Argo Group International Holdings, Ltd. (ARGO) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Argo Group First Quarter 2021 Earnings Conference Call. . Please note this event is being recorded. I would now like to turn the conference over to Brett Shirreffs, Head of Investor Relations. Please go ahead.
Brett Shirreffs: Thanks, and good morning. Welcome to Argo Group's conference call for the first 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.argo group.com and was filed with the SEC. Presenting on today's call is Kevin Rehnberg, Chief Executive Officer; and Scott Kirk, Chief Financial Officer. As the operator mentioned, this call is being recorded.
Kevin Rehnberg: Good morning, and thank you for the introduction, Brett. Welcome to everyone on the call. I'm happy to be speaking with you again today, just about 7 weeks since our investor update in March. A lot has happened since then, including a change in our outlook from A.M. Best. We are pleased that A.M. Best revised our outlook to stable, and we certainly believe that the actions we have taken demonstrate our commitment to producing better returns, becoming more efficient and maintaining a strong balance sheet. We have the benefit of a few more data points since we last spoke, and our experience continues to suggest that the market remains strong and is likely to provide lots of opportunities for specialty carriers like Argo going forward. As you will see from the numbers, our strategic actions and expense focus are beginning to become evident in our underlying combined ratio results. Pricing, terms and conditions, all have maintained momentum and there are signs that parts of the economy are turning. This environment should allow us to grow in a disciplined manner while improving our margins. While our top line was impacted by business exits and reunderwriting actions, our strategic growth areas continue to produce strong growth and margin results. Excluding the impact of Ariel Re, our planned exits in Italy and Malta and our U.S. Grocery business, gross premiums were up approximately 6.5%. This is within the growth range that we outlined for the full year when we provided guidance in March. Both the U.S. and International segments contributed to this underlying growth picture, although it was impacted by our actions to reduce property exposure.
Scott Kirk: Yes. Thank you, Kevin, and good morning, everybody. In the first quarter, we made good progress towards our strategic initiatives and our financial targets. The ex-CAT accident year combined ratio for the quarter of 93.4% is a 250 basis point improvement over Q1 2020. Importantly, this being driven by improvement in both the ex-CAT accident year loss ratio and the expense ratio. Our operating EPS was $0.44 for the first quarter and annualized operating return on common equity was just under 4%. These improvements have been achieved despite the catastrophe events during the quarter. Turning to operating results. Gross written premiums declined 8.4% in the first quarter of 2021, largely due to the impact of the sale of Ariel Re and the business exits we have announced over the last few quarters. As Kevin mentioned earlier, excluding these business exits, premiums were up over 6% in the quarter.
Operator: . The first question comes from Greg Peters with Raymond James.
Charles Peters: I will focus my first question around retention. There -- obviously, there's a lot of moving parts in your top line with the sale of Ariel Re and the other actions that you're taking. But there has been some noise in the marketplace about some other departures that weren't necessarily planned for within the company. So I was wondering, Kevin, without specifically calling out things like that, if you could just give us an idea of how retention is evolving at the company with key producers and key underwriters and if you think that everything is intact or where your challenges are?
Kevin Rehnberg: Yes. Greg, thanks. The movement of people happens from time to time in the business, and we do have some going in and some coming out. And I think it's important to remember that all of our businesses have different stages. And in each stage as they grow and develop, there's different skill sets that are brought to the party by certain leaders, and some of them are needed by us or desired by those folks. So as an example, folks who really enjoy building businesses, there's a lot of opportunities in the marketplace at the moment with a lot of the capital that's moved in, in some of the new entrants and folks find that attractive. The good news is we have institutionalized our businesses, and we don't have anything that's dependent upon any one individual. We've got strong leadership teams and very good producer relationships. To just briefly move to the retention piece with the producers. Our retentions of -- renewal retention has actually moved up this year in most businesses, they're the ones that we're trying to grow in, as opposed to what we've seen in previous years. But the opportunities that exist then for individuals as some of these leaders move on is also helpful, all the way down the line. And it's really not that unusual. The timing of this is unusual that there were several at 1 time, and we got a couple of headlines. But when you look at the 6 businesses we identified, 2 of those we've had leadership changes in, but we had 2 leadership changes last year in those businesses, too. And so again, it's not something that's unusual for a specialty business. The timing and the headlines are, as I mentioned. But I think we're in great shape for growth going forward, and these businesses are performing well with good teams.
