Good morning, and welcome to the Argo Group, 2017 Fourth Quarter and Year End Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Susan Spivak Bernstein, Senior Vice President of Investor Relations. Please go ahead..

Thank you, and good morning. Welcome to Argo Group's Conference Call for the fourth quarter and year end 2017 results. Last night we issued a press release on our earnings, which is available in the Investor section of our website at www.argolimited.com.

Also, this morning you will find an investor supplement to review some additional slides that we’ll be referring to on today’s call.

Presenting on the call today is Mark Watson, Chief Executive Officer, who will share his thoughts about the quarter and the year, after which Mark Rose, our Chief Investment Officer, will discuss the investment results followed by Jay Bullock, the Chief Financial Officer, who will add some more commentary to the financial results.

As the operator mentioned, this call is being recorded. As a result of this conference call, Argo Group 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 conference call. For a more detailed discussion of such risks and uncertainties, please see Argo Group's filings with the SEC.

With that, I'll turn the call over to Mark Watson, Chief Executive Officer of Argo Group. Mark..

Good morning, and let me add my welcome to today’s fourth quarter 2017 conference call. I’d like to spend a little bit of time this morning talking about how things went for all of 2017, where I think that puts us for 2018, and I’d also like to give some insight into what we’ve been doing in developing our digital platform.

I’ve alluded to it frequently over the last couple of years, but I think given the progress that we’ve made in 2017, I think it’s a good time for us to spend a little bit of time talking about it. For many reasons 2017 was an important year for us.

It’s unfortunate that our financial results don’t reflect the investments that we’ve made in our business, but they do give a sense for our risk management, diversification, and the strengthening of our underwriting and investment teams.

The diversity of our product portfolio combined with strong investment results and more than 20% growth in gross written premium for the year, demonstrate the breadth and strength of the team we put together, and in a year punctuated by significant industry wide catastrophe results, our balance sheet held up well and we finished the year in a position of financial strength.

Before I get to that, let me also first say that we made a few mistakes in the last couple of years which we had to deal with in 2017, and while I discussed them at length last quarter, I think they are worth repeating a little bit here at year end.

You heard me talk for a couple of years about how challenging it is to participate in the Lloyd's market, in the London market, mainly on its bureaucracy and the pricing. I think that you guys have heard more than once now that over the last few years pricing for the property market in London is down about 40%.

It is coming back in the first quarter of this year, which I’m happy to report. Having said that, it would appear that we didn’t heed our own warnings and perhaps wrote a bit more businesses in the market than we should have and as it turns out, that old adage that the market price is the market price, well it’s still the market price.

While this is disappointing, I can also say that we recognized this early last year, meanings 2017, and began taking steps to change our underwriting guidelines and our pricing structure which led to higher loss ticks on current year businesses and in some cases as losses came through at higher than expected frequency, strengthening our reserves from prior years, again all things we talked about last quarter.

For property and other lines we talked about, I’m sorry – on a positive note we are clearly seeing the benefits of the actions taken on the property book as an example, but as you know there is a lag between premiums written and earned and in many instances we will not see the benefit in our financial results until the second half of 2018.

Having said that, price increases for the January 1 did mainly fall in the double digit range. The second challenge and frustration for us is well, as the P&C industry as a whole was the frequent loss activity during the second half of 2017.

As we know timing is everything and closing the Ariel Re acquisition in the first quarter of 2017 left us with a larger net retention for multiple reinsurance programs than we otherwise would have had and I think that we’ve done a good job of outlining this in our press release tables, showing the impact of these programs on our earned premium, loss and expense ratios.

Having said that, if you turn to slide – to page four in the supplement that we posted this morning, it will give you a sense for what our CAT activity was relative to our equity and relative to earnings, and we also published what we thought it would be if we’d had the same reinsurance program in 2017 that we now have in place for 2018.

I think many of you have heard me talk about this for a bit over the last quarter or so, but I think it’s worth noting that the difference would have been about $40 million and so if you flip back to page three and you look at our net income of $50 million for the year, this probably would have been closer to $90 million had we’ve been able to close the transaction earlier and combine our reinsurance programs.

So I don’t mean to make excuses, but rather to just offer a little foreshadowing of how I think things will play out this year should we see another series of similar events.

