Contact:

Susan Spivak Bernstein

Senior Vice President, Investor Relations

212.607.8835

susan.spivak@argolimited.com

 

2018 Third Quarter Recap

 

 

 

 

⁽¹⁾     Refer to Non-GAAP Financial Measures below.

⁽²⁾      The percentage increase in book value per share is calculated prior to the effects of cash dividends of $9.3 million paid to shareholders during the third quarter of 2018.

⁽³⁾     At assumed tax rate of 20%.

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U.S. Operations

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Gross written premiums in the 2018 third quarter of $482.6 million were up $53.7 million or 12.5% compared to the 2017 third quarter. This growth was achieved in all major lines of business, reflecting the continued execution of strategic growth and digital initiatives, while still executing on appropriate risk selection and exposure management actions.

 

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Net earned premiums in the 2018 third quarter of $278.3 million were up $35.7 million or 14.7% from the 2017 third quarter, driven by the aforementioned growth in gross written premiums across all major lines of business.

 

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The loss ratio for the 2018 third quarter was 56.1%, compared to 61.2% for the 2017 third quarter.  The lower loss ratio in 2018 third quarter reflects lower catastrophe losses, partially offset by a modest increase in the current accident year, ex-CAT loss ratio. The current accident year ex-CAT loss ratio for the 2018 third quarter was 57.9%, compared to 57.5% for the 2017 third quarter. This modest increase is primarily related to business mix changes.

 

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Net favorable prior-year reserve development for the 2018 third quarter was $10.7 million, consistent with the 2017 third quarter.  The current quarter favorable development is largely attributable to Liability and Specialty lines.

 

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Catastrophe losses for the 2018 third quarter were $5.6 million compared to catastrophe losses of $17.2 million in the 2017 third quarter.  In addition, the 2017 third quarter was adversely impacted by CAT-related premium adjustments of $3.8 million, resulting in a total catastrophe related impact of $21.0 million.

 

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The expense ratio for the 2018 third quarter was 32.5%, compared to 36.5% for the 2017 third quarter. The improvement in the expense ratio reflected the aforementioned 14.7% increase in net earned premiums and lower acquisition costs, partially offset by continued strategic investments in people and technology, including digital initiatives in support of premium growth. The 2017 third quarter included a $3.5 million charge relating to the final resolution of a premium tax dispute, which increased the expense ratio in the 2017 quarter by 1.4%.

 

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Underwriting income for the 2018 third quarter was $31.8 million, compared to $5.6 million for the 2017 third quarter. The $26.2 million increase in underwriting income is primarily related to lower catastrophe losses, an increase in underwriting gains related to the growth in net earned premiums, and improved scale, as reflected by a lower expense ratio.

International Operations

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Gross written premiums in the 2018 third quarter of $357.2 million were down $19.1 million or 5.1% compared to the 2017 third quarter.

 

As discussed last quarter, in connection with the full integration of the reinsurance business of Ariel Re that we acquired in 2017, beginning in 2018 we changed the capital structure supporting that business by introducing certain third party capital to participate in the exposures we underwrite. This third party capital receives a corresponding proportion of the gross written premiums. As such, this structure has the effect of reducing the gross written premiums reported in our financial statements. In exchange, we receive certain remuneration for originating risks and for the underlying underwriting performance. During the 2018 third quarter, approximately $53.4 million of gross written premiums are attributable to our third party capital partners. There was no such structure for our Ariel Re business in 2017.

 

The decline in gross written premiums also reflects the effects of corrective underwriting actions within Syndicate 1200, most notably the Property D&F business and the non-renewal of certain casualty line accounts in Bermuda. Partially offsetting these declines were increases in Liability, Professional and Specialty lines in Europe, Liability, Professional and Specialty lines in Syndicate 1200 (including 2017 Year of Account (YOA) adjustments), Professional lines in Bermuda, and to a lesser extent growth in Specialty lines in Latin America.