Charles Peters: Great. Makes sense. Can you -- I'd like to pivot to the expense ratio in the U.S. operations. And I'm just looking on that table that you provided. And I do appreciate the breakout of acquisition and general and administrative. It provides some additional clarity to the moving pieces. And I guess when I look at that, I'm trying to reconcile what you're saying about these improvements and investments with the numbers I'm seeing on the page as it relates just to the U.S. operations. So maybe you can help bridge the gap, why the acquisition ratio was up, why the general and administration expense ratio was up in the quarter. I'm sure it's -- there's a reasonable explanation to it.
Kevin Rehnberg: Yes. No, this is the one that really jumps out at everybody because it seems to be counter to what we've been saying. Only if you look at the first quarter of this year in isolation versus the first quarter last year. So what I mean by that is our expense ratio -- the way it generally flows through the year. The 3 previous years all ended up in the mid-32 range. And in the first quarters of those years, we had 34.3%, 34.4%, then 31.8% last year. So this is back to more of a normalized first quarter for us. And it balanced itself out last year, I mean, through the balance of the year. The two things that drove the overall expense ratio the most were a reinsurance transaction timing, for one, and how it affected the earned premium in that quarter. And the other was related to some IT expenses. There is more detail to it than that, but that's, in general, the first part of your question answered. The second piece on the acquisition costs, that is completely driven by business mix, although it was impacted a little bit by the Trident transaction we did. So that transaction drove up the expense ratio a little bit. But the trade-off, we thought was a good one for the overall business. But the business mix and some of the things we're driving out or have pulled out of, actually, had lower expense ratios. And then on the G&A side, there -- I'll let Scott follow-up on this. But in general, it's -- some of it has to do with the size of a taxpayer. And that there's -- I don't think we've got an issue from that standpoint in terms of the investments we're making and the rate of growth there. So overall, as we mentioned, it's not going to be linear, but some of the actions we're taking, some of the expenses that come through this year just are -- I don't want to use the word alarming, but they stand out in a way that I expected this question. So Scott, would you like to add anything?
Scott Kirk: Kevin, I think that's a pretty comprehensive answer. And Greg, I guess I'd just take us back to the investor update and say that, look, our expense story was going to be driven by two components here. The first one being increased earnings coming through, and you're seeing that importantly in the first quarter, and then the second piece would be about reducing our expense dollars. And I'm certainly getting my seat under the table here. And we have actually taken -- we've been able to take some actions early in Q2 here to reduce the level of expenses go forward. And we remain confident that we're going to hit those expense targets that we have out there.
Charles Peters: Understood. The other question that -- I have a lot of them, but I'll just pivot to the last question for net investment income. You called out the alternatives. You called out the lower run rate of investment income x alternatives. Should I look at the $23.7 million that you did in the first quarter of net investment income, excluding alternatives, is sort of like a good quarterly run rate, give or take?
Kevin Rehnberg: Yes. I think that's with the message we're trying to get across on the investor update and in previous calls, is that it's closer to that number. And that -- because I think folks have been thinking about reaching for something a bit higher, recognizing we still have an element of the other portfolio. So yes, that's -- Scott, do you want to add anything to that?
Scott Kirk: Yes. No, I think that's absolutely right, Kevin. I would say, though, with rates moving a little bit, Greg, we hope to see that number maybe come up towards the end of the year a little bit. But it's not going to be all that sensitive to cash flow in there. So look, it's not a bad run rate for now. And hopefully, we can come in a little bit higher than that towards the end of the year, but not that meaningful. I don't want to come across as it's going to be a major shift, but hopefully, a little up.
Charles Peters: Okay. Just one final recommendation. And I don't want -- and I don't want this to be misconstrued because you do provide a lot of information. With all the moving pieces, understanding how reinsurance works and how storms may affect the your underwriting income would be helpful. And I know you called out the -- you will have reduced your to Florida storms, 40% and 4% PML or 4% of shareholders' equity, beginning in the Florida storm season, but understanding how your reinsurance works for other events because Florida hurricanes aren't the only events out there. And again, I'm not suggesting you provide the secret sauce in it. But some better clarity at some point might be helpful. And I just thought I'd throw that out there. That's all I have to say.