Having said that, in a year that was superior as 2011 from a CAT perspective, I think that we fared much better and generated an operating profit which we did not do in 2011; thanks in part to our strong investment results.

When you look at the growth of the company over the past six years, coupled with the addition of Ariel Re, our focus was on the ability to manage both our gross and net exposures to a single event as well as a series of events as we experienced in 2017, including the California wild fires in the fourth quarter; I should have mentioned that earlier.

The good news is that our net exposure relative to our internal models was within reason for all the events, including the wildfires, keeping in mind that many of our competitors did not have wild fire models. The net results of our growing exposure – this is the net result of our growing exposures and continuation of our involving capital structure.

Some other things that I wanted to talk about on that front are as of the January 1 we were able to use a fair amount of third party capital to support of property CAT underwriting. In fact, about 80% of our property CAT risk now is supported by third party capital at one of our syndicates at Lloyd's.

Now let me spend a few minutes highlighting some of the financial results. As I mentioned a minute ago, net income was $50.3 million or $1.64 for the year compared to $146.7 million or $4.75 per share in 2016. Our results for the year were impacted in total by $166 million from CAT activity and that reduced our pretax earnings by about $47 million.

Jay will give you a little bit more detail in just a minute. Despite these catastrophe losses, we were able to earn a profit for the quarter and for the year, which as I alluded to a minute ago I think demonstrates the diversity of our portfolio and our focus on risk management.

We maintain a strong balance sheet, so that we can support our customers when they need it most in awake of the numerous events that we experienced in 2017, I think that showed that we’ve done a pretty good job. We ended the year with book value per share of $61.48. Growth in book value per share plus dividends was just under 5% in 2017.

This is obviously below what we would typically expect, but given the magnitude of global catastrophe activity and progress we’ve made on our internal investments, we believe that this result demonstrates the future potential earnings growth of our platform.

As a result we’ve grown book value per share plus dividends at 9.4% for the past 15 years and if you look on page five of our investor presentation, I think it’s just a reminder of how we think about the company, which is we are very focused on growing book value per share and there are really three measures – there are three levers that make that happen; underwriting margin, total return on invested assets, plus capital management and when I think through the last 17 years of my stewardship under this company, its really taken all three of those levers to grow our company.

If I focus on the last lever, capital management, I think that we continue to manage our capital effectively. During some of the volatility this year we were able to buy our stock back at attractive prices.

For the year we repurchased a little more than 750,000 shares for $45 million and continue to believe that this represents an attractive use of our capital.

If you flip to page six of our presentation, it just shows a good table of how we managed capital, and since we began repatriating capital in 2010, we’ve given back nearly $600 million between stock buybacks and dividends paid.

However, our first priority remains to deploy capital into our business at attractive returns, and we believe that our balance sheet remains in a good position to take advantage of opportunities in the market and opportunistically repurchase shares. Our business continues to show the progress we are making on the underwriting side. In the U.S.

gross written premiums were up 24% during the fourth quarter as we find attractive opportunities across many areas of our portfolio, including Surety, Professional Liability, excess in Surplus Lines of Causality and Rockwood, our mining business. For the year, premiums were up 18% in the U.S.

and we expect more opportunities for growth in 2018 as the markets begin to show some signs of improvement and just about across the broad, we are starting to see pricing moving up in the first quarter of this year. From a margin perspective, the ex-CAT accident year loss ratio was 58.2% for the year.

This was up slightly from the period which was 55.4%, but still a very attractive level on an absolute basis.

Our calendar year loss ratio compares favorably again this year at 66.8% versus 70.7% through our peer group average and if you look on slide seven, you will see that this is the fifth year in a row that our loss ratio has been better than our peer group average.

And then if you also look at slide eight, you can see that for the 13th year in a row we’ve had reserve redundancies on our balance sheet and I believe that this is also true for the last 14 out of 15 years.

Our international business was more heavily impacted by catastrophes during 2017 as we would expect given the risk portfolio and remains an import part of our business for the future. Gross premium written were up 18% for the quarter and 34% for the year, primarily reflecting our acquisition of Ariel Re in February.

