Q3 2022 Argo Group International Holdings Ltd Earnings Call
Welcome to Argo group's conference call for the third quarter ended September 32022.
After the market closed last night, we issued a press release on our earnings which is available in the investor sections of our website Argo group Dotcom and was filed with the SEC.
Presenting on today's calls comp Bradley, our group Executive Chairman and Chief Executive Officer, and Scott Kirk Chief Financial Officer.
As the operator mentioned this call is being recorded during this conference call Argo management may make comments that reflect argo's intention beliefs and expectations for the future such.
Such forward looking statements are qualified by the inherent risks and uncertainties uncertainties surrounding future expectations generally and may materially differ from actual future results involving 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 the to the call.
For a more detailed discussion of such risks and uncertainties. Please see Argo group's filings with the SEC also note that we'll be referencing certain non-GAAP financial information more information regarding these non-GAAP financial measures is provided in our earnings release I will now turn the call over to Tom.
Thank you Andrew and thank you to everyone for joining us today.
Over the past two years, we have transformed our go better position positioning the company to advance our business strategies.
In September we announced the sale of our Lloyd's operation, which marks a significant milestone in Argo, becoming a focused pure play U S specialty insurer.
Importantly, this transaction further simplifies our corporate structure and enables greater focus on our diverse portfolio of profitable and scalable U S specialty businesses.
In addition, the announced U S loss portfolio transfer with and Star will help provide protection against potential future reserve volatility. We believe these transactions will strengthen and derisk, our balance sheet and better position the company to evaluate additional strategic opportunities.
We are fully committed to maximizing shareholder value and remain focused on our strategic review process for the benefit of all Argo shareholders.
Turning to the third quarter we.
We reported operating earnings of 44 cents per common share and an ex cat current accident year combined ratio of 93, 4%.
Our performance continues to benefit from earned premium growth and attractive business lines, lower expenses and lower catastrophe losses, Despite hurricane Ian.
We also continue to be encouraged by the increasing investment income from our fixed income portfolio driven by higher reinvestment rates.
This improvement was driven by disciplined underwriting lower cat losses, and positive rate continuing to earn through.
While our thoughts are with those impacted by Hurricane and we are pleased with the company's quarterly cat losses decreased year over year for the sixth straight quarter, despite elevated industry cat losses.
Our total cat losses of $23 4 million in the quarter were down 14% from third quarter last year.
The U R. U S operations accounted for just $4 2 million of these losses, which did not reach our U S cat reinsurance retention levels.
Our remaining cat losses were in the international segment and.
In contrast to broader industry trends Argos.
Argo's cat losses for the nine months of 2022 are nearly 60% lower than the same period last last year, while these losses in our cat.
While these losses in our U S operations were down over 70%.
The success of our volatility reduction efforts through exiting business businesses with property cat exposure is evident in these results.
We are also particularly pleased with the continued success of our ongoing cost reduction efforts.
The expense ratio improved nine percentage points from the prior year third quarter were one five percentage points after adjusting for the reinstatement premiums.
Through nine months, we have lowered total expenses by over $35 million and reduced the expense ratio one seven percentage points to 35, 6%.
Our expense reduction efforts have successfully helped streamline our operations and we remain confident there are opportunities to further reduce cost and improve the expense ratio in the future.
We continue to feel good about the pricing gains we are seeing across our portfolio of businesses. We are achieving both rate and premium growth in many lines with particular strength in casualty environmental and inland marine.
While there are some pockets of freight softness in the portfolio, most notably public company D&O, we remained disciplined in our underwriting approach.
Insistent with the first half of the year rates increased in the mid single digits across the vast majority of our businesses.
Accordingly, the average rates, we're achieving continued to trend above loss cost expectations.
We remain focused on executing our business strategies building upon our performance through the first nine months of 2022 and further enhancing the companys position for 2023.