Kevin Rehnberg: No, Greg, it's a -- thank you. And it's a very valid point that a number of folks have been asking about. And it's because of the way the business is running off at a 1-1 time frame, the 4-1 renewals, anything that was 5-1, some that are 7-1s. And then how we're moving out of certain businesses, it does move -- it's literally been moving on like a monthly basis, but it's all been down. And I think what we were trying to do with the Florida piece was be instructive to say, this is in general how things are moving forward. But the reduction will come back with a specific number at the next call in terms of what percentage it is down because by that point, it will be final. But the actions that are being taken are moving us closer to that number, which is over 25% at the moment.
Operator: The next question comes from Bob Farnam of Boenning and Scattergood.
Robert Farnam: Just to continue on that theme. So I'm assuming your CAT load that you're looking for, you had been in kind of the 3% to 4% range every year. As the business flows off as Ariel Re flows off, we do expect that CAT load, like the CAT load for 2022, for example, would that theoretically be lower than it has been?
Kevin Rehnberg: Yes. Bob, that's a great question. And I think in theory, yes, but in practice, probably not, given the fact that the catastrophes that we're facing and everyone's facing are up. And I think when you just look at the costs of rebuilding and things like that, that are coming into the overall exposures, while we're reducing exposure, the CAT profile and what we're facing doesn't seem to be abating at the moment. So in order to counter that and accept the fact that we are getting rate, but we do need some other things. We'll probably keep it in the range it's been. This year, it's actually because of exposure was down, it's actually up over what it was. So I think we'll continue to assess that. And again, how much we reposition the book will drive what that number ultimately is, and we'll continue to talk about it.
Robert Farnam: Understood. Okay. I'm assuming -- so for the COVID losses, I'm assuming events are still being canceled as we speak. I mean, it's -- not everything is back up to running speed yet. So should we expect further losses here in the second quarter and perhaps in the third quarter as everything kind of gets back up to speed?
Kevin Rehnberg: Yes. So the approach we took, just for everyone's benefit, was that we were going to address them each quarter rather than just make an assessment, pick a number and try to figure out when it ended. And we did say it would decline every quarter, and that's exactly what has happened, and it's gotten down to a point now where it's a low single-digit figure this quarter. I would expect that the numbers will continue depending on how long the pandemic continues to have some things come in. But bear in mind that there may be some expenses at different times as we go into the future that show up just based on all the litigation that's out there, and the fact that some of this stuff may take 3 to 4 years to settle, given what estimates are coming from people. But I think the majority of our exposure was seen last year. And I think the numbers play that out. When you look at what we ended up with last year versus what you're seeing here.
Robert Farnam: We're -- I guess we're getting to the point now where it's been probably long enough since the beginning of COVID that -- did you start changing the policy language in some of these -- in some of your policies that perhaps would reduce the exposure as well?
Kevin Rehnberg: Yes. We really had -- that was not something that we had a big problem with across the board, right? I mean we had a few circumstances where we had specific coverage grants, but those have finite limits on. And so I think there's -- it wasn't like we -- that situation in the U.K., right? We had a small exposure to that, but was very small, and it was dealt within a quarter that you've seen the numbers were previously. It wasn't like we had products that were out there that had a lot of exposure that way. So we just continue to move along. And we haven't seen new areas of development. There may be some, but our main exposure really was on the contingency side and then that specific property side. And as I'd mentioned a year ago, we had a very specific environmental product that covered virus cleanup that we had in that first quarter there. And then some other property exposures that were across the board. But we're expecting it to be modest as we go forward.
Robert Farnam: Yes. Heard it. Okay. And last question for me. So in the past, we've been kind of guided to use maybe a 15% effective tax rate going forward. Is that still the case with all the moving parts and been getting rid of Ariel Re? I'm just kind of curious about the effective tax rate has changed or our expectations for the effective tax rate will change going forward?
Kevin Rehnberg: Yes. I'm going to pass this one right to Scott because he's in the middle of that one.
Scott Kirk: I thought you might do that, Kevin. Look, Bob, it's a good question, and there are a lot of moving parts here because, as you know, your effective tax rate is always going to be driven by emergence of profits and where the emergence of those profits come from, right? But for now, I think we're sticking with that 15% as our estimate. And look, if things change, and profit shifts around in the Group then will definitely come back and let you know.
Operator: The next question comes from Casey Alexander with Compass Point.
Casey Alexander: I guess I only get one chance to ask this question because the shift in business mix here has been pretty extraordinarily complex, with some lines completely stopped, some lines where you stopped the clock but there's still things earning in the growth on one side. So how do you see premiums earning in relative to what you earned in, in the first quarter over the rest of the year? Because it is a pretty complex mix of how your earned premiums are coming into the income statement.
