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Argo Group International Holdings, Inc. (ARGO)·Q2 2023 Earnings Summary

Executive Summary

  • Q2 2023 delivered modest improvement in net loss per share to ($0.01) with total revenue of $364.3M; underwriting deteriorated as the combined ratio rose to 106.8% on higher loss ratio and adverse prior-year development .
  • Expense ratio improved to 33.6% (–180 bps YoY), aided by portfolio simplification, while net investment income rose 11.9% YoY to $32.8M on higher rates, partly offset by lower alternatives .
  • U.S. segment’s combined ratio worsened to 108.1% on inflationary loss cost trends, D&O rate pressure, and adverse reserve development; International’s combined ratio improved sharply to 67.7% driven by ceding commissions and exited lines .
  • No formal financial guidance; the primary near‑term catalyst remained the pending Brookfield Reinsurance merger, expected to close in 2H 2023, pending regulatory approvals (maintained) .
  • Wall Street consensus EPS and revenue estimates from S&P Global were unavailable; estimate comparisons not provided.

What Went Well and What Went Wrong

What Went Well

  • Expense discipline: consolidated expense ratio improved to 33.6% (–180 bps YoY), reflecting business mix changes post-Lloyd’s sale .
  • Investment income tailwind: net investment income grew to $32.8M (+11.9% YoY) on higher reinvestment rates despite weaker alternatives .
  • International segment improvement: combined ratio fell to 67.7% (from 103.5% in Q2’22) with acquisition expense ratio of –29.0% due to ceding commissions and exits; no CAT losses in the quarter .
  • Management tone: “focused on lowering expenses and reducing earnings volatility,” citing low CAT losses despite elevated industry CATs and ongoing portfolio repositioning .

What Went Wrong

  • Underwriting deterioration: combined ratio increased to 106.8% (from 96.2% Q2’22), driven by a higher loss ratio of 73.2% (+1,240 bps YoY) and $26.4M of adverse prior-year development (8.0 pts on loss ratio) .
  • U.S. segment headwinds: CAY ex‑CAT loss ratio rose to 64.5% (+600 bps YoY) on claims inflation, evolving loss trends, and weaker rates in management liability (commercial D&O saw low double‑digit rate decreases) .
  • Top‑line drag from portfolio actions: consolidated GWP fell 23.2% YoY, NWP –25.6% YoY, earned premiums –27.4% YoY, largely from sold/exited businesses (including Lloyd’s Syndicate 1200) .

Financial Results

MetricQ2 2022Q4 2022Q1 2023Q2 2023
Total Revenue ($M)443.2 383.7 401.7 364.3
Diluted EPS ($)(0.54) (3.19) (1.04) (0.01)
Operating EPS (non-GAAP, $)0.89 (2.69) (0.31) (0.02)
Combined Ratio (%)96.2 138.2 108.1 106.8
Loss Ratio (%)60.8 88.0 73.0 73.2
Expense Ratio (%)35.4 50.2 35.1 33.6
CAY ex‑CAT Combined (%)92.0 126.1 94.7 97.9
CAY ex‑CAT Loss Ratio (%)56.6 75.9 59.6 64.3

Segment performance (Q2 2023 vs Q2 2022):

Segment MetricQ2 2022Q2 2023
U.S. Earned Premiums ($M)332.8 311.2
U.S. Combined Ratio (%)91.5 108.1
U.S. Loss Ratio (%)60.8 73.7
U.S. Expense Ratio (%)30.7 34.4
U.S. CAY ex‑CAT Combined (%)89.2 98.9
International Earned Premiums ($M)121.3 18.6
International Combined Ratio (%)103.5 67.7
International Loss Ratio (%)59.4 62.4
International Expense Ratio (%)44.1 5.3
International CAY ex‑CAT Combined (%)95.5 65.5

Operational KPIs:

KPIQ4 2022Q1 2023Q2 2023
Gross Written Premiums ($M)644.5 596.7 561.9
Net Written Premiums ($M)326.7 335.9 348.9
Earned Premiums ($M)350.5 389.9 329.9
Net Investment Income ($M)28.9 29.7 32.8
Catastrophe Losses ($M)9.4 3.6 3.1
Net Prior‑Year Reserve Development ($M)33.1 48.6 26.4
Book Value per Common Share ($)31.06 (12/31/22) 31.31 (3/31/23) 31.00 (6/30/23)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Merger closing timeline2023Expected 2H 2023 (subject to regulatory approvals) Expected 2H 2023 (subject to regulatory approvals) Maintained