 

 

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Net earned premiums in the 2018 third quarter of $168.5 million increased $21.7 million or 14.8% from the 2017 third quarter due largely to adjustments to certain 2017 YOA account binders within Syndicate 1200, and earning impacts for net written premiums written in the later part of 2017 and in 2018, partially offset by the retained percentage of certain of our Lloyd's insurance and reinsurance businesses as noted above.

 

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The loss ratio for the 2018 third quarter was 66.9%, compared to 113.0% for the 2017 third quarter. The improvement in the loss ratio was due to lower catastrophe losses and an improvement in the current accident year ex-CAT loss ratio, partially offset by unfavorable prior-year reserve development recorded  in the 2018 third quarter compared to favorable prior-year reserve development for the 2017 third quarter.

 

The current accident year ex-CAT loss ratio for the 2018 third quarter was 54.3% compared to 60.9% for the 2017 third quarter. The 6.6 point improvement in the current accident year ex-CAT loss ratio is due primarily to the earned premium impact of one-time CAT and risk management reinsurance purchases in 2017 in connection with the acquisition of Ariel Re. The effect of these purchases was an increase to the 2017 current accident year ex-CAT loss ratio of 2.6 points.  Additionally, the 2018 third quarter reflected improved property experience as a result of lower attritional losses, in part due to corrective underwriting actions within the Property D&F book within Syndicate 1200.

 

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For the 2018 third quarter, net unfavorable prior-year reserve development was $2.5 million, compared to net favorable prior-year reserve development of $2.6 million in the 2017 third quarter.  The 2018 charge relates primarily to Syndicate 1200 Liability lines, partially offset by a reduction in Property lines.

 

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Catastrophe losses for the 2018 third quarter were $19.0 million and net inward CAT-related premium adjustments were $0.4 million for a net catastrophe impact of $18.6 million.  In the third quarter of 2017, catastrophe losses were $72.8 million and net outward CAT-related premium adjustments of $10.7 million were recorded for a total catastrophe impact of $83.5 million. The 2018 catastrophe losses are related to H urricane Florence, Typhoon Jebi and other catastrophe and weather-related events in the third quarter of 2018 and include losses related to certain aggregate excess of loss contracts.

 

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The expense ratio for the 2018 third quarter was 37.6%, compared to 43.3% for the 2017 third quarter. The decrease in the expense ratio relates to the aforementioned 14.8% increase in net earned premiums and lower operating costs within the Reinsurance business unit due to expenses attributable to third party capital providers, partially offset by certain investments in support of strategic growth areas, most notably in Europe, Latin America and Asia Pacific.  Additionally, the 2017 third quarter expense ratio was increased due to a reduction in net earned premiums due to one-time CAT and risk management reinsurance purchases mentioned above.

 

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The underwriting loss for the 2018 third quarter was $7.7 million, compared to an underwriting loss of $82.7 million for the 2017 third quarter. The $75.0 million improvement in underwriting results was due primarily to lower impacts from catastrophes.  As noted above, the 2018 third quarter includes catastrophe impacts of $18.6 million compared to $83.5 million in the 2017 third quarter.  Additionally, the 2018 third quarter reflected an increase in underwriting gains related to the $21.7 million growth in net earned premiums, partially offset by net unfavorable prior-year reserve development.

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CONFERENCE CALL

Argo Group management will conduct an investor conference call starting at 10:00 a.m. EST (12:00 p.m. AST) tomorrow, Tuesday, November 6, 2018. A live webcast of the conference call can be accessed by visiting https://services.choruscall.com/links/argo181106.html. Participants in the U.S. can access the call by dialing (877) 291-5203. Callers dialing from outside the U.S. can access the call by dialing (412) 902-6610. Please ask the operator to be connected to the Argo Group earnings call.

A webcast replay will be available shortly after the live conference call and can be accessed at https://services.choruscall.com/ccforms/replay.html. A telephone replay of the conference call will be available through November 13, 2018, to callers in the U.S. by dialing (877) 344-7529 (conference #10125398). Callers dialing from outside the U.S. can access the telephone replay by dialing (412) 317-0088 (conference # 10125398).