Kevin Rehnberg: Yes. So there's a couple of things at play here that factor in as well. Some of the things we are out of no longer require reinsurance, and we had programs that may have reached across the Group that we're reassessing. And as we've -- so there's a reinsurance element of this as well. But remember, the largest group that was -- I don't know if it was the largest, but we went through all the premium last year on a gross basis. But on a net basis, it was a lot lower, right? And as we go through the year, the growth we're seeing in the larger areas, absent in the U.S., will take care of whatever issues we are dealing with and moving out of in the U.S. That's the first piece. On the International side, on the top line because of the impact of Ariel there's -- and some reunderwriting, it is more of an issue there with Italy and Malta. And on the earned premium side, I don't remember the exact number. Scott, do you -- as to what that may be?
Scott Kirk: Not off the top of my head, Kevin.
Kevin Rehnberg: So we're going to have to come back to you on that in terms of what the expectation is. But it's all factored into the guidance we gave. So it's -- and it's just tough to figure out because it will sort itself out sort of halfway through the year, right, because that's where I think this stopped.
Casey Alexander: Well, if you think it's tough for you, you ought to try it from the outside.
Scott Kirk: Casey, it's Scott here. Maybe I can help a little bit with that. At the Investor Day, we did go back and try to give you a bit of a look both on a -- on how premium flowed through on an annual basis as well as the earnings split by the U.S. and International. I thought that might be a helpful place for a year to go and have a look to see if that plays in a little, in terms of what you're looking for.
Casey Alexander: Okay. Secondly, on the net investment income, I know your base is $23 million and change. But I mean are you suggesting that we just modeled no earnings for the alternative side? I mean, it would seem to me that there would be some expectation that, over time, that would add to that $23 million base.
Kevin Rehnberg: Yes. That is absolutely correct. But I think that -- I think I answered the question as asked relative to what he was asking on that part of the portfolio. And I did mention that we would see, continue to see some income from the alternative side.
Operator: . The next question comes from Ron Bobman with Capital Returns.
Ronald Bobman: I had a sort of a core business question and sort of app, I guess, sort of counts. I think it's going back, I don't know, it's probably easily a year, maybe as much as 3 years, sort of the E&S market broadly, and I'm talking about your core E&S business has enjoyed a real pickup in sort of shots at the basket, sort of submissions were up across the board for everyone in that segment. And I imagine in the earliest days, that was really a function of sort of competitive behavior, whether it was Lloyd's or other E&S companies sort of taking a different view towards underwriting and presenting an opportunity. But of late, from what I understand, the E&S stamping office measures are also showing a continued pickup in submissions and, I guess, writings, I guess. Is it now really much more a function of the economy driving those volumes up further, and less so about sort of competitive underwriters retrenching or taking action that's prompting a pickup in opportunities?
Kevin Rehnberg: Yes. Look, Ron, that is a great question. And I think -- I'm just looking at our submissions here for those areas. And we were excluding contract and property because of our actions. See, 2 things happened. One is things flow into the E&S market or they flow into the regular market. And then producers respond to our appetite, so we've got to look at each instance like, wow, we've got one that's up 70%. Okay. Well, we really weren't doing much of that last year, right? So -- and there's others that are down 60%, but we're trying to get out of that business. So when you look across the board in the quarter, we were up in low single digits across the board. But in March, it was a little bit higher than that. But in April, it's 16% across the board, right? Excluding the 2 areas that we're really trying to get out of. And it's so -- the double-digit growth in the submission change is so high. It has to be the economy, right? Because it can't just be the -- it can't just be the insurance market. A lot of these businesses, we were in -- we were open. So I would say based on that, the economy is helping there as well.
Ronald Bobman: Right. Right. And presumably, your CFO isn't allowing isn't allowing you to pay the intermediaries anymore. So that isn't driving it.
Kevin Rehnberg: Yes, it's interesting. They -- the market sort of dictates what that amount is, but -- and it does vary by line. And there are multiple sources. So we're cognizant of all that. But the business flow in April is really encouraging.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Kevin J. Rehnberg for any closing remarks.
Kevin Rehnberg: Thank you. I appreciate everyone's interest. The involvement that you're -- and support you're giving the company. So thanks to our shareholders, to our Wall Street community following us, to our employees and producers and anyone else supporting us. So I hope everyone has a good day. Look forward to catching up soon. Thanks.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