We’ve also found select organic growth opportunities in professional and surety lines, while also trimming our portfolio of businesses that didn’t meet our returns. From a profitability perspective, the ex-CAT accident year loss ratio was 59.4% compared to 55.1% for the prior year.

The increase was primarily due to attritional losses on the property book that I discussed at length last year. Again, we’ve taken significant action to remediate this book of business and expect the efforts to show up in our results in the second half of 2018.

Moving on to investments, in the fourth quarter total return was 1.1% and year-to-date we were up 5.5% versus 4.3% in 2016 or on a dollar return basis we were up $243 million this year. Mark will talk more about this in a little bit. This kind of brings us to where we start 2018, which is what I really wanted to talk about this morning.

Over the course of the last year and a half we’ve accelerated our investments in technology and have made considerable strides in building a leading internal digital effort to help reinvest Argo for the digital age.

Why have we done this? Advancements in digital connectivity and processing power, as well as in user adoptions and distribution have finally reached a point in which we can change a customer’s experience and how they view their risk and acquire coverage.

Automation can enable us to better partner with our brokers and agents, create a leaner overall Argo platform, all while providing faster response times in binding policies and servicing claims.

New tech enabled markets such as Cyber, Ecommerce, Crypto who is sharing gate economies are developing quickly and changing the way people and businesses transact. Thus we need to stay close to these trends and be prepared to move quickly to capture opportunities in these areas.

How are we going about it? We’ve assembled a talented team from inside and outside of the insurance industry to internally develop software via a highly interactive approach. We are partnering with startups that have developed tech that they can solve meaningful, identify pain points in our business and invest in leading and emerging technologies.

We are working to leverage machine learning, cheaper data processing and vast amounts of new data resources from sensors, drones, governments, commercial out woods, social media and other sources for faster and smarter underwriting. In fact if you go to page 10, you can see some of these things laid out and I’ll come back to this in a little bit.

We are building technology to more efficiently connect with our distribution partners. We are offering turnkey all digital connections to alternative distribution sources that require no human interaction to rate, quote, bind and issue, so the customer can sort of transact in minutes.

I believe it’s a differentiated approach from the undertaking of many of our competitors and we’ve seen early success in this area.

I’d like to go through just a few examples, but before I do that, I’d like to just point out that this is the work of a whole lot of people, including the head of our digital team Andy Breen; the Head of Operations, Phil Vedell and our CIO, Jeff Strohschein.

They are all working together and this has been something that we started several years ago, but we are just getting there now. And there is a few ways that we really think about this, and if you go to slide 11 for a minute, you will see that we really put things into different buckets.

We spent about 60% our time, energy and budget focused on digitizing our core business; 30% of our time figuring out how we can use technology and the digital team to growth adjacencies to our core business, and then the last 10% focusing on things that we think might be disruptive to our industry going forward.

So let me give you some examples of things that we’ve done, many of which are described on page 11. We’ve developed a product to give our E&S brokers an advantage. We’ve taken wait time from a few days to a few hours to receive a quite in our market for those brokers.

Our software solution enables immediate pricing on roughly 80% of the [inaudible] minimizing referrals, so this should give – we should be the first one to quote and hopefully that puts us in a great advantage with our distribution partners. To-date 65% of the broker offices that have enrolled in this platform has gone on to generate a digital quote.

In the fourth quarter we saw a 231% increase in premium quoted through the platform compared to the third quarter of 2017. So we are just getting going and see are seeing good traction. We launched Argo Risk Tech to help retail merchants better manage the risks of their businesses.

Argo Risk Tech is a sensor base technology that allows owners of retail establishments to reduce the frequency and severity of customer and employee accidents. We initially implemented this in our Argo Insurance business unit that’s in the U.S.

and to-date have the seen the general liability loss ratio on high deductible, self insured managed claims improve almost 30% better than parts of the book that have not implemented tech or I should say, there has been 30 points of loss ratio improvement.

We rolled out the third release of our end-to-end enterprise policy administration system that we implemented a couple – a few years ago and the end of 2017 marked a major milestone in this evolution as we now processed over $1 billion premium through this system since inception.

We incubated a startup whose software integrates affinity groups with their external partners and users for the purpose of discounted purchasing of which insurance is the largest spend.

