Argo Group International's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: Argo Group (AGII)

Argo Group International Holdings, Ltd. (NASDAQ:AGII)

Q4 2013 Earnings Conference Call

February 12, 2014 10:00 AM ET

Executives

Susan Spivak Bernstein – Senior Vice President-Investor Relations

Mark E. Watson III – President and Chief Executive Officer

Jay S. Bullock – Executive Vice President and Chief Financial Officer

Analysts

Kenneth G. Billingsley – Compass Point Research & Trading LLC

Bijan Moazami – Guggenheim Securities, LLC

Amit Kumar – Macquarie Capital, Inc.

John F. Thomas – William Blair & Co. LLC

Operator

Good day and welcome to the Argo Group 2013 Fourth Quarter Earnings Call webcast. All participants will be in listen-only mode. (Operator Instructions) I would now like to turn the conference over to Ms. Susan Spivak, Senior Vice President of Investor Relations. Please go ahead.

Susan Spivak Bernstein

Thank you and good morning. Welcome to Argo Group’s conference call for the fourth quarter and calendar 2013 results. Last night, we issued a press release on earnings which is available in the investor section of our website at www.argolimited.com. With me on today’s call is Mark Watson, Chief Executive Officer and Jay Bullock, Chief Financial Officer.

We are pleased to review the Company’s results for the quarter and year, as well as provide you with management’s perspective on the business. As the operator mentioned, this call is being recorded following management’s opening remarks, you will receive instructions on how to queue in to ask a question.

As a result of this conference call, Argo management may make comments that reflect their intentions, beliefs and expectations for the future. Such forward-looking statements are qualified by the inherent risks and uncertainties surrounding future expectations generally and may materially differ from actual future results involving any one or more of such statements.

Argo Group undertakes no obligation to publicly update forward-looking statements as a result of events or developments subsequent to this conference call. For a more detailed discussion of such risks and uncertainties, please see Argo Group’s filings with the SEC.

With that I’m pleased to turn the call over to Mark Watson, Chief Executive Officer of Argo Group. Mark?

Mark E. Watson III

Thank you, Susan. Good morning everyone, and welcome to Argo Group’s fourth quarter and year-end 2013 earnings conference call. I’ll briefly share my thoughts regarding the highlights in the quarter and the year after which Jay Bullock our Chief Financial Officer will add some color to the financial results. We look forward to responding to any questions you may have during the Q&A portion following our remarks.

Overall, I’m pleased that Argo reported a solid 2013. We delivered a better performance in most of our business lines and showed continued year-over-year improved underwriting profits in every business. We ended the year with consolidated gross written premium of $1.9 billion, an increase of 8.2% over 2012.

Our Excess and Surplus Lines, Syndicated Lloyd’s and International Specialty businesses all experienced strong double-digit growth for the year. And we posted a combined ratio of 97.5% for the year and a 95.2% for the fourth quarter of 2013.

For the Group as a whole, we ended the year with diluted book value per share of $58.96 per share, up 3% from $57.38 at September 30, 2013 and up 7.9% from $55.22 at the end of 2012 including cash dividend.

Capital management remains a focus as we maintained a measured pace of return to shareholders during the year. We continue to think, if our franchise is undervalued and view share repurchases at a discount to book value as a great investment. In 2013, we repurchased approximately 1.1 million of our shares or 4.4% of our 2012 year-end share base at an average price of $41.04 for a total value of $45.1 million. In addition cash dividends for the year totaled $15.8 million.

Let me briefly comment on each of our operating segments before turning the call to over to Jay to discuss our financials in more detail.

Our Excess and Surplus Lines business grew premium by nearly 16% in both the quarter and the year with most of that growth coming from our higher margin businesses. Our core casualty business where we were experiencing the strongest growth is the segment of the market that we’ve been successfully underwriting a Colony for the last 20 years. This is the one example of the payoff from the hard work and focused marketing efforts of our E&S team in 2013.

In addition to finding ways to expand its business, we continue to refine our underwriting appetite and that was reflected in selected reductions in lines such as our transportation business. These decisions coupled with our growth initiatives are reflected in our improved combined ratios. For the quarter, we posted a combined ratio of 83.2% compared with 92.6% in the 2012 fourth quarter and for the year, a combined ratio of 88.1% compared with 91.9% for the 2012 year.

Prior year development continues to have a positive impact on our results in this segments and Jay will go through the results by segment when discussing the financials in more detail.

As we look at 2014, we have several initiatives including those mentioned like transportation above, which will continue the progress we’ve made in 2013. Continued expansion in areas where we see the best profit potential, the introduction of the new technology tools and the addition of new underwriting talent in areas where we don’t yet have critical math should contribute to the top and bottom line results.