No formal revenue/EPS/margin guidance was provided in Q2 2023 materials .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2022)Previous Mentions (Q1 2023)Current Period (Q2 2023)Trend
Strategic portfolio actions (exits/sales)Completed U.S. LPT; transformative year; focus on profitable lines Completed sale of Lloyd’s Syndicate 1200; ongoing business earned premium up ~6.7% Ongoing business earned premium up ~0.9%; continued exits reflected in lower GWP/EP Continuing simplification
Expense managementAdjusted expense ratio 35.1% excl. LPT; G&A reduction Expense ratio 35.1% (–90 bps YoY) Expense ratio 33.6% (–180 bps YoY) Improving
Catastrophe loss exposureQ4 CAT $9.4M; FY CAT $44.0M reduced >50% YoY CAT $3.6M (–59% YoY) CAT $3.1M; H1 CAT down 40% YoY Lower volatility
Reserve developmentQ4 adverse PYD $33.1M; U.S. liability pressure Adverse PYD $48.6M; professional lines reassessment Adverse PYD $26.4M; primarily exited businesses Improving but still a headwind
Rate environment & inflationResponse to inflationary loss trends Mid‑single‑digit rate increases overall; D&O rate declines D&O rate decreases continued; rest of portfolio mid‑single‑digit increases Mixed pricing pressure
Merger with Brookfield ReinsuranceAgreement announced; transformative path forward Shareholders approved merger; expect close in 2H 2023 Integration planning ongoing; expect close in 2H 2023 On track

Management Commentary

  • “Our second quarter performance further reflects the proactive steps we are taking to prioritize improving profitability… We have remained focused on lowering expenses and reducing earnings volatility… further improvement in the expense ratio, and a low level of catastrophe losses, despite elevated industry catastrophe losses during the period.” — Thomas A. Bradley, Executive Chairman & CEO .
  • “We are pleased with the overwhelming shareholder support… this transaction maximizes shareholder value… we continue to expect to complete the merger in the second half of 2023.” — Thomas A. Bradley on the Brookfield Reinsurance merger .
  • “The strategic actions we have taken strengthened Argo… streamlined the company to focus on our most profitable business lines, achieved targeted expense reductions, and continued to de-risk the balance sheet.” — Thomas A. Bradley (Q4’22 context) .

Q&A Highlights

  • Not available; a Q2 2023 earnings call transcript was not identified in company investor materials or filings reviewed

Estimates Context

  • S&P Global Wall Street consensus EPS and revenue estimates for ARGO were unavailable through our data interface; therefore, beat/miss analysis vs consensus is not provided.

Key Takeaways for Investors

  • Underwriting remains challenged: combined ratio of 106.8% reflects higher loss ratio and ongoing adverse prior‑year reserve development; watch for further reserve actions in exited legacy lines .
  • Expense execution is a bright spot: consolidated expense ratio improved to 33.6% with International’s acquisition expense ratio sharply lower due to ceding commissions; this is supportive to medium‑term margin trajectory .
  • U.S. management liability pressure: D&O rate declines and inflationary claims trends lifted CAY ex‑CAT loss ratio to 64.5%; near‑term pricing/mix adjustments likely to continue .
  • Investment income tailwind: net investment income up 11.9% YoY on higher rates; in a higher‑for‑longer environment, this can partially offset underwriting volatility .
  • Portfolio simplification materially impacts top‑line: GWP/EP declines are primarily due to exits/sales (e.g., Lloyd’s Syndicate 1200); evaluate ongoing business growth (environmental, inland marine, casualty) as the core forward driver .
  • Merger is the main near‑term catalyst: expected 2H 2023 close; integration planning active. Trading implications hinge on regulatory timeline and perceived synergy/scale benefits under Brookfield Reinsurance .
  • International segment improvement is notable: combined ratio 67.7% with no CAT losses; sustained performance here can stabilize consolidated results during U.S. remediation .