ABOUT ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

Argo Group International Holdings, Ltd. (NYSE: ARGO) is an international underwriter of specialty insurance and reinsurance products in the property and casualty market. Argo Group offers a full line of products and services designed to meet the unique coverage and claims handling needs of businesses in two primary segments: U.S. Operations and International Operations. Argo Group's insurance subsidiaries are A.M. Best-rated 'A' (Excellent) (third highest rating out of 16 rating classifications) with a stable outlook, and Argo Group's U.S. insurance subsidiaries are Standard and Poor's-rated 'A-' (Strong) with a positive outlook. More information on Argo Group and its subsidiaries is available at   www.argolimited.com .

 

FORWARD-LOOKING STATEMENTS

This press release may include forward-looking statements, both with respect to Argo Group and its industry, that reflect our current views with respect to future events and financial performance. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "expect," "intend," "plan," "believe," “do not believe,” “aim,” "project," "anticipate," “seek,” "will," “likely,” “assume,” “estimate,” "may," “continue,” “guidance,” “objective,” “outlook,” “trends,” “future,” “could,” “would,” “should,” “target,” “on track” and similar expressions of a future or forward-looking nature. All forward-looking statements address matters that involve risks and uncertainties, many of which are beyond Argo Group's control. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such statements. We believe that these factors include, but are not limited to, the following: 1) unpredictability and severity of catastrophic events; 2) rating agency actions; 3) adequacy of our risk management and loss limitation methods; 4) cyclicality of demand and pricing in the insurance and reinsurance markets; 5) statutory or regulatory developments including tax policy, reinsurance and other regulatory matters; 6) our ability to implement our business strategy; 7) adequacy of our loss reserves; 8) continued availability of capital and financing; 9) retention of key personnel; 10) competition; 11) potential loss of business from one or more major insurance or reinsurance brokers; 12) our ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements; 13) general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates); 14) the integration of Ariel Re and other businesses we may acquire or new business ventures we may start; 15) the effect on our investment portfolios of changing financial market conditions including inflation, interest rates, liquidity and other factors; 16) acts of terrorism or outbreak of war; and 17) availability of reinsurance and retrocessional coverage, as well as management's response to any of the aforementioned factors.

In addition, any estimates relating to loss events involve the exercise of considerable judgment and reflect a combination of ground-up evaluations, information available to date from brokers and cedents, market intelligence, initial tentative loss reports and other sources. The actuarial range of reserves and management’s best estimate is based on our then current state of knowledge including explicit and implicit assumptions relating to the pattern of claim development, the expected ultimate settlement amount, inflation and dependencies between lines of business. Our internal capital model is used to consider the distribution for reserving risk around this best estimate and predict the potential range of outcomes. However, due to the complexity of factors contributing to the losses and the preliminary nature of the information used to prepare these estimates, there can be no assurance that Argo Group’s ultimate losses will remain within the stated amount.

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The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein and elsewhere, including the risk factors included in our most recent reports on Form 10-K and Form 10-Q and other documents of Argo Group on file with or furnished to the U.S. Securities and Exchange Commission (“SEC”). Any forward-looking statements made in this press release are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Argo Group will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Argo Group or its business or operations. Except as required by law, Argo Group undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

NON-GAAP FINANCIAL MEASURES

In presenting the Company's results, management has included and discussed in this press release certain non-generally accepted accounting principles ("non-GAAP") financial measures within the meaning of Regulation G as promulgated by the U.S. Securities and Exchange Commission. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company's results of operations in a manner that allows for a more complete understanding of the underlying trends in the Company's business. However, these measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles ("U.S. GAAP").

“Underwriting income” is an internal performance measure used in the management of the Company’s operations and represents net amount earned from underwriting activities (net premiums earned less underwriting expenses and claims incurred). Although this measure of profit (loss) does not replace net income (loss) computed in accordance with U.S. GAAP as a measure of profitability, management uses this measure of profit (loss) to focus our reporting segments on generating underwriting income. The Company presents Underwriting income as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of its financial information.