As I've said, we are fully committed to the strategic review process and we continue as a board along with our financial and legal advisors to actively consider a wide range of options for orca.
I will now turn the call over to Scott to discuss third quarter results in more detail.
Thank you Tom and good morning, everyone.
Operating earnings for the third quarter with $15 $5 million and $89 $8 million for the nine months in 2022.
These results reflect our continued efforts to reduce cat losses maintain expense discipline and gross earned premiums in our ongoing businesses.
These favorable trends were partially offset by the lower contribution from alternative investment portfolio compared to a year ago.
While we reported positive operating earnings of $15 $5 million for the quarter, our net loss attributable to common shareholders was $51 4 million.
The difference is primarily attributable to net realized investment losses of $44 $7 million, and a $28 $5 million and payment of goodwill and intangible assets associated with the previously announced sale of our Lloyd's operation.
Included in the net realized investment losses was $34 $2 million of impairment losses related to the assets that will be transferred upon closing of the L. P. P.
Okay.
Before I provide more detail on the results I wanted to update you on the <unk> transaction with and staff and we.
Received the final regulatory approval yesterday and expect the transaction to close imminently.
The results for the quarter. Therefore, do not include the circa $100 million net of tax charge in connection with the L. P. T. As we'd originally anticipated pare out Q2 earnings call now we expect to record this charge in the fourth quarter of this year.
And with regards to the loss corridor in the L. P. K as we previously mentioned AGA will retained $75 million of losses above the $746 million of reserves trend spud.
By way of update through the nine months ended September 32022, we have recognized $37.7 million of prior year development that falls within the retained loss corridor, leaving at 37 $3 million of the corridor remaining.
Until we reach the $275 million covered lives.
L P T.
In addition, we expect to transfer just dive a $500 million of remaining reserves upon closing of the <unk> transaction.
Looking at the consolidated results in more detail.
Reported gross written premiums decreased 14, 2% from the prior year third quarter, primarily driven by businesses. The company has exited.
Gross written premiums in our ongoing business. However were in line with the prior year's third quarter as Tom mentioned, we are seeing positive rate trends across several areas in our portfolio.
Net earned premiums were $455 million compared to $487 $5 million in the third quarter last year.
This includes $12 $5 million of reinstatement premiums, primarily associated with cat losses, compared to $5 6 million of reinstatement premiums in the third quarter last year.
In our ongoing business.
Net earned premiums grew over 13%.
We're retaining more risk net on the businesses, we feel amongst attractive resulting in net earned premiums outpacing gross written premiums on a reported and ongoing basis.
Our loss ratio increased one seven percentage points to 65, 7% in the third quarter, driven mainly by net adverse prior year reserve development of $11 $9 million or two six percentage points on the loss ratio.
The current accident year ex cat loss ratio of 58% increased 90 basis points from the prior year third quarter. However, when you adjust for the reinstatement premiums.
Accident year ex cat loss ratio for the third quarter of 2022 was 56, 4%, which is in line with the prior year third quarter.
The loss ratio also benefited from lower year over year cat losses, which totaled $23 4 million or five one.
Our signage points on the loss ratio in the third quarter of 2022.
This result compares favorably to cat losses of $27 3 million or five six percentage points on the loss ratio from the prior year third quarter.
Thanks.
Turning to expenses.
Our expense ratio was 35, 4%, a 90 basis point improvement compared to the prior year third quarter.
This reduction was primarily driven by a 90 basis point improvement in the G&A expense ratio reflects $9 9 million a decrease in G&A expenses when compared to the third quarter last year.
And when adjusting for the reinstatement premiums the expense ratio for the third quarter of 2022 was 34, 4% an improvement of 150 basis points from a year ago.
Moving on to the segment results.
U S operations generated underwriting income of $9 $3 million and a combined ratio of 97, 2%.
Written premiums in our ongoing business or in line with the third quarter of 2021, while earned premiums increased approximately 13% and our ongoing business.