Commercial Specialty made significant progress in 2013 in returning to profitability particularly in our Argo Insurance business, which we recall form prior discussions encompasses our admitted Grocery, Restaurants, and Dry cleaning business.

John Yediny, President of Rockwood, our mining business were diligently with the management team at Argo Insurance in 2013 to return to the focus of that business to their core areas of expertise and we are all pleased with the results we are seeing from those efforts.

We still have work to do in Trident, our public entity business, but I am really pleased with our results in commercial specialty for the year. As planned, premium for the segment declined for the quarter by 3.3% and for the year by 4.1% reflecting or continued re-underwriting of the portfolio. We continued achieving rate increases where needed and remain positive about the prospects for this segment in 2014.

The segments combined ratio improved to 97.1% in the fourth quarter from 122.9% in 2012 fourth quarter into 97.8% for the year compared to 115.1% for 2012.

On the heels of the significant improvements, our President of Commercial Specialty Mike Arledge retired at the end of the year after having spent the past 13 years helping me build this business. I want to thank Mike for all his efforts, leadership and his friendship over the years and I am sure he is proud of wrapped up the year on such positive note. We all wish him the very best in retirement.

Talent management is an important element of our annual process at Argo. It has enabled us to identify internal candidates to lead our E&S segment as mentioned in one of our previous conference calls which Art Davis is now running and in our International Specialty Segment, we also had the management changes as we appointed Matthew Wilken as President of Argo Re. Matthew who has served as Chief Underwriting Officer of Argo Re since 2008 took over the helm of that business in the fourth quarter.

Overall, gross return premiums written in our International Specialty segment declined 18.2% in the fourth quarter, primarily driven by lower reinsurance premium; this was more a function of a modest shift in portfolio direction than a reflection of the dynamics in the reinsurance market. Premiums were also impacted by increase competition in our Bermuda professional lines business.

On an annual basis, our gross premiums written were at 11.7%. The combined ratio improved to 94% in the fourth quarter and was 95.4% for the full year. Remember 2012 results were impacted by Superstorm Sandy losses.

We are quite pleased with the results for the Syndicate for both the quarter and the year; this is especially rewarding to us looking back to where we’re just a couple of years ago.

Gross written premiums written were up 15% for the quarter and 9.5% for the full year. Net premiums written were up even more as we retained more risk. On an underwriting basis, the combined ratio improved to 88.7% from 93.9% in the fourth quarter of 2013 and 92.4% from 96.2% for the year.

Here the strategy of diversifying into lines with historically good opportunities for those in the Lloyd's market while at the same time a focused discipline on risk concentration and good underwriting decisions is paying off. The progress which we have made in this segment in the last 24 months has increased our ability to focus management’s attention on other areas of the business.

Moving on the investment side, our portfolio achieved a strong performance in the fourth quarter where we had realized gains of $41.7 for the quarter and for the full year, $71.3 million.

Most of that was due to our decision to reduce our equity portfolio by approximately 50%. Additionally, we reduced our non investment rate bond holdings by approximately $40 million. Our decision to reallocate was made in the several macro observations, the S&P was up 30% for 2013 the U.S. Federal Reserve was close to reducing its QE program and it was very low volatility in the financial markets and near record low U.S. for corporate bonds of all ratings.

We remained committed to the strategy of a diversified portfolio across a spectrum of high grade and value focused asset classes, but now the time was right to make permanent some of the gains we had achieved; this small shift is reflected in significant gains following through this quarter’s and next year’s P&L.

Specific for the fourth quarter, Argo’s portfolio achieved the total written of over 1.6%; this performance is despite the fact that we continue to manage our bond portfolio by far the majority of our holdings defensively with respect to duration. Our bond portfolio duration declined to 2.8 at the end of the third quarter compared to 3.0 at the end of the third quarter.

Net investment income was $22.7 million for the fourth quarter, it’s down $5.8 million quarter-over-quarter as key others continue to compress, but to a lesser degree with the modest rebound in reinvestment rates in the fourth quarter.

Our book continues to benefit in our portfolio yield and net investment income continued to be impacted by an emphasis on total return over income. We believe this approach is most consistent with maximizing shareholder value in the long run and the long run is our focus. For example, our modest allocation to alternatives produced a return in excess of $17 million in 2013 against what otherwise would have been approximately $4 million of current income had it remained in the bond portfolio. In other words, this return flows through a gain instead of net investment income.

Overall, the observed rate of decline in investment income continues to decelerate. We continued to analyze and seek investment opportunities providing greater yield and we expect to see an inflection point in book yields by mid-2014.