“Current accident year ex-CAT combined ratio” and the “Current accident year ex-CAT loss ratio” are internal measures used by the management of the Company to evaluate the performance of its' underwriting activity and represents the net amount of underwriting income excluding catastrophe related charges (impacts to both premiums and losses),the impact of changes to prior year loss reserves and other one-time items that would impact expenses or net earned premiums. Although this measure does not replace the combined ratio it provides management with a view of the quality of earnings generated by underwriting activity for the current accident year.

“Total return on average investments” is an internal measure used by management of the Company to evaluate the performance of its investment and asset management activities and represents the total of net investment income, net realized gains and losses, and the net change in unrealized gains and losses. These returns are analyzed as a percentage of the average investments excluding investments managed on behalf of trade capital providers who are third-parties that provide underwriting capital to our Syndicate operations. This measure does not replace net investment income as a measure of return on invested assets. However, it provides management with an overall view of investment performance.

“Adjusted operating income" is an internal performance measure used in the management of the Company's operations and represents after-tax (at an assumed effective tax rate of 20%) operational results excluding, as applicable, net realized investment gains or losses, net foreign exchange gain or loss, and other similar non-recurring items. The Company excludes net realized investment gains or losses, net foreign exchange gain or loss, and other similar non-recurring items from the calculation of adjusted operating income because these amounts are influenced by and fluctuate in part, by market conditions that are outside of management’s control . In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing adjusted operating income enables investors, analysts, rating agencies and other users of the Company's financial information to more easily analyze our results of operations and underlying business performance. Adjusted operating income should not be viewed as a substitute for U.S. GAAP net income.

"Annualized return on average shareholders’ equity" ("ROAE") is calculated using average shareholders' equity. In calculating ROAE, the net income available to shareholders for the period is multiplied by the number of periods in a calendar year to arrive at annualized net income available to shareholders. The Company presents ROAE as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of its financial information.

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"Annualized adjusted operating return on average shareholders' equity" is calculated using adjusted operating income (as defined above and annualized in the manner described for net income (loss) available to shareholders under ROAE above) and average shareholders' equity. The assumed tax rate is 20%.

Reconciliations of these financial measures to their most directly comparable U.S. GAAP measures are included in the attached tables.

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(financial tables follow)

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(1)	New reporting requirements for the change in fair value of equity securities commenced January 1, 2018 resulting from our adoption of ASU 2016-01. Amounts for the three and nine months ended September 30, 2017 are not presented, as ASU 2016-01 was required to be adopted on a prospective basis.

(2)

For purposes of calculating these ratios, net earned premiums were adjusted to exclude reinstatement and other catastrophe-related premium adjustments of $0.4 million (inward premiums) for both the three and nine months ended September 30, 2018, and $14.5 million (outward premiums) for both the three and nine months ended September 30, 2017.

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(1)

For purposes of calculating these ratios, net earned premiums were adjusted to exclude reinstatement and other catastrophe-related premium adjustments of $3.8 million (outward premiums) for both the three and nine months ended September 30, 2017. There were no such premium adjustments for the three and nine months ended September 30, 2018.

(2)

For purposes of calculating these ratios, net earned premiums were adjusted to exclude reinstatement and other catastrophe-related premium adjustments of $0.4 million (inward premiums) for both the three and nine months ended September 30, 2018, and $10.7 million (outward premiums) for both the three and nine months ended September 30, 2017.

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⁽¹⁾ At assumed tax rate of 20%.

 

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⁽¹⁾ At assumed tax rate of 20%.

Note: In connection with the adoption of ASU No. 2016-01, during the first nine months of 2018, the company recorded a pre-tax loss of $22.1 million (after tax loss of $17.7 million) for the change in fair value of equity securities. As required by the accounting standard, prior year amounts are not restated to reflect this accounting change. Excluding the impact of this accounting change, net income would have been $124.9 million and the related annualized return on average shareholder's equity would be approximately 9.2% compared to 1.6% for the first nine months of 2017.

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