cap losses.
The current accident near XCAT loss ratio of 51.4% was generally in line with the prior year's second quarter.
Cat losses of $1.5 million during the second quarter of 2022, or 1.2 percentage points on the loss ratio. These results compared favourably cat losses of $9.1 million, or 5.9 percentage points on the loss ratio in the prior year's second quarter.
We did not see any change in our COVID-related losses during the current quarter.
While we reduced expenses by $8 million in our international business, the expense ratio increased 4.7 points to 44.1%, driven by lower net earned premiums.
Turning now to investments.
We generated net investment income of $29.3 million in the current quarter. As expected, the decrease is due to a reduction of income from alternative investments.
While down from the prior year's second quarter, the alternative portfolio continued to generate positive net investment income.
And as we previously stated, alternative investment returns may continue to be more challenged over the next few quarters given the recent volatility in the markets.
Now we are however encouraged by the increased income from our fixed income portfolio, which grew approximately 20% compared to the second quarter of 2021, and approximately 10% compared to the first quarter this year.
Now for context, our reinvestment yields were hovering around 1.75% at the end of 2021 and are now above 4% today.
and we continue to hold a relatively short duration portfolio at 2.9 years.
Before moving on to capital, let me remind you that at the beginning of the first quarter this year we increased our assumed tax rate used to calculate operating earnings to 19% from 15%.
This reflects our view of the distribution of profits across the company and the jurisdictions we believe these profits will be generated from.
And finally, let me talk about capital.
The reduction in shareholders' equity during the second quarter of 2022 reflects a continuation of the trends we observed during the first quarter and is largely attributable to an increase in unrealised investment losses of $121.1 million net of tax in our fixed income portfolio.
The unrealised position improved in July , resulting in approximately $40 million improvement net attacks in our unrealised loss position at month end.
Book value per share was $37.65 as of June 30, 2022, down from $45.62 at the end of 2021.
Book value per share excluding accumulated other comprehensive income was $44.97 as of June 30, 2022, a decrease of just under 3% from $46.27 at year end.
As Tom mentioned, we entered into a lost portfolio transfer for a majority of our US casualty insurance reserves, including construction, relating to accident years 2011 through 2019.
Under the terms of the agreement, ENSTA will provide a ground up cover for $746 million of reserves. Now we will retain a lost corridor of $75 million above the $746 million of reserves.
NSTA will then provide an additional $275 million of cover in excess of the $821 million Mode as it isbeit completed.
We anticipate recognising an after-tax charge for approximately $100 million in connection with this transaction in the third quarter of 2020.
2022.
Now, completion of this transaction is subject to regulatory approvals and other customary closing conditions and we expect the transaction to close in the second half of 2022.
The loss portfolio transfer transaction provides increased certainty in our reserve position in addition to providing us with further capital flexibility.
And with that, I will now turn the call back over to Tom for some concluding remarks.
Thank you, Scott. Before turning to Q&A, I'd like to cover two things.
First, our Board of Directors has continued to undertake a strategic alternatives review process.
We are evaluating a range of options and as we previously noted, the company has not set a timetable for the completion of this process.
The process has progressed as expected and we have been pleased with the opportunities available for us to consider.
We were able to execute on one of these opportunities with the announcement of the lost portfolio transfer. Again, the objective is simple, to maximize the company's value and its considerable long-term prospects for the benefit of all shareholders.
Secondly, as announced yesterday, we are pleased to welcome Dan Plants as a member of the Argo Board of Directors. The company will benefit from his valuable skills and perspectives in the areas of capital market strategy.
corporate governance and his understanding and insights about Argo.
Operator, that concludes our prepared remarks. We're now ready to take questions.
Thank you. We can now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two.
I'll repeat that is star followed by one on your telephone keypad now, star followed by two if you change your mind.
So we currently don't have any questions lined up. Apologies, we just had a question come in. Our first question comes today from John Heagney from Dowling & Partners. Your line is now open John . Your line is now open.
Hi, good morning. Could you just help me a little bit with the math on the $100 million, so after tax charge.
Does that assume then that you're booking the $75 million loss corridor up to the attachment point of the ADC? Nah.
Hi John , it's Scott here. No, that does not assume we're blocking the $75 million.
Hi John , it's Scott here. No, that does not assume we're bulking the $75 million. Ok.
And then the other quick question I had,
Boy Scouts of America, there's
would appear to be a handful of policies that ARGO has or had to enforce.
Is there any exposure there and I assume it would be in the runoff book though I'm not 100% positive of that Or do you have any sort of mass tort reserves that would cover it?
Hi John , it's Scott here again. Look, we wouldn't comment on anything specific to an individual case.
Got it. Okay.
That's all I had guys, thank you.
We have no further questions so on that note that concludes today's Q&A session and I'll now refer you back to Tom Bradley for closing remarks.
All right, thank you, thanks everybody for your time, attention this morning and your interest in ARGO. Good day. All right, thank you again, have a good one. Bye.
That concludes today's call. You may now disconnect your line.
