Argo Group Reports 2017 Fourth Quarter and Full Year Results

Argo Group International Holdings, Ltd. AGII today announced financial results for the three months and year ended Dec. 31, 2017.

2017 Annual Recap

"It has been a noteworthy year for the Property and Casualty industry, with significant catastrophe losses, continued low interest rates, new tax laws in the U.S., and continued merger and acquisition activity," said Argo Group CEO Mark E. Watson III. "In this market, Argo continues to emerge as a leading, innovative specialty insurer, demonstrated by the nearly 25% growth in gross written premium in 2017. And while catastrophe losses impacted our underwriting margins, our strong investment performance and capital management framework helped us generate net income and growth in book value per share."

⁽¹⁾ Refer to Non-GAAP Financial Measures below.
⁽²⁾ At assumed tax rate of 20%

U.S. Operations

U.S. Operations include the Excess & Surplus Lines and Commercial Specialty businesses.

• Fourth quarter 2017 gross written premiums growth of 23.9% was driven by growth in all lines of business, with the strongest growth in Professional, Liability, and Specialty lines. Property lines were up, compared to the prior year's fourth quarter, due to the strategic addition of a property program, partially offset by planned reductions to exposures in certain other classes of business within this line. Gross written premiums for 2017 were up 18.2% from the same 2016 period and reflect growth in all four business lines, as U.S. Operations continues to execute on its strategic growth initiatives.
• Net earned premium in the fourth quarter of 2017 of $243.7 million was up 10.9% from the prior year fourth quarter, as all business lines increased except for property. This growth was partially offset by additional group reinsurance programs purchased and attributed to U.S. Operations following the acquisition of Ariel Re and the storm activity in the 2017 third quarter.
• The fourth quarter 2017 loss ratio was 54.9%, compared to 54.3% for the 2016 fourth quarter. For 2017, the loss ratio was 56.4%, compared to 55.0% in 2016.
• For the 2017 fourth quarter, net favorable prior-year reserve development was $10.0 million, compared to net favorable prior-year reserve development of $10.3 million for the 2016 fourth quarter. For 2017, net favorable prior-year reserve development was $38.7 million, compared to net favorable prior-year reserve development of $35.9 million for 2016.
• Catastrophe losses for Q4 events were $1.7 million. In addition, during Q4 2017, estimates for Q3 and other 2017 CATs were reduced by $7.0 million. Consistent with Q3 2017, the current quarter was further impacted by $1.3 million of catastrophe-related premium charges. The impact on Q4 2017 for these items is a net benefit of $4.0 million, compared to a $2.7 million charge in the 2016 fourth quarter. There were no comparable catastrophe-related premium charges in 2016.
• The current accident year ex-CAT loss ratio, as adjusted for the 2017 fourth quarter, was 60.2%, compared to 57.8% for the 2016 fourth quarter. For 2017, the current accident year ex-CAT loss ratio, as adjusted, was 58.2%, compared to 57.6% for 2016. Both the quarter and year-to-date increase relates primarily to discrete non-catastrophe-related property losses.
• The expense ratio for the 2017 fourth quarter was 31.2%, compared to 30.9% for the 2016 fourth quarter. For 2017, the expense ratio was 34.1%, compared to 31.9% in 2016.
• The fourth quarter 2017 expense ratio, as adjusted, was 29.9%, compared to 30.9% in the fourth quarter of 2016. For 2017, the expense ratio, as adjusted, was 33.2%, compared to 31.9%. The decrease in the quarterly ratio is due in large part to reductions in certain incentive compensation programs. While the full year expense ratio includes the reductions to compensation programs, it also includes continued strategic investments in people and technology in support of the aforementioned 23.9% growth in gross written premiums and other operational initiatives.
• For the 2017 fourth quarter, U.S. Operations reported underwriting income of $33.7 million, compared to underwriting income of $32.6 million for the 2016 fourth quarter. For 2017, underwriting income was $89.4 million, compared to $111.5 million in 2016.