The loss ratio increased two nine percentage points to 65, 9% in the third quarter compared to the same period last year.
The increase was primarily driven by the net adverse prior year reserve development of $16 $2 million, which was primarily attributable to losses from businesses we have exited.
On a current accident year ex cat basis, the loss ratio of 59, 7% was broadly in line with the prior year quarter.
Tax free losses of $4 2 million, one three percentage points on the loss ratio decreased nearly 60% from a year ago.
The expense ratio of 31, 3% decreased 110 basis points from the prior year third quarter. This improvement was due to a 2.8 percentage point reduction in the G&A expense ratio, partially offset by a higher acquisition expense ratio.
Turning to the international operations.
Segment reported an underwriting loss of $3 $5 million driven by the cat losses, and the reinstatement premiums from hurricane Ian in the quarter.
This compares to a $4 $6 million loss in the third quarter last year.
The loss ratio increased two percentage points to 65, 3% in the third quarter of 2022.
Cat losses in our international operations were $19 $2 million during the third quarter of 2022 or 15, three percentage points on the loss ratio. These.
These results compare to cat losses of $17 3 million or 10, five percentage points on the loss ratio in the prior year third quarter.
The current quarter benefited from net favorable prior year reserve development of $4 4 million compared to $2 million of net adverse development a year ago.
The current accident year ex cat loss ratio of 53, 5% increased one 9%.
<unk> points year over year.
Adjusting for reinstatement premiums current accident year ex cat loss ratio was 48, 9% an improvement of 110 basis points.
The expense ratio of 37, 5% decreased two percentage points from the third quarter of 2021. Please.
This improvement was due to a full percentage point reduction in the acquisition expense ratio, partially offset by a two percentage point increase in the G&A expense ratio adjusting.
Adjusting for reinstatement premiums the expense ratio for the third quarter of 2022 was 34, 4% an improvement of three nine percentage points year over year.
Okay.
Moving on to investments.
We generated net investment income of $34 million in the current year third quarter compared to $46 $1 million a year ago with the decrease due to lower returns from al kind of investments.
Now while down from the prior year third quarter. The alternative investment portfolio continued to generate positive net investment income.
As we've said all kind of investment returns might continue to be challenged over the next few quarters given the continued volatility in the markets.
We are however, encouraged by the increased investment income from our fixed income portfolio, which grew approximately 24% compared to the third quarter 2021, and approximately 10% from the second quarter. This year.
Our reinvestment yields were hovering around 175% at the end of 2021 for an average single I bond compared to above four 5% for short term use securities.
We continue to hold a relatively short duration portfolio at $2 seven years, including cash.
This shorter duration positions us well in a rising interest rate environment now as we expect duration to shorten further we anticipate the future change in the level of unrealized investment losses from interest rate movements to be less volatile.
Now, let me talk about capital.
Book value per share was $33.72 of September 32022 decreased 10, 4% from June 30, with a decrease driven largely by changes in accumulated other comprehensive income.
Changing.
<unk> is mainly attributable to unrealized investment losses in our fixed income portfolio of $75 9 million net of tax for the quarter.
For the nine month period in 2022, we have approximately $340 million of unrealized losses net of tax from the investment portfolio included in OCI.
Given our shorter duration investment portfolio, we would anticipate the unrealized investment losses arising from interest rate movements to unwind diver approximately three years at securities reach maturity at the same time, we'll also see higher interest rates continued to benefit investment income.
Excluding <unk> book value per share was $43.23 at the end of the third quarter 2022, a decrease of three 9% from June 30.
And in closing we continue to engage in regular communication and maintain strong relationships without writing agencies and regulators. Most recently S&P reaffirmed our modest strong financial strength rating.
And with that I would now like to hand, the call back to Tom.
Thank you Scott and before we open the call for questions I'd like to briefly address matters related to our upcoming annual meeting and one of our shareholders' capital returns management.