Since the launch in January of 2017, this platform which posses strong network effects has signed on 33 groups with an average user base of 14,000 or that equates to about half a million total users in one of the markets where we operate.

In Brazil our online broker facing digital platform protector which you heard me talk about in the past processed 50 million Reis of premium across roughly 100,000 transactions in 2017.

Currently 2,300 brokers and agents in the market are on the platform and our actively using it to purchase professional lines equipment and bicycle insurance, just to give you a few examples. We built and launched the digital portal for brokers and policy holders for self service.

This account management platform offers state-of-the-art user experience and its advanced search helps brokers and policy holders find what they are looking for quickly and efficiently.

To-date we have seen active user registration increase between 20% and 50% and search activity is up as much as 128% month-over-month, keeping in mind that we just launched this a few months ago.

We have invested alongside some of our venture capital partners, some of the leading funds in the world in artificial inelegance businesses that look to automate data entry that we can apply in our own business, tech enabled brokerages with whom we can test our automatic pricing technology and companies in emerging categories such as Crypto and Blockchain in order to stay close to these types of markets and technologies.

Our latest investment in a leading Crypto Currency Payment Processor allows us to potentially partner with a leader in this space, monitor how insurance in Crypto currency continues to evolve and helps us assess opportunities to engage.

This investment does not directly harness the risk of any individual Crypto currency and has the potential to generate a strong return on invested capital on a standalone basis at the same time. We’ve continued to deploy artificial intelligence and Robotic Process Automation or RPA throughout our business.

With partners in India, Brazil and the U.S., we built and deployed bots in target areas where individuals use to manually spend time leaking information from system to system. So this is a lot more than just a chat bots that you’ve heard about recently in our industry.

There are many more focused digital initiatives underway and many of them are already embedded in our business. Some of them are table stakes in order to compete in today’s market, while others will lead to tangible, differentiated financial outcomes.

I’ll try to give you some of the tangible metrics on traction that we are seeing today and I’ll look forward to sharing more with you in the coming quarters, especially where we have clear tangible financial matrices to go with them.

I realize this was a lot of digest, but we’ve had a lot going on and I’m happy to discuss this more in Q&A if you would like. And with that I’d like to go back to our investment portfolio and turn the call over to Mark Rose, our Chief Investment Officer. Mark..

Thank you, Mark. And I appreciate you going over the quarter percentage change as well as the year, 1.1% and 5.5% approximately. Let me add some color to this, also its worth noting that with the acquisition of Ariel Re and the growth in the portfolio, our U.S. dollar return was $68 million higher in ’17 versus ’16 or totaled $243 million.

During 2017 the U.S. tenure ended where it began at around 2.4%. The U.S. high yield returned 7.5% benefiting from spread compression and the S&P was up 21.8%. Our $5 billion portfolio is made up of two distinct sub-portfolios, a $1.1 billion risk portfolio and the remaining amount which is the core bond portfolio.

For the year our multi-asset risk portfolio was up 14.1%, largely benefitting from the rally in U.S. in global stocks. Our outperformance in high yield credit improved results from our hedge fund portfolio and a higher contribution from private equity structured investments.

We think that this performance is worth noting, especially after achieving a solid 12.6% return in 2016. During 2017, which includes the fourth quarter as well, we trimmed our equity holdings as they grew in market value.

In some high yield positions as spreads compressed, our core bond portfolio for the quarter – I’m sorry, for the year was up 3.1% versus 1.9% in 2016, which was slightly ahead of short duration investment grade indices.

In the fourth quarter recognizing that investment grade spreads were very tight as well, we reduced lower rate incorporates and increased our short duration treasury holdings. Our reported net investment income was $35 million for the fourth quarter of ’17, up $9.5 million versus the prior year and $4.1 million versus the third quarter of 2017.

For 2017 our net investment income was $140 million versus $115 million in 2016, aided by portfolio growth and a bigger contribution from alternatives. Both our hedge funds and private equity portfolios outperformed in ’17 versus their performance in ’16. With that, I’ll turn the call over to Jay..

