Argo Group International Holdings, Ltd.

Good morning. Thank you for attending today's Argo Group fourth quarter 2021 earnings call. My name is Queda. I will be your moderator for today's call. All lines will be muted in the presentation portion of the call with the opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to your host, Greg Chapinter with Argo Group. Please go ahead, Greg.

Thanks and good morning. Welcome to Argo Group's conference call for the fourth quarter and year ended December 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.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 this 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. On today's call, I will reflect on the progress we have made toward the strategic goals we have set for Argo over the past two years and review the operating highlights from the quarter and year. Scott Kirk, our Chief Financial Officer, will take us through additional detail on the financials, and I'll provide some closing remarks before we begin the Q&A. Our strategy continues to focus on growth in earned premium, reducing volatility, expanding our margins, and generating higher earnings. Although our fourth quarter results are below expectations, We remain encouraged by several strengths and accomplishments in the ongoing business. Having just completed my second full year as CEO, I'd like to begin by reflecting on the progress we've made against these goals. First, Bargo is a stronger, simpler operation. We have made meaningful progress toward our expense ratio target and expect to realize continued benefits in 2022 from our cost reduction efforts. Our expense reduction The efforts are not complete, and there are several areas that we are focusing on to drive additional expense savings over the coming year. Argo today is a U.S.-focused specialty cash insurer with leading positions in very profitable specialty lines. Over the past two years, Argo has divested its reinsurance operations, significantly reduced its property exposure through divestitures of U.S. specialty property and contract-binding business units, exited non-core lines of business and lowered volatility of its business model. As a result, we are in the fourth quarter of our journey, and I'm confident in the underlying strength and profitability of our ongoing business. Second, we completed the majority of our work towards reducing volatility in our underwriting results. Our strategic focus on reducing volatility through exiting and divesting non-core businesses is evident in 2021 catastrophe loss results. Despite elevated industry losses year over year, our catastrophe losses were down significantly, and in the ongoing businesses, net catastrophe losses have averaged 18 million annually over the last five years. And third, I would like to point out the strong progress we are making on growing our most profitable businesses. In fact, gross written premium has increased by approximately 15 percent in the full year of 2021 in the ongoing businesses. These are all notable milestones, which we will describe in more detail throughout the call. Let's begin by discussing our efforts to simplify the organization and reduce expenses. The actions we have implemented are our current year accident combined ratio, which improved three points in the 2021 fourth quarter. This was primarily driven by improvement in our expense ratio and to a lesser extent modest improvement in our current accident year ex-cat loss ratio, which marks the seventh consecutive quarter of year-over-year improvement. The benefits from expense reduction efforts continue to materialize in the fourth quarter results as expense ratio improved 2.9 points to 35.3 percent. Both the acquisition and general and administrative expense ratios contributed to the improvement, and we are making meaningful progress in several focus areas. We continue to reduce our future real estate expense base with the reduction of our real estate footprint in the UK as announced two weeks ago. Occupancy costs are expected to be down 8 million or 40% in 2022 when compared to 2019. Our headcount has decreased approximately 20% or just under 300 employees since July of 2020, including the divested businesses. Included in the fourth quarter non-operating expenses were charges related to certain information technology assets. ARGO will continue to focus resources on core lines of business as we reg size our asset base and exit certain locations. Expenses related to information technology are expected to decrease nearly 20% in 2022 as compared to such expenses incurred in 2019. When we began our expense reduction efforts, some of the identified savings will be invested back into the businesses to facilitate our growth and improve efficiency. Now turning to our focus on reducing volatility in our underwriting results, we are continuously looking at ways to optimize our portfolio and allocate capital and resources to business units within the highest risk adjusted returns. There are several cases where we've taken appropriate action in lines of business that are profitable contributors today. If we can't obtain the results we require, we will exit the line or business as we have previously demonstrated. While we always review our lines of business and respond to environmental changes in the marketplace, we feel confident in what comprises our ongoing business today. The results we achieved in our international operations further demonstrates the progress we've made after taking swift remedial action. In the 2021 fourth quarter, international operations generated an underwriting income of $36 million, its highest quarterly underwriting income in company history. The improvement was a result of favorable prior year loss development, a significant reduction in catastrophe losses, and an improved expense ratio. I'm pleased to announce that Syndicate 1200 was a strong contributor to these results, generating positive underwriting income in both the 2021 fourth quarter and for the full year. Market conditions which have compounded over the past three years, have allowed us to grow premiums while maintaining or reducing the amount