Argo Group International Holdings, Ltd.

Hello and welcome to the Argo Group third quarter 2021 earnings call. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star one on your telephone keypad. If you wish to withdraw your question, you can press star two. I will now hand over to your host, Greg Charpentier, AVP of Investor Relations and Corporate Finance. Greg, over to you.

Thank you and good morning. Welcome to Argo Group's conference call for the third quarter of 2021. After the market closed last night, we issued a press release on our earnings, which is available in the investor section of our website at www.argogroup.com and was filed with the SEC. Presenting on today's call is Kevin Renberg, Chief Executive Officer, and Scott Kirk, Chief Financial Officer. As the operator mentioned, this call is being recorded. As a result of the conference call, ARGO management may make comments that reflect their intentions, beliefs, and expectations for the future. Such forward-looking statements are qualified by the inherent risks and 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 this call. For a more detailed discussion of such risks and uncertainties, please see Argo Group's filings with the SEC. Also note that we will be referencing certain non-GAAP financial information. More information regarding these non-GAAP measures are provided in our earnings release. I will now turn the call over to Kevin Renberg, Chief Executive Officer of Argo Group.

Good morning, and thank you for the introduction, Greg. Welcome to everyone on the call. I'm happy to speak today about the strong results we reported. Our operating earnings per share was 91 cents for the third quarter, despite elevated catastrophe losses the industry experienced. Argo's annualized operating return on common equity was 7.3 percent. Our loss ratio improved 9.8 points to 64.0 for the third quarter and reflects lower catastrophe losses and an improved underlying loss ratio, which is directly attributable to the strategic direction we have implemented at Argo. We continue to make progress on reducing expenses, implementing our growth plan, and the actions we are implementing are starting to come through in our financial performance as we remain focused on pursuing profitable growth, improved underwriting margins, reduced volatility, and disciplined expense management. I'm particularly proud of the results achieved given the elevated catastrophe losses facing the insurance industry this quarter. Over the past year, we have highlighted our strategy to reduce the volatility of our underwriting results and allocate capital to businesses with more stable returns. This was evident in the most recent quarter as our efforts to reduce property catastrophe exposure led to a significant improvement in our results. We made the decision to exit our reinsurance operations in 2020 as we actively adjusted our insurance business to significantly reduce volatility. Given the tougher conditions the reinsurance market has experienced recently, we are very happy with the direction we have taken. We continue to increase attachment points and reduce limits across multiple areas of our portfolio. In our US excess casualty portfolio during the first nine months of 2021, the average attachment point is up 26% while the limits are down 11% compared to the same period in 2020. Our D&O portfolio, average limits have continued to decrease as well. And over the past two years, commercial primary and excess limits have decreased by 45 percent and 11 percent respectively. Importantly, this leads to increased underwriting profitability while at the same time limiting volatility. We continue to execute on our priority of becoming a leading U.S.-focused specialty insurer. This quarter, we executed on several transactions to exit underperforming or non-strategic businesses, including the recent announcement to sell our Brazil operations, Argos Seguros, and we closed on the sale of our contract P&C business in October. Now our business is comprised of three main platforms. Our U.S. operations, which represent two-thirds of our business on a go-forward basis, followed by Syndicate 1200 and Bermuda Insurance. U.S. specialty risks are regularly placed in the Lloyd's market and Bermuda. In these platforms, we are focused on U.S. specialty risks, and we are targeting business in which we have demonstrated our expertise. Our Bermuda insurance business has an impressive long-term track record generating underwriting profits in nine of the last 10 years, and we have taken numerous actions in Syndicate 1200 on the business to optimize this portfolio and are starting to see them come through our financial results. On the investment side, we reported very strong results driven by a significant contribution from our alternative investments portfolio. We adjusted our portfolio to targeted asset allocations based on a study conducted at the end of last year. Our bond portfolio is more heavily weighted to short durations due to the profile of our liabilities. A portfolio with shorter duration for us of three years and A plus credit quality positions are go well in an inflationary environment. We also continue to hold allocations in equities and alternatives. In terms of underlying growth, our top line in the quarter continued to reflect our focus on growth areas. Overall, gross premium was down 1.6 percent in the quarter. The decrease in gross written premiums is attributable to the businesses we are exiting, plan to exit, or have sold, including sales of Ariel Rio November 2020, contract binding, in October 2021, and businesses in Italy, Malta, and the U.S. grocery business. In the ongoing businesses, premiums grew approximately 17 percent during the third quarter of 2021 when compared to the third quarter of 2020. U.S. growth was 3.7 percent in the third quarter of 2021. Premium growth continues to be driven by businesses we highlighted in March as grow and invest businesses, and those include Argo Pro, Casualty, Construction, environmental, inland marine, and surety. These businesses, which represent nearly two-thirds of our U.S. operations gross written premium, were up approximately 20% in total during the quarter. And more importantly, these businesses remain highly profitable with the combined ratios in the 80s and minimal catastrophe losses. There was meaningful top-line impact from our decisions to reduce exposure in property and underperforming business units. On a year-to-date basis, these actions have limited top-line growth by over $60 million. but have improved overall profitability. In the US, we continue to see solid rate increases in the mid single digits on average. This is a bit less than the increase we experienced over the last couple of quarters, but we feel very good about the rates we're getting in direction of our margins. Our grow and invest businesses outpace the US average, increasing in the high single digits range. Turning to international, reported gross premiums were down about 10% in the third quarter due to the impact of businesses we are exiting, plan to exit, or have sold, including the sale of Ariel Re in November 2020, and the planned exits of businesses in Italy and Malta. In the ongoing businesses, excluding the increased share of Syndicate 1200's capacity, gross written premiums were up approximately 19%, primarily due to the higher rates. Of this growth, rate increases and exposure from lines with attractive market conditions each contributed approximately one-half of that growth. Pricing continued to be strong in the quarter with rate increases averaging 11 percent in international and continue to remain broad-based. Over the past three years, cumulative rate change for Syndicate 1200 has been 32 percent and approximately 110 percent for Bermuda Insurance. We believe these businesses are well positioned to continue to generate favorable underlying margins and market conditions remain attractive across most of our platform. We will continue to de-emphasize or take strategic actions in lines where we believe market conditions are not attractive or where we do not have a competitive advantage. Now turning to expenses, we continue to make progress towards driving efficiency in our operations. On a year-to-date basis, our non-acquisition expense ratio continues to decrease, and we are making meaningful progress in several areas. We have reduced our real estate footprint as we've embraced a hybrid and flexible work environment. Including the divested businesses, our headcount has decreased by 16%, or 248 employees since July 2020. Additionally, we have consolidated, renegotiated, or eliminated a number of contracts with outside vendors, with additional significant savings to be realized going forward. We continue to target a 36 expense ratio for the full year 2022. Overall, I'm very pleased with our results for the quarter and the progress we've been able to make on our strategic objectives. I will now turn the call over to Scott to discuss our results in more detail.