Thanks Mark and good morning everyone. Let me add some additional color on the financial and then let’s get to the questions. Last night we reported results for the fourth quarter, earnings per share of $0.95 versus $1.07 in the prior year’s quarter.

Again as in last quarter’s results there’s a lot of moving pieces to the numbers and we’ve included additional exhibits and disclosure in our press release to show our underwriting ratio is adjusted for extraordinary items. We think this better reflects the underlying trends in the business.

The primary unusual impacts on the results include catastrophe losses experienced in the quarter, improvement on the losses estimated for the third quarter and the adjustments to earn premium we announced last quarter.

Starting with premium adjustments, as we mentioned on last quarter’s call, post the acquisition of Ariel we purchased additional reinsurance protection to align the combination of Ariel on our existing businesses with our risk appetites. The cost of that protection that was recognized in the fourth quarter was $12.7 million.

For the year the total cost was $20.8 million, roughly equivalent to the benefit on recoveries we’ll make on those contracts. So while the additional premium was neutral from an underwriting income perspective, it allowed us to manage the risk on our portfolio throughout the year. These specific costs will all be contained in the 2017 results.

Next we have the adjustment related to the aggregate contract triggered by the losses incurred in the third quarter. Through nine months as reported, that adjustment was $14.5 million and the fourth quarter results reflect $4.5 million of additional seated premium.

The contract itself had the effect of reducing and retaining losses by a much larger amount. Next as it relates to loss and loss adjustment expenses, as noted in our press release and in line with our pre-announcement related into the Q4, CAT events, we reported $37.5 million in catastrophe losses.

These losses resulted from the wild fires in California and certain other aggregate contracts written in our reinsurance business that were impacted by the accumulation of smaller events throughout 2017.

As to the catastrophe losses reported in prior quarters of 2017, net to Argo we saw an improvement of $7.6 million, primarily related to the re-estimation of losses from hurricane Harvy. Commenting briefly on the accident year loss results, the slight increase in the U.S.

results in the fourth quarter was primarily driven by certain non-catastrophe property losses incurred in the quarter. For the year the U.S. current accident year non-CAT loss ratio was up by 0.6%, representing the aforementioned property losses.

In our international segment and again as reported in the third quarter results and call, we increased our current accident year loss pick primarily related to Property Business and Syndicate 1200.

The net effect of this was to raise the current non-CAT loss ratio for the international segment in the fourth quarter to 59.4% and for the full year to 57.2%. While the results will continue to be impacted from the older business earning through, we expect improvement in the loss ratio as our underwriting strategies take effect.

The impact of this should be seem by the middle of 2018 and as Mark mentioned, given the work that’s going on and the results we see quarter-by-quarter, we’re optimistic that we’re getting the business on track.

Finally on the prior year movement, we finished the year with positive prior year development of $8.2 million, marking as Mark said, the 13th straight year of overall positive development.

In this quarter both operating segments contributed to the positive result and as mentioned previously, the year’s results include the impact of $10 million from the Ogden rate change in the UK and still over claims for the fourth quarter 2016 catastrophe event for hurricane Matthew.

Moving onto the expense ratio, because some of the adjustments mentioned impact premium and are one-time in nature, it’s worth commenting on the ratios as reported and as adjusted.

The reported expense ratio in the quarter of 39.8% reflects the lower earned premium of $17.1 million and includes charges of $2.2 million related to restructuring activities, primarily around premises and systems and are catching up to the amortization of intangibles related to the Ariel Re acquisition as we concluded in the fourth quarter on the final purchase accounting.

Adjusting for these one-time items, the expense ratio would have been 37.5% in the quarter compared to 39.7% reported in the comparable quarter of 2016.

The ratio for the fourth quarter does benefit from a lower provision for compensation expense, so it reflects ongoing investments in technology and people are in support of our strategic plans as evidenced by the strong growth, most notably in the U.S. business of 23% to almost 24% in the fourth quarter.

Three other items of note, interest expense for the year reflects the additional data incurred with the Ariel acquisition and modestly higher LIBOR rates impacting the floating rate component of our capital structure.

The net result of our fee based revenues and expenses reflects the one-time gain on the sale of a portion of that business which was recorded in the third quarter and finally the net foreign exchange loss was a result of the weaker dollar in the year, offset by appreciation in non-dollar assets in our investment portfolio.