of risk exposed. We expect the strategic transformation Argo has undergone in conjunction with current market conditions to drive improvement and underwriting results as we move forward. Now, to share more detail on our growing, our most profitable businesses, our top line in the quarter continued to reflect targeted growth in our prioritized business segments. Overall, gross written premium increased 2.3% in the quarter. However, ongoing business premiums grew approximately 11% during the fourth quarter of 2021. Net written and net earned premium outpaced gross written premium in the fourth quarter, driven by strategic actions and business mix shifts towards the lines of business with higher premium retention. Growth was more pronounced in our ongoing business as net written premium and net earned premium grew 24 and 20% respectively. U.S. gross written premium growth was 1.8% in the fourth quarter of 2021 due mainly to growth in specialty, casualty, and professional lines, while premiums in property lines declined. Gross written premium in our U.S. ongoing business increased approximately 12% in the fourth quarter of 2021. In the U.S., we continue to see solid rate increases in the mid-single digits on average. We feel very good about the rates we're seeing and the direction of our markets. It is worth noting the cumulative rate change for U.S. operations business written in the fourth quarter over the past three years has been 23.9%. Turning to international, reported gross premium increased 3.3% in the fourth quarter. The increase in gross written premiums is primarily attributable to higher rates, which averaged high single digits during the 2021 fourth quarter, partially offset by the impact of the exited businesses. In the ongoing business, excluding the increased share of Syndicate 1200's capacity, gross written premium was broadly in line with the prior year fourth quarter. Over the past three years, cumulative rate change for international operations business written for the fourth quarter has been 50.5%. We reported very strong results on the investment side, driven by a significant contribution from our alternative investment. Notably, net investment income from our bond portfolio increased in the fourth quarter, encouraging reversal from the trend experience in the first nine months of 2021. We have seen a recovery in reinvestment rates that has continued into the current quarter. For context, reinvestment yields were hovering around 1.1% in the first half of 2021 and today are closer to 2.5%. Fourth quarter underwriting results included reserve strengthening of $132 million 27 points on the loss ratio with adverse development coming from U.S. operations and runoff lines. As previously mentioned, this was partially offset by favorable development in our international operations. We believe the reserve actions we've taken during 2021 fourth quarter reflect all the latest and up-to-date information that was included in the fourth quarter reserve review. We conduct reserve reviews of all ongoing businesses each quarter. We maintain a continuous feedback loop between actuarial, underwriting, claims, and reinsurance operations that enhances our ability to react quickly to the findings of the reserve reviews. The Booker reserves the best estimates and believe they reflect the trends, both positive and negative, that we observe across our lines of business. Approximately $77 million of the adverse prior year development was driven by construction defect claims within Argo's U.S. operations. A large portion of the reserve increase for construction defect was associated with businesses that have either been discontinued, including contract binding in October of 2021, or have been significantly remediated. The remediated portion was previously underwritten by our casualty We established Argo Construction as a standalone business unit in June of 2018 to focus on the construction market with a greater depth of talent and knowledge. Most of the claims associated with contract binding and casualty were written outside of the core construction business. Over 95% of the construction defect prior year adverse development in 2021 fourth quarter applied to 2017 and prior years. We started taking underwriting action on construction defect at the end of 2017, including strengthening underwriting guidelines and placing significant restrictions on certain states and exposures. Much of the adverse reserve development was a result of analyses performed in the fourth quarter, which included, among other things, new and or updated information received relating to construction defect claims. As a result of the underwriting actions and the changed profile of the book, I would like to note that more recent accident years are performing within expectations. Management liability accounted for nearly $30 million of the adverse development in our U.S. operations in the 2021 fourth quarter. The reserve increase applied to accident years 2016 through 2018. The balance of adverse development in our U.S. operations was primarily driven by our U.S. specialty programs business, but we also took action in the current year. Prior year losses also include the conclusion of ARGO's annual runoff review of reserves, which resulted in a $38 million reserve increase for the 2021 fourth quarter. Included in our runoff line segment are claims related to risk management, work comp coverage, ESCOs and environmental liabilities, and other runoff lines. More than 55% of runoff net reserves are related to our risk management business, which has performed within expectation During the fourth quarter, we engaged an internationally recognized third-party actuarial firm to perform an in-depth review of our reserves across the company as of the year-end 2021. Our carried reserve total as of December 31, 2021, was above their central estimate when including our reserve strengthening actions in the 2021 fourth quarter. This is not an indication of any future performance, but it does give more confidence following the actions we took last year. I will now turn the call over to Scott to discuss our results in more detail.