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HAMILTON, Bermuda–(BUSINESS WIRE)–Argo Group International Holdings, Ltd. (NYSE: ARGO) today announced
financial results for the three months ended March 31, 2019.

       

2019 First Quarter Recap

 

Net Income

Per Diluted Share

 

 

$2.63

↑ 270.4%

from Q1 2018

Adjusted Operating

Income Per Diluted

Share (1)

 

$1.18

↑ 12.4%

from Q1 2018

Gross Written

Premiums

 

 

$760.8M

↑ 7.1%

from Q1 2018

Combined

Ratio

 

 

94.8%

↓ 100 basis pts

from Q1 2018

Book Value

Per Share

 

 

$55.23

↑ 8.0%(1)

from Q4 2018

 

“Our strong first quarter 2019 results demonstrate our focus on
delivering value to shareholders.  Our annualized ROE of 20.1% in
the first quarter is an outstanding achievement. The 9.1%
annualized operating ROE for the quarter, a 100 basis point
improvement year-over-year, reflects strong momentum toward our
run rate objective of 10%.  In addition, book value per share
increased 8.0% from the beginning of the year,” said Mark E.
Watson III, CEO. “These results were enabled by a 7.1% increase in
gross written premiums, with a 10.2% rise in the U.S. Operations,
an improvement in our expense ratio, and a 26.6% increase in our
underwriting income.    We expect our strategy to continue to
deliver superior and sustainable returns to shareholders.”

 
 
HIGHLIGHTS FOR THE THREE MONTHS
ENDED MARCH 31, 2019
 

 

Net income was $91.2 million or $2.63 per diluted share,
compared to net income of $24.8 million or $0.71 per diluted share
for the 2018 first quarter, an increase of 270.4% compared to the
2018 first quarter.


The 2019 first quarter net income included pre-tax net gains
related to changes in the fair value of equity securities of $54.2
million, compared to pre-tax net losses related to changes in the
fair value of equity securities of $30.9 million in the 2018 first
quarter. These changes in fair value are included as a component
of Net Realized Gains and Losses on the income statement.

 

 

Adjusted operating income(1)(2) increased
12.6% to $41.1 million or $1.18 per diluted share, compared to
adjusted operating income of $36.5 million or $1.05 per diluted
share for the 2018 first quarter. Underwriting income
(1)
, a component of adjusted
operating income, increased 26.6% to $21.9 million, compared to
$17.3 million in the 2018 first quarter.

As previously
discussed, for purposes of calculating adjusted operating income,
effective January 1, 2019, the company prospectively decreased its
assumed effective tax rate to 15% from 20%. This change is in
response to ongoing tax planning strategies implemented following
the 2018 change in U.S. corporate tax rate from 35% to 21%.

 

 

Gross written premiums grew 7.1% to $760.8 million,
compared to $710.5 million for the 2018 first quarter. U.S.
Operations grew 10.2% to $410.7 million, compared to $372.8
million for the 2018 first quarter. International Operations grew
3.7% to $350.1 million, compared to $337.7 million for the 2018
first quarter.

 

The combined ratio was 94.8% compared to 95.8% for the 2018
first quarter. The loss and expense ratios for the 2019 first
quarter were 56.6% and 38.2%, respectively, compared to 57.2% and
38.6%, respectively, for the 2018 first quarter. The current
accident year, ex-CAT combined ratio was 94.1%, compared to 95.3%
in the 2018 first quarter.

 

Catastrophe losses were $5.5 million, compared to $4.3
million for the 2018 first quarter.

 

Net favorable prior-year reserve development was $2.5
million, compared to favorable prior-year development of $2.0
million in the 2018 first quarter.

 

Net investment income decreased 5.8% to $33.9 million,
compared to $36.0 million in the 2018 first quarter.

Net
investment income on the core portfolio increased 17.2% to $32.0
million, compared to $27.3 million in the 2018 first quarter. This
increase was primarily due to an increase in the invested asset
base and higher investment yields.

Alternative
investments, which are reported on a lag, contributed $1.9 million
in the 2019 first quarter, compared to $8.7 million in the 2018
first quarter, a decrease of 78.2%. This decline was primarily due
to the volatility in the securities market during the 2018 fourth
quarter.

 

The quarterly cash dividend was increased by 15% to $0.31 per
share.  Since 2010, cash dividends have increased by approximately
300%. The Company did not purchase any shares of its common stock
during the 2019 first quarter.

 

Book value per share increased 8.0%(1) to $55.23
at March 31, 2019, compared to $51.43 at December 31, 2018.

 

Notes

All references to catastrophe losses are pre-tax.

 

Point impacts on the combined ratio are calculated as the difference
between the reported combined ratio and the combined ratio excluding
incurred catastrophe losses and associated reinstatement and other
catastrophe-related premium adjustments.
 
 
(1) Refer to Non-GAAP Financial Measures below.
 