Income which more than off the the CL in net investment income from from the alterive in portfolio. Our ongoing businesses line growth strong six mon premiums increasing proximately 16% from the year a proteularly pleasase with our afterfor to reduced C volatility, manage expenses. andas trated in our under sul tax losses of two point five million. The second quarter, the FIF con Ed quarter of year over year improvement ES loss level cent two twent eighteteen. The reduction in our CCAP losses is contr to the level these losses. The continueed experiions year tax losses were ele point two million compared to C losses in the first of two thousand 20 and 2, 20 and 20: one of 57.000059 trillion respectctively. The six strategy of reducing volatability ex cour business evident in these resul. The expen ratio improve two percentage pointing.gg second quarter of two thousand 20, two y year eight ES relecting the effect ongoing cost reductionion for we are sent our commitment further reduced cost and Re very coun in our ability to continue improving the expen ratio. We about the seen the direction of markets. We continue strong Leve of and premium growth in M business's proteject coun in mental and over consisted. The first quarter Ed increased in the mid Al diges across jor bus impro ly the verage IE ues to T loss cost inpleion expectationsions. We continue to exlo of potential options to X rat value and vantage of opportunities in the mar concer objected we are ry in to LO ortfolio trans for which Co's of jility of a? U casual insurance reserves including instruction related acc year 20, 11 to 2, 20 eighte loss tailsars transaction shortly to res proteactction reserve volatility and provides for additional capital fxiability. We Re fourcus on proofitable growth as a? U's se insure posions in tract speci our TER to just L more deta thank and mning Re the current quarter four mon reflected posit of underwriting income and increased six income returns. As expected that was a low conribution from alternative investions. Operating Ning of the 31 illion dollars decreased from 60, six point of Ed fifty six point one million dollars in the prior year. Second quarter however, the first six month of two thousand and 20, two operating earings increased 4% from a year ago. We reported a net loss tributable. The common shareholders of eighte $9 thousand for second arter of two thousand two 20, two the dece between our net loss and our operating income is primarily tributable to tax net realizeded investment and other losses of forty point four million dollars which included a net loss of 20 1, $3 thousand. So IO with Al of the companyies, UL operations go gloable. Holdings were no, our operration were own by our go in the M and the reized loss. The of the business was not subject Court tax and this resulted in a high effected tax ATE of the current quarter Turning our sollidated operating sults. Reported gross written and net premiums deincreased ten point 2% and three point 4% respectively from the prior year second quarter. The was driven by business, the company ex gross itten and net mium, our ongoing business 4% and twel percent pectively. We said on previous Co we are retain more risk net on the business FE most tred resulted net premum out P gross itten premiums on by thea reported and ongoing BAs. Now this is evident in our tention ratio counculated net En premium by by gross reitten mium and this increased three point six percentage pointts to 60, four point 1%. Were not that after rejusting for the fund business that Inthe's our tention ratio increas five point centage pointts to 60, eight point 3%. In the quarter loss ratio increased three point one percentage point to 60 point 8%, driven primarily by net adverse prior year reserve development of sixtyteen $3 thousand or three point six percentage point on the loss ratio. The net adverse prior year reserve development of six point seven million dollars Inthe's orations was primarily tributable to losses from business exed and our international operation. Adverse prior year reserve development was drivenby a estment of potial losses. So at large La and our proofession line businessment and our mut operation. The adverse development and our M business was of set by vorable development from cnic wel hundred. The loss ratio enef year over year lower C losses which Tal 2, a half million dollars or 60 basase point on the loss ratio in the second quarter of two thousand and twent two This resulted comp favorablely C loes of 11 point one million dollars in prior year second quarter. As mention the 6, implementation of our strategy to reduced property related expposes has resulted in a meaningful reduction in our CCAP losses. The rent actcident year C loss ratio of fifty six point 6% increased one percentage point from the prior year second quarter were no that this quarter current actcident C? Lo ratio is in line one add year and the four year of two thousand 20, one and provided collor on thesegment loss ratios. Shortly Turning to expenes, our expense ratio was thirty five point 4%, a two point three percentage point provement compared to the prior year second quarter. G expense ratio impro two percentage point verses the second arter of two thousand and 20 quisition ratio, all improved lightly the year over year. improment reflects our ongoing cost reduction efforts that we began implement the in two thousand twent. This is evident. Our expense dollars which continue to deincreas general ministrated EXP, se the down from nineinty five point sixmillion dollars in the second arter of two 20, one to two 80, three point two million dollars. This quarter MO on to segment sults's oration generated underwriting income of 20, eight point million dollars and increase of 13% from the prior year second quarter. The combined ratio of niney one point 5% improved FIF basase pointingggts from a year ago. Gross premiums: ongoing business increase proxim 5% in the arter two thousand and 20, two net itten premiums and net premums in U's ongoing business increased 10% and fourteen point 5% respectively versus the prior year. Second quarter loss ratio increased 2, a half percentage point to 60 point 8% in the curren year second quarter. The increase primarily driven by a net adverse PRI year reserve development. The current actcident cut LO ratio increased mar in was offset by lower C