For the fourth quarter of 2017 we recorded a tax benefit of $16.6 million that was largely the result of revaluation of our differed tax liabilities at the new lower U.S. statutory tax rate. Our differed tax liabilities are primarily related to unrealized appreciation in our investment portfolio.

For most of our differed tax assets we have full valuation allowances. Related to U.S. tax reform, we performed initial analysis of changes and do not expect a significant impact on our tax expense as with any period the geography in which we earn profits will determine our future effective tax rate.

Growth in most balance sheet accounts during the year results from the inclusion of the Ariel Re business in our year-end balance sheet and the increase in loss is payable in recoveries from the events of the third and fourth quarter.

As mentioned, we concluded on the purchase accounting for Ariel in the quarter that resulted in no material change to the approximate $40 million of intangibles we recorded at the acquisition.

We ended the quarter with a pre-tax unrealized embedded gain of $181 million in the investment portfolio, roughly equal to the balance at the end of the third quarter. The majority of that gain are in our equity holdings. Operator, that concludes our prepared remarks and we are now ready to take questions..

[Operator Instructions] The first question comes from Jeff Schmidt with William Blair. Please go ahead..

Hi, good morning everyone.

I apologize if I missed it, but did you mention how big the new property program was in the U.S.?.

The size of the reinsurance program?.

Yeah, you had mentioned that you added yeah, a new property program in the U.S..

Yeah, I think the reference was we have consolidated our reinsurance programs into a single program for 2018. That was the purpose of the slide. It was to show the pro forma effect of that single reinsurance program. We haven’t historically disclosed the size of our reinsurance programs.

The comments that we made is that we have well established risk tolerances and we continue to operate within those risk tolerances. I think it’s important to note, when we acquired Ariel, we did not change any of those risk tolerances.

So the same parameters we were working with at the start of 2017 are the same parameters that we are working with at the start of 2018..

Okay, alright.

And then what are you seeing in terms of submission growth for the ENS book and how big is that book now?.

The submission growth has continued for the last many years, but as I’ve said in the past, the most important thing is not so much how many submissions that we get, but rather how we deal with them or to speak more figuratively, we’ve got plenty of business in the funnel.

The challenge and the opportunity is to make sure that we’re getting to the risks that we want to underwrite and avoiding those that we don’t, and I think what we’ve seen in the last couple of years with some of the investments and technology that I referred to earlier is that we’re able to get – not only are we able to pick the risks that we want to get to quicker, but we’re able to turn around quotations more quickly on the risks, on the submissions that we like..

Okay, that’s helpful.

And then one last one, what are you seeing in terms of pricing in the workers comp market, particularly in California?.

Yeah, we’re not really California comp experts anymore. We gave that up 17 years ago..

But are you seeing – pricing….

We have so little risk on our books in California comp that I don’t think I can answer that question..

Yeah. Okay, thank you..

[Operator Instructions] The next question comes from Christopher Campbell with KBW. Please go ahead..

Hi, good morning gentlemen..

Good morning..

Right, first question. Just looking at the U.S. current year loss ratios as adjusted, there was about 240 bps year-over-year deterioration for the quarter and maybe I missed this in the opening script, but were these results more attritional, mix driven or one-offs? Any additional color you can provide on the trends there would be helpful..

The attritional losses by definition, so we’re talking current accident year non-CAT loss ratio, so they are attritional by definition. The main impact was an uptick and some one-off property losses in the fourth quarter.

So the way I think about it is does it seem trend worthy to us? No, and they were just some larger than expected property losses in the fourth quarter. As I think around the rest of the U.S. businesses, most businesses are performing pretty close to their original loss picks..

And also one of the faster growing parts of the business in the U.S. is causality, which runs at a higher loss ratio, but a lower expense ratio..

Yeah, so just to be clear, the current accident year ex-CAT loss ratio for the U.S. increased by 0.6% year-over-year..

Yeah, I think I may have misspoken my remarks earlier..

Oh! Okay, alright..

So just tell everyone what the two numbers are?.

Yeah, the two numbers are 57.6, 2016 and 58.2, 2017 and that 0.6% was the impact of the fourth quarter related to those property losses..