International Operations

International Operations comprises Syndicate 1200, International Specialty, and the Ariel Re businesses, including Syndicate 1910. The Ariel Re transaction closed on February 6, 2017; therefore, Ariel Re results are included in the International Operations results since that date.

• Gross written premiums were up 17.7% in the fourth quarter and 33.9% for 2017, compared to the same periods in 2016, driven primarily by the acquisition of Ariel Re. Also contributing to growth in the quarter was Professional and Surety lines in the Company's European and International Specialty businesses. This growth was partially offset by planned reductions in Property Direct and Facultative business for U.S. exposures written in Syndicate 1200 as part of the actions taken to restore risk adjusted underwriting margins to more profitable levels.
• Net premiums earned in the fourth quarter of 2017 of $160.9 million were up 13.0%, compared to the 2016 quarter, driven primarily by the acquisition of Ariel Re. This growth was partially offset by additional group reinsurance programs purchased and attributed to the International operations following the acquisition of Ariel Re and the storm activity in the 2017 third quarter.
• The fourth quarter 2017 loss ratio was 84.3%, compared to 65.8% in the 2016 fourth quarter. For 2017, the loss ratio was 79.4%, compared to 57.8% for 2016. The increase in the fourth quarter and 2017 loss ratios relates to higher catastrophe losses and to an increase in attritional losses.
• For the 2017 fourth quarter, net favorable prior-year reserve development was $3.8 million, compared to net favorable prior year reserve development of $5.2 million for the 2016 fourth quarter. For 2017, net unfavorable prior-year reserve development was $13.2 million, compared to net favorable prior-year reserve development of $16.0 million for 2016.
• Catastrophe losses for Q4 events were $35.8 million. In addition, during Q4 2017, estimates for Q3 and other 2017 CATs were reduced by $0.6 million. Consistent with Q3 2017, the current quarter was further impacted by $3.1 million of catastrophe-related premium charges. The impact on Q4 2017 for these items is a net charge of $38.3 million, compared to a $20.1 million charge in the 2016 fourth quarter. There were no comparable catastrophe-related premium charges in 2016.
• The current accident year ex-CAT loss ratio, as adjusted for the fourth quarter of 2017, was 59.4%, compared to 55.1% for the 2016 fourth quarter. For 2017, the current accident year ex-CAT loss ratio, as adjusted, was 57.2%, compared to 52.0% in 2016. The increase in the attritional loss ratio is due to higher losses within certain classes of business at Syndicate 1200, most notably within Property lines (as discussed in prior quarters).
• The expense ratio for the 2017 fourth quarter was 36.3%, compared to 37.5% for the 2016 fourth quarter. For 2017, the reported expense ratio was 38.1%, compared to 37.6% in 2016.
• The fourth quarter 2017 expense ratio, as adjusted, was 33.1%, compared to 37.5% in the same 2016 period. The 2017 expense ratio, as adjusted, was 36.4%, compared to 37.6% in 2016. The decrease in both the quarterly and full expense ratios, as adjusted, is due in large part to reductions in certain incentive compensation programs.
• For the 2017 fourth quarter, International Operations reported an underwriting loss of $33.1 million, compared to a loss of $4.8 million for the 2016 fourth quarter. In 2017, the underwriting loss was $111.2 million, compared to underwriting income of $25.8 million in 2016.

CONFERENCE CALL

Argo Group management will conduct an investor conference call starting at 9:30 a.m. EST (10:30 a.m. AST) tomorrow, Wed., Feb. 14, 2018. A live webcast of the conference call can be accessed by visiting https://services.choruscall.com/links/agii180214.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/agii180214.html. A telephone replay of the conference call will be available through Feb. 21, 2018, to callers in the U.S. by dialing (877) 344-7529 (conference # 10117133). Callers dialing from outside the U.S. can access the telephone replay by dialing (412) 317-0088 (conference # 10117133).

ABOUT ARGO GROUP INTERNATIONAL HOLDINGS, LTD.

Argo Group International Holdings, Ltd. AGII 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.

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; 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.