Argo Group Reports 2018 Second Quarter Net Income of $41.8 Million or $1.20 Per Diluted Share
Aug. 06, 2018
HAMILTON, Bermuda--(BUSINESS WIRE)--Aug 6, 2018--Argo Group International Holdings, Ltd. (NYSE: ARGO) today announced financial results for the three and six months ended June 30, 2018.
“Improved underwriting results in both the second quarter and the first six months of 2018 reflect the continued execution of our business plan,” said CEO Mark E. Watson III. “In our U.S. Operations, gross written premiums were up over 12% in the quarter with continued strong underlying margins. In our International Operations, we reduced exposure to select risks, and allocated capital and resources where we can earn more attractive returns. In addition, we are making progress in our ongoing expense initiatives. The overall expense ratio improved by 1.3 points in the second quarter of 2018 to 37.5% compared to the same period in 2017, reflecting the streamlining of operations, our digital initiatives and use of technology, all while making continued investments in our strategic growth areas.”
(1) Refer to Non-GAAP Financial Measures below. (2) At assumed tax rate of 20%.
U.S. OperationsGross written premiums in the 2018 second quarter of $410.0 million were up $45.0 million or 12.3% compared to the 2017 second quarter. This growth was driven by all major lines of business, reflecting the continued execution of strategic growth initiatives, our digital initiatives, and appropriate risk selection and exposure management actions. Net earned premiums in the 2018 second quarter of $267.0 million were up $37.9 million or 16.5% from the 2017 second quarter, as all business lines increased. The loss ratio for the 2018 second quarter was 58.3%, compared to 53.6% for the 2017 second quarter. The higher loss ratio in 2018 second quarter reflects less net favorable prior-year reserve development than the 2017 quarter, partially offset by lower catastrophe losses. The current accident year ex-CAT loss ratio for the 2018 second quarter was 59.0%, compared to 57.4% for the 2017 second quarter. This increase is primarily related to a number of discrete non-catastrophe related property losses, partially offset by improving business mix trends. Net favorable prior-year reserve development for the 2018 second quarter was $3.1 million, compared to net favorable prior-year reserve development of $12.8 million for the 2017 second quarter. Catastrophe losses for the 2018 second quarter were $1.3 million compared to catastrophe losses of $4.0 million in the 2017 second quarter. The expense ratio for the 2018 second quarter was 31.8%, compared to 33.6% for the 2017 second quarter. The improvement in the expense ratio reflects the aforementioned 16.5% increase in net earned premiums, and to a lesser extent lower acquisition costs, partially offset by continued strategic investments in people and technology in support of premium growth. Underwriting income for the 2018 second quarter was $26.4 million, compared to $29.3 million for the 2017 second quarter. The $2.9 million decline in underwriting income is due to lower net favorable prior-year reserve development of $9.7 million, the aforementioned property losses, partially offset by lower catastrophe losses and a lower expense ratio.
International OperationsGross written premiums in the 2018 second quarter of $292.6 million were down $29.5 million or 9.2% compared to the 2017 second quarter. As part of the full integration of the reinsurance business of Ariel Re which we acquired in 2017, beginning in 2018 we changed the capital structure supporting that business by introducing certain third party capital to share in the risk and exposures we underwrite (based on predetermined percentages). 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 generating this business and for the underlying underwriting performance. During the 2018 second quarter, approximately $30 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 the Syndicate 1200 Property D&F business and the non-renewal of certain casualty line accounts in Bermuda. Partially offsetting these declines were increased premiums in Europe, growth in our Specialty lines in Syndicate 1200, and growth in our Bermuda Professional and Property insurance lines due to new business and increased rates. Net earned premiums in the 2018 second quarter of $150.5 million were down $19.4 million or 11.4% from the 2017 second quarter due to changes, as noted above, in the retained percentage of certain of our Lloyd's insurance and reinsurance businesses. The loss ratio for the 2018 second quarter was 58.9%, compared to 62.4% for the 2017 second quarter. The lower loss ratio in 2018 second quarter is due a 6.2 point improvement in prior-year reserve development compared to 2017 quarter, partially offset by an increase in the current accident year ex-CAT loss ratio. The current accident year ex-CAT loss ratio for the 2018 second quarter was 58.9%, compared to 56.3% for the 2017 second quarter. For the 2018 second quarter, net favorable prior-year reserve development was $0.5 million, compared to net adverse prior-year reserve development of $10.0 million in the 2017 second quarter which related primarily to Property, Liability, and Specialty lines. Catastrophe losses for the 2018 second quarter were $0.4 million compared to catastrophe losses of $0.5 million for the 2017 second quarter. The expense ratio for the 2018 second quarter was 36.8%, compared to 37.0% for the 2017 second quarter. The decrease in the expense ratio relates to modestly lower acquisition costs associated with syndicate operations, partially offset by certain investments in support of strategic growth areas, most notably in Europe, Latin America and Asia Pacific. Underwriting income for the 2018 second quarter was $6.4 million, compared to $1.0 million for the 2017 second quarter. The $5.4 million increase in underwriting income is due primarily to the net favorable year-over-year improvement in prior-year reserve development of $10.5 million, and to a lesser extent a modest improvement in the expense ratio. These improvements were partially offset by an increase in the current accident year ex-CAT loss ratio.
Argo Group management will conduct an investor conference call starting at 11:00 a.m. EDT (12:00 p.m. ADT) tomorrow, Tuesday, August 7, 2018. A live webcast of the conference call can be accessed by visiting https://services.choruscall.com/links/argo180807.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 August 14, 2018, to callers in the U.S. by dialing (877) 344-7529 (conference # 10122868). Callers dialing from outside the U.S. can access the telephone replay by dialing (412) 317-0088 (conference # 10122868).
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 stable outlook. More information on Argo Group and its subsidiaries is available at www.argolimited.com.
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 cedants, 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.
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, as adjusted”, “Current accident year ex-CAT loss ratio, as adjusted”, and “Expense ratio, as adjusted” 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, the impact of changes to prior year loss reserves and other non-recurring items. 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.
"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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