Last week, we filed a definitive proxy statement and accompanying blue proxy card and other relevant materials with the SEC and can tuck <unk> with the solicitation of proxies for the annual meeting.
As I hope, we have made very clear to you today and over the past several months Argo's Board is actively overseeing a robust strategic review process to maximize value for our shareholders, which includes exploring the potential sale merger or strategic transaction.
At the same time Arco has made significant progress in repositioning the company for growth and increased profitability today RV as a focused pure play U S specialty insurer with over $2 billion in premium and renewed momentum better positioned to drive our business strategies and evaluate further strategic opportunities to drive.
Value.
Argo consistently engages with its shareholders and appreciates their ideas and input towards maximizing shareholder value.
In keeping with this for more than a year <unk> Board and management team have engage with capital returns in an attempt to foster constructive dialogue and hear their views.
Despite this outreach and the significant progress we have made capital returns has nominated two director candidates to stand for election at our 2022 annual meeting.
Pursuant to our established policies the board's nominating and corporate governance Committee formally interviewed both of capital returns nominees and concluded that neither candidate offers any incremental skills or experience that would be additive to the current board or to its ongoing strategic review process.
In fact, we believe they would diminish the board's overall capabilities and expertise.
As such the board presented its recommended slate of director nominees in our definitive proxy materials encouraging shareholders to use the blue proxy card and vote for all of the Argo nominees.
Any and all details related to our annual meeting can be found in our public filings on our IR webpage.
With that I'd like to hand, the call back over to the operator for any questions.
Yes.
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Okay.
Okay.
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There are no questions registered at this time, we have a question registered apologies.
Our first question today comes from the line.
Of John Haney from Dowling and partners. Please go ahead. Your line is now open.
Good morning, how are you.
I did want to touch on one thing.
Maybe get your thoughts Youre talking a lot about.
Changing the portfolio.
Business development.
I guess could you take a deeper dive into what has actually changed in the U S operations I mean, I get it Holistically you sold Lloyds Youre focused on the U S, but what specifically in the U S is now changing or improving versus.
Let's call it two two years ago, a year and a half ago.
When you had when the company had its first sort of strategic review of its underwriting business.
Yes. Thank you John for that yes, the biggest single change that we've kind of referred to is property.
Not only deemphasizing, it, but specifically reducing our exposure there.
That's not always the capital management exercise, but it's a profitability exercise we had we had poor results and.
And not the right capabilities to do that so we sold off some of those businesses and just dropped dropped out of others.
I think the other significant change with the rationalization of some of the programs in our in our program segment.
Again to actively managed programs and where we see we don't have a future visibility into profitability. We've taken we've taken action to.
AE to remediate or exit those programs.
Got anything you want to add John I'd, just also add that obviously we have been.
Actively looking at the level of expenses, we incurred in the business and in over the last 18 months <unk> seen a significant reduction there to great profitability lay before us and look we we continue to be active and execute on those opportunities.
Alright, great. Thank you.
Thank you John Thanks, Sean.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one.
There are no additional questions waiting at this time, so I'd like to pass the conference over to Tom Bradley for any closing remarks.
Thank you operator.
In closing our third quarter performance continued to benefit from the execution on our strategic priorities, including growth in our most attractive lines of business reduced underwriting volatility and lower expenses.
Catastrophe losses declined year over year, despite elevated industry losses, highlighting the success of our strategy of reducing volatility through exiting businesses with property cat exposure.
Our L. P T in Lloyd's transactions will strengthen and Derisk our balance sheet as we have delivered on our core strategy of becoming a focused pure play U S specialty insurer.
And finally, we are unwavering in our commitment to evaluate additional strategic alternatives, including the potential sale or merger of the company that will deliver on our goal of maximizing value for all shareholders. We.
We are pleased by the progress of our strategic review and the level of interest in Argo to date.
Thank you everyone for your time and for your interest in Argo Good day.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
Okay.
Okay.