(2) For purposes of calculating Adjusted Operating Income, assumed tax
rates of 15% and 20% were used for the three months ended March 31,
2019 and 2018, respectively.
 

U.S. Operations

  • Gross written premiums in the 2019 first quarter of $410.7 million
    increased $37.9 million or 10.2% compared to the 2018 first quarter.
    This growth was achieved in Property, Professional, and Specialty
    lines, while writings within Liability were consistent with amounts
    written in the 2018 first quarter. The overall increase in gross
    written premiums reflects the continued execution of strategic growth
    and digital initiatives, and a new fronted program within the Property
    lines, while still executing on appropriate risk selection and
    exposure management actions.

    Net retained premiums (net
    written premiums as a percentage of gross written premiums) for the
    2019 first quarter were 60.5% (consistent with the fourth quarter of
    2018), compared to 66.8% for the 2018 first quarter. The overall
    current quarter decrease in the percent of net premiums retained was
    due in large part to an increase in ongoing strategic use of
    reinsurance programs, as part of overall risk management initiatives,
    and as it relates to Property, a new fronted program.

  • Net earned premiums in the 2019 first quarter of $273.8 million were
    up $11.5 million or 4.4% from the 2018 first quarter, driven by the
    aforementioned growth in gross written premiums partially offset by
    the increased use of reinsurance. All major lines of business, with
    the exception of Property, reported growth in net earned premiums
    compared to the 2018 first quarter. The decline in Property related to
    the aforementioned increased use of reinsurance.
  • The loss ratio for the 2019 first quarter was 56.5%, compared to 59.5%
    for the 2018 first quarter, an improvement of 3.0 points. The lower
    2019 first quarter ratio is driven by a 1.8 point improvement in the
    current accident year ex-CAT loss ratio, an improvement of 1.1 points
    from an increase in favorable net prior-year reserve development, and
    an improvement of 0.1 points from decreased catastrophe-related losses.
  • The current accident year ex-CAT loss ratio for the 2019 first quarter
    was 56.5%, compared to 58.3% for the 2018 first quarter. The 1.8 point
    improvement in the current accident year ex-CAT loss ratio was driven
    in large part by both increased rates in most lines of business and
    improved business mix trends. In addition, the 2018 first quarter
    included a number of discrete non-CAT, weather-related property losses.
  • Net favorable prior-year reserve development for the 2019 first
    quarter was $4.0 million, compared to $1.0 million in the 2018 first
    quarter. The current quarter favorable development related primarily
    to Liability and Specialty lines, partially offset by unfavorable
    development in Professional lines.
  • Catastrophe losses for the 2019 first quarter were $4.0 million
    compared to catastrophe losses of $4.3 million in the 2018 first
    quarter.
  • The expense ratio for the 2019 first quarter was 34.4%, which is
    consistent with the 2018 first quarter (which was also 34.4%). The
    2019 first quarter reflected lower acquisition costs associated with
    increased ceding commissions that were offset by continued strategic
    investments in people and technology, including digital initiatives in
    support of the aforementioned 10.2% gross written premium growth.
  • Underwriting income for the 2019 first quarter increased 55.0% to
    $24.8 million, compared to $16.0 million for the 2018 first quarter.
    The $8.8 million increase in underwriting income is primarily related
    to an improvement in the current accident year ex-CAT loss ratio, an
    increase in favorable net-prior year reserve development, lower
    catastrophe losses, and an increase in underwriting income related to
    the growth in net earned premiums.

International Operations

  • Gross written premiums in the 2019 first quarter of $350.1 million
    increased $12.4 million or 3.7%, compared to the 2018 first quarter.
    This growth was due primarily to Professional and Specialty lines, as
    Property and Liability lines approximate the 2018 first quarter
    writings. Geographically, the growth was primarily due to Bermuda
    (insurance) and Europe. Bermuda, which represented 58.8% of the
    overall increase, reported growth as a result of an increase in new
    business and favorable rate changes. Europe, which represented 41.1%
    of the overall increase, reported growth following the acquisition of
    Ariscom in the 2018 first quarter.

    Net retained premiums
    (net written premiums as a percentage of gross written premiums) for
    the 2019 first quarter were 32.1%, compared to 35.0% for the 2018
    first quarter. The current quarter decrease in the percent of net
    premiums retained was due in large part to an increase in ongoing
    strategic use of reinsurance programs and an increased use of
    third-party capital, most notably within Property Reinsurance lines.
    As a result, net written premiums for Property lines in the first
    quarter of 2019 decreased by $22.3 million or 72.6%, compared to the
    2018 first quarter. This decline was largely offset by growth in
    Specialty, Professional, and Liability lines.