losses. The current actcident C ratio fifty eight point five cent increased 60 based pointinggg the prior year second quarter and this ANS primarily tributable to the prior year second arter inincluding three quency benefits from the economic loed under nineeighteteen. In addition, the loss ratio in the current quar reflects our ponse to paated flationion loss cost. T current actc cut LO ratio in line of the current year first quarter and four year of two thousand and 20. the expense ratio of 31% decreased three percentage point from the prior year. This improvement due two point four percentage point reduction in the expense ratio and lower acquision expense ratio. The reduction the expense rat driven by a 9% decreas in general and ministrated expenses ced with a five point 8% increas in miums in in second AR of two thousand 20, two Turning now to our international segment, we reported an underwring loss of four point two million dollars compared to underwriting income of seven point five million dollars the prior year quarter. The underwriting loss, international sement tributable, the mut businesses nindic weve hundred however, generated a strong arter of under wrating income theicated by combined rat of eighte, nine point 5%. noedably this resullt marks the FIF thesec quarter of year over year improvement in the combined ratio four the ndicate premiums, national ongoing iness were line the prior year. Second arter premiums increased five point 3%, primarily due cent twel hundred. The loss ratio increased three point seven point fifty, nine point 4% in the second arter of two thousand 20, two This was driven by adverse reserve development and our mut business that mention mviously ly of set by lower cap losses. The current actc C loss atio fifty, one point 4% generally line of the prior year second quarter loes one halfmillion dollars during quarter of two thousand twent two or one point two percentage pointinggg in the LO ratio. This results compared favorablely: CCAP loes of nine point one million dollars or five point nine percentage point. On the loss ratio in theprior second quarter we did not any change in our Co related losses J the current quarter while we reuced expenes by eight million dollars in our international business the expense Rio increased four point seven point to forty four point 1% D ven by low net premium Turning investment we generated net investment income of 20 9, $3 thousand. The cur quter expected the decreased due to reduction of income from alternative investments from the prior second quarter. Alter portli continued to generate posited net invest income and, as we prev stated, alterive investment res continue be more over quarter venthe recent volatility markets. Now we are however, cur by the increased income from our six income portfolio, which approxim 20% compared to secondquarter oftwo thousand and 20 and proxim percent compared to the first quarter this year. Now contax Re investment year for vering around one quarter percent the of two thousand and 20, one and the now above 4%. Today we continue to hold a relatedively short ration portfolio to point 9, year four Moving on to counital remin that the begining of the first quarter this year increased our tax rate U to coun ATE operating earning to nine teen percent from 15%. This reflects disribution profits across the company and the ur sixictions were believe these profits were be generated from our capital. The reduction hold qu? D uringin the second quarter of two thousand and 20 reflects continue ation of the TS erved during the first quarter and large tributable increase. rerealizeded investment losses of a hundred 20, one point one million dollars. Net tax in six income portfolio. The underrealized addition improved in sulted in approximately Ty million dollars. Improvement net tax in our reized loss position was $37 60, 5% as 60, five cent of Jun thirthousand two thousand 20, two from forty five doll 60 y two the end of two thousand and 20, one cluding ulated of comp per income was forty $4 20, seven percent as of Jun three thousand and twent two decrease of just the 3% from forty $6 two 20, seven year. And as mention we LO portfoli trans for majority of a? U's casual insurance reserve including instruction rerelating the act year 20 11 3, 20 and 19 under reement provid Co the seven hundred forty six illion doars reser. We were retain a loss cot or of seventy five million dollars O the seven hundred forty six million reser and provid addition two hundred venty million dollars of Co in excent of the eight hundred two 20, one illion dollars reser. We icipate Re iz after tax chargge, proximately a hundred million dollars. conneion with transaction third quarter of two thousand two thousand 20, two comtion of the transaction subject to reregul, to improes and other coto cloing ition and we exppect the transaction CLOs in the half of two thousand and 20, two the LO ort trans transaction provided increased certain in our reserve position in addition to providiting thir capital flectlex ability now the back for some concluding mar Thank cover two things. First, rep directored has continue to under ategic alterves revie process. We are value ated Re ion And as provious noted, the company not for the completion of process, has process, has progress expected and we are pleased the of ailable for us cent. We Re able: one of opportunities with the oun of the loss portfolio trans the, the jected simple to X the company val and considable long TER prst tax for the benefit of. Secondly, as yesterday we ased come plans a MEM of the dires the company benefit from ills and respecteds and the capital mar strategy corporate governance and is under understanding an in of our ago at.ed concludes rep ated ions. Thank you. We action if like question fease for by one now change Min ase eightetwo ll by one now for by two G year nine have any creion nine question income question ING our with the the hundred million dollars after tax charge su the sevent five million dollars loss courar two the of the 80 that not the seventwenty five, million, and the other questiont of ared for force exlosure be the run hundred per posit that have any sort of reser of cover. ated would comment on 20 six C, two to an individual case thiryear. We have no the question concluded and our our cloing mar. Thank you. tention, warning and year interest in ago day.