Okay, got it. I was just looking at the quarter-over-quarter numbers. Okay, got it. And then this is another question on the premium, like kind of on the premium growth. Sessions were down – when I am looking at U.S., sessions were down pretty meaningfully and U.S. liability and professional lines.

Could we get an update on what your reinsurance strategy is here and kind of your current thoughts on the casualty market in the U.S.?.

So I’ll start and then I’ll let Jay jump in. We’re pretty positive about the casualty market. At least the parts – let me rephrase that. Of the parts of the casualty market that we’re operating in, we’re pretty positive that there is room and opportunity for growth in 2018. Having said that, there is a whole lot of it that’s pretty competitive.

We haven’t really changed our reinsurance strategy, I don’t think at all in the U.S., so that maybe more of a timing issue than anything else, that way you’re looking at it.

Jay, do you want to add anything?.

No, I think it is, but just to amplify on that a bit, there is not one strategy for those entire portfolios and I say that because in some instances we will employ excessive loss.

In others we have certain strategic quota shares in place where we can get paid an appropriate and profitable seating commission to underwrite some of those and allows us to put out some larger limits. So I think in particular some of that impact is probably being seen in the professional launch business..

And shifting to the portfolio, I know your Argo duration is pretty low relative to its liability and then as rates are rising.

How should we be thinking about the potential to kind of be the push out the duration, take more credit risk, etcetera? How should we be thinking about the upside there from the portfolio?.

We should be thinking that unless we’re going to get paid to take duration risk or credit risk we’re not going to do it.

Mark, do you want to add anything?.

We were on our core portfolio which is mainly where you focus when you say duration with three different managers. I have calls pretty regularly with them and they have intermediary targets where they say, okay if we get to here on the U.S.

tenure we’re going to add a little more here and here and they are talking to their strategists who are saying it could here, but we really don’t see it blowing out much more. So we look at duration. Yes, we’re not getting paid very well for it, but we will tactically shift it when things move out and we think our markets too far forward.

But I think the theme right now in both the equity and debt markets is you really got to think tactically and focus on – I don’t think you can just hope by things and lock it away right now. It’s very difficult to see that kind of environment here..

Right, well that’s very helpful. And then just one more Jay you had mentioned, you don’t expect an impact from our tax reform.

So should we still be thinking about a 20% operating tax rate going forward?.

Yeah, I have run the number several different ways and it kind of keeps coming out in that same zip code. So I think that’s the appropriate number.

You know one of the things that’s important is, we don’t know what the tax reform is until they write the rules right, and so – but even if there – even if read in their most punitive fashion, I still think 20% is the right number..

Well, thanks for all the answers. Best of luck in 2018..

Thank you..

The next question comes from Greg Peters with Raymond James. Please go ahead..

Good morning. This is Mark [ph] who is in for Greg. So tough year, but it seems like this year’s outlook includes better ability of leverage, reinsurance as a result of last year’s merger and the run off of the underperforming books, which should lead to a better combined ratio.

But I want to circle back to some of Marks comments around last year’s high level of alternative private equity income. So should we be expecting a similar level of income this year? It seems like last year was going to be a tough comp..

I would say every year is a tough comp with our private equity and hedge fund portfolio. You know some of that was the benefit of selling SureTec which we explained on the – I believe it was the second quarter. I think Jay and I run a model and we’ll go through it with you, but yeah, this year was a tremendous year.

We still expect a good year in ’18, but it’s hard you know to predict the markets. I think if you take my last comments on duration in the equity markets, you know we’re thinking you have to be tactical and thoughtful and we don’t see you know the long ball being pitched this year..

So if I can just add, I think we’ve been pretty consistent in suggesting that there is a fair amount of volatility from one quarter to the next and how that part of the income statement performers. Having said that, a whole lot the alternatives strategies that Mark has invested in are credit strategies.

And so I mean we’ll see what happens with the markets but I’m more concerned with overall market volatility than alternative volatility..

Got it, can you guys perhaps also comment on your January 1 renewals and perhaps walk us through the revaluation of the CAT losses this quarter?.

So as we kind of thought three months ago, we thought pricing would change its downward trend and start moving up. We weren’t sure the rate at which pricing would move up.