  • Consistent with net written premiums, net earned premiums in the 2019
    first quarter of $146.7 million decreased $5.7 million or 3.7% from
    the 2018 first quarter. As noted above, all major lines of business,
    with the exception of Property, reported growth in net earned premiums
    compared to the 2018 first quarter. The decline in Property related to
    the aforementioned increased use of reinsurance and third party
    capital.
  • The loss ratio for the 2019 first quarter was 56.2%, compared to 52.0%
    for the 2018 first quarter. The increase in the loss ratio was due to
    2.3 points resulting from $0.8 million of net unfavorable prior-year
    reserve development in 2019 compared to net favorable prior-year
    reserves development of $2.8 million in the 2018 first quarter, 1.1
    points related to 2019 first quarter catastrophe losses of $1.5
    million, and 0.8 points from an increase in the current accident year
    ex-CAT loss ratio.
  • The current accident year ex-CAT loss ratio for the 2019 first quarter
    was 54.6%, compared to 53.8% for the 2018 first quarter. The increase
    in the loss ratio was driven by increased ceded reinstatement premiums
    paid (which reduced net earned premiums) in the 2019 first quarter as
    a result of higher ceded loss recoveries on prior-year catastrophe
    events.
  • Net unfavorable prior-year reserve development for the 2019 first
    quarter was $0.8 million, compared to net favorable prior-year reserve
    development of $2.8 million in the 2018 first quarter. The 2019 first
    quarter net unfavorable prior-year reserve development was driven by
    Liability lines largely offset by favorable development on Property
    losses related to various prior-year catastrophe events.
  • Catastrophe losses incurred for the 2019 first quarter were $1.5
    million. There were no catastrophe losses incurred in the 2018 first
    quarter.
  • The expense ratio for the 2019 first quarter was 37.5%, down modestly
    from 37.6% for the 2018 first quarter. The decrease in the expense
    ratio related to a decline in personnel and other operating costs,
    partially offset by an increase in the acquisition ratio.
  • Underwriting income for the 2019 first quarter was $9.2 million,
    compared to $15.8 million for the 2018 first quarter. The $6.6 million
    decline in underwriting results was due primarily to the decline in
    net earned premiums, as a result of increased reinsurance and use of
    third-party capital, the quarter over quarter increase in
    catastrophe-related losses of $1.5 million, and the unfavorable change
    in net prior-year reserve development of $3.6 million.

CONFERENCE CALL

Argo Group management will conduct an investor conference call starting
at 5:15 p.m. EDT on Monday, April 29, 2019. A live webcast of the
conference call can be accessed by https://services.choruscall.com/ccforms/replay.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/links/argo190429.html.
A telephone replay of the conference call will be available through May
6, 2019, to callers in the U.S. by dialing (877) 344-7529 (conference
#10131078). Callers dialing from outside the U.S. can access the
telephone replay by dialing (412) 317-0088 (conference #10131078).

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) (first 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;
17) availability of reinsurance and retrocessional coverage, as well as
management’s response to any of the aforementioned factors and; 18)
costs associated with shareholder activism.

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.

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.

“Adjusted operating income” is an internal performance measure used in
the management of the Company’s operations and represents after-tax (at
assumed effective tax rates of 15% for 2019 and 20% for 2018)
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 “percentage change in book value per share” included in the 2019
First Quarter Recap includes (by adding) the effects of cash dividends
paid per share to the calculated book value per share for the current
period. This adjusted amount is then compared to the prior period’s book
value per share to determine the period over period change. The Company
believes that including the dividends paid per share allows users of its
financial statements to more easily identify the impact of the changes
in book value per share from the perspective of investors.

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

   

ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

 
March 31, December 31,
2019 2018
(unaudited)
Assets
Total investments $ 4,903.5 $ 4,787.0
Cash 152.7 139.2
Accrued investment income 27.5 27.2
Receivables 3,334.6 3,338.2
Goodwill and intangible assets 270.1 270.5
Deferred acquisition costs, net 167.9 167.3
Ceded unearned premiums 562.5 457.7
Other assets 535.7   371.1
Total assets $ 9,954.5   $ 9,558.2
 
Liabilities and Shareholders’ Equity
Reserves for losses and loss adjustment expenses $ 4,668.9 $ 4,654.6
Unearned premiums 1,344.5 1,300.9
Ceded reinsurance payable, net 1,047.1 970.5
Senior unsecured fixed rate notes 139.9 139.8
Other indebtedness 183.0 183.4
Junior subordinated debentures 257.0 257.0
Other liabilities 433.5   305.3
Total liabilities 8,073.9 7,811.5
 
Total shareholders’ equity 1,880.6   1,746.7
Total liabilities and shareholders’ equity $ 9,954.5   $ 9,558.2
 
Book value per common share $ 55.23   $ 51.43
 

Contacts

David Snowden
Senior Vice President, Communications & Media
210.321.2104
[email protected]

Susan Spivak Bernstein
Senior Vice President, Investor Relations
212.607.8835
[email protected]

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