As I mentioned in my remarks, pretty much across the board we are seeing price increases on the first of January, well I should say all of January and the beginning of February and the rate of change is directly related to whether or not portfolios are risks or loss affected or portfolios were adequately priced to begin with.

So if they were loss effected and/or they were inadequately priced, we are seeing more price increase, then other parts of the portfolio that are priced just fine.

Jay do you add anything?.

Yes, I’ll add on your second part of your question which was the revaluation of the CAT losses. If you think about the timing of the third quarter, that was pretty close to the events. At that point in time what you did is you pull out a map and you pins in it and figure out where your risk are, obviously there is more sophisticated tools than that.

But you don’t have a lot of reported losses as the next 90 days progressed. In some instances we were slower repotting of losses and that’s really what has led to us to conclude that our initial estimate was bit higher, but only a bit high, you know a $7 million reduction on the size of those losses is pretty modest..

And I’d like to go back to your preamble before your question.

You were right that we are using more reinsurance, but I think there is a better way to frame that and so if you don’t mind I’d like to go ahead and reframe that, which is, there are different forms of capital that we have to support our business and one of the things that we’ve talked about in the past and I alluded to it earlier, but I should have been more specific.

We use a fair amount of reinsurance as capital to support a lot of the CAT activity in our books, and one of the goals of acquiring Ariel Re and having Ryan Mather and his team join us was putting together their risk, their underwriting portfolio with ours and the result has been that we’ve found a lot of interest in people that – of investors and non-traditional reinsurers that have paid us to originate risk for them, and so it’s been a pretty intended, a pretty intended strategic shift for January 1 and I think it’s probably more app to refer to Ryan and his team as asset managers as much as risk takers or certainly risk originators.

And as Jay said a minute ago, for some of the reinsurance programs that we have in other portfolios, a lot of them are structured in such a way that again we are getting paid to originate risk for others..

Got it, got it that does sound a lot better. I guess just one last one and I’ll re-queue. Can you guys perhaps just comment on the recent M&A activities around your research following the AIG Validus deal. It looks like Softonic will likely acquire [inaudible] and there is also a talk of validity just looking in to the Exco [ph] Group..

Well Jay is a former investment banker, but he is forbidden to speculate now that he is the CFO of our company..

All right.

So no color there, no chatter?.

There is always a motivated buyer and a motivated seller somewhere..

Alright. Well, thanks guys..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Watson for any closing remarks..

Thank you. I’d like to thank everybody for joining the call today.

It lasted a bit longer than it normally does, but there is a lot going on in 2017 to set up 2018 and I think part of it I just mentioned a minute ago, which is I think as we look forward in 2018 to the financial results, I think you will see us seeding more premium in ’18 than ’17 and that’s absolutely by design.

We are finally at a point where people are paying us to originate risk for them. So that’s an important thing for us to talk about in 2018.

I think we begin the year in a really good place, both in terms of our balance sheet as well as the pricing environment and then the last thing which I spent a little bit of time talking about is I think the investments that we’ve made in technology and the investments that we’ve made in our digital team are starting to pay off.

It’s hard to quantify that financially, but as the year goes on and/or I should say the next couple of years go on, I think we will be able to be more precise in the financial benefits that we are getting from the investments that we are making today.

And just as a reminder, a lot of the income that we are generating today is from investments that we made five or 10 years ago. So I’d like to thank all of my colleagues at Argo for a really hard working year. As I said in the beginning, the financial results don’t really reflect all the hard work that was done by everyone at Argo.

So I’d like to thank everybody for all of their hard work. I look forward to talking to everyone at the end of the first quarter. I think that will be a really good time to see some of the changes that we’ve made and the financial impact of them for 2018 and with that, I’ll turn the call back over to Susan Spivak, our Head of Investor Relations..

Thank you, Mark. I just want to mentioned that tomorrow Mark will be making an additional presentation at an investor conference and that there will be a link in the Investor section of our website and we hope that all of you will join in and take the opportunities to hear more about how we see Argo position for the future. So that’s at 12:35 p.m.

Eastern Time and just look for the link in the Investor section of our website. Thank you. I look forward to the end of the first quarter call..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..