In summary, we reported a solid 2013, showing continued improvement in our results. The market is no doubt equally challenging today on the underwriting side as it was a year ago and we continue to face strong headwinds from the investment environment.

Having said that, I feel really good about where we are going today. Our focus and commitment to the specialty underwriting space is working and as it has for the last 13 years, this strategy will produce good stable returns for our shareholder and I’m proud of the progress that we’ve made this year.

On the underwriting side, our E&S platform is producing a greater amount of profitable business with roughly an equivalent level of resources. Commercial specialty is once again contributing to underwriting income. At the Syndicate, we have overcome our initial challenges and are now a top performing Lloyd’s franchise against similarly diversified syndicates. Our international specialty operations include a mix in growing emerging markets business and clients now fully matured that will produce attractive returns to the group in the coming years.

On the balance sheet side, we’ve demonstrated a disciplined approach to reserving which has resulted in overall favorable development in each of the last eight years. Capital management has been a key part of our strategy and we’ve returned over $300 million of capital to shareholders over the last six years.

We will continue to invest in our stock and return capital to shareholders very carefully against the risk adjusted returns of other capital users. While we still have a long way to go and we will continue to focus on driving efficiencies and improving performance through our platforms, I’m optimistic about 2014 and our future.

And with that I will turn the call over to our Chief Financial Officer, Jay Bullock.

Jay S. Bullock

Thanks Mark and good morning everyone. I will take everyone quickly through some additional detail on the financials and then open it up to Q&A. I won’t repeat the things the Mark has just gone through, but clearly we are pleased to see the results of much hard work over the past few years.

Keep refining our underwriting selections, make the organization more efficient and effectively deploy our capital with the execution initiatives for 2013 and will continue to be the initiatives for 2014.

With that in mind let me comment on some of our results more specifically. The Group’s accident year loss ratio improved by 2 points from 2012 as we continue to see the impact of rates and underwriting initiatives. This was most pronounced in our Commercial Specialty segment as we continue to achieve and in some cases exceed rate targets and benefit from our initiatives around risk selection. Catastrophe losses were negligible in the quarter and total cat losses for the year were $22.7 million, down from $69.8 million in 2012.

However as the press release notes, in our E&S segment we had several unrelated fire losses in the fourth quarter that impacted our current year accident results in that segment. These losses increased the fourth quarter combined ratio by approximately 4 points.

In addition, our Commercial Specialty results include a very large individual loss of $2.5 million representing 3.4 points on the fourth quarter combined ratio. Away from the current accident year, we experienced overall favorable reserve development in the quarter, representing our 11th consecutive quarter of overall positive reserve development. Total prior year development for the Group was $12.1 million in the quarter and $33.6 million for 2013.

In Excess and Surplus Lines, positive development for the quarter was $17.1 million driven by accident years 2011 and prior, and Syndicate 1200 positive development totaled $2.1 million driven by the liability lines.

Commercial Specialty and International Specialty were both essentially flat with small ups and downs by unit. And finally adverse development of $5.9 million in run-off was a result of modest adjustment to the assumed domestic ANA exposure as well as a review and re-estimation of some reinsurance recoverables.

The table on the press release provides a full year breakdown. While our expense ratio improved year-over-year, we did not report the degree of progress we want to see. That was in part due to the $22.8 million of increased equity compensation incurred as a result of the increase in our stock price during the year. This expense alone accounted for fully 170 basis points on the expense ratio. So absent that, you can see real underlying improvement.

That said, our combined ratio improved by 7.1 percentage points. More importantly, we generated 2.5 points of underlying profit for the year towards our goal of generating a consistent 5 points of underwriting margin by 2015.

While we continue to focus on how we organize and execute our business and will continue to focus on the efficient use of resources. At the end of the day, underwriting margin is what drives long-term shareholder value creation.

Briefly on the fee income line; our results continue to be effected by the lack of scale in certain businesses in our Alteris unit which are reported net of expenses and certain expenses incurred by the managing agent of Syndicate 1200 which were higher than in prior periods, primarily as a result of the strong performance of the Syndicate in 2013. In both instances, adjustments are being made to these units to bring results more inline with expectations.

Foreign exchange gains in the P&L in 2013 were a modest $1.7 million and roughly offset by a loss on the value of foreign denominated assets running to the balance sheet of $2.8 million. Generally speaking, we managed foreign currency exposure through the natural hedge available through foreign denominated assets against contracts denominated in like currencies.

For 2013, the effective tax rate for the Group was 20.3% and compares to 21.6% in 2012. As we have discussed, our blended tax rate for the organization should overtime be approximately 20%.

Turning to investments, the overall size of the portfolio including cash decreased by approximately $60 million from 2012; this was the net result of positive cash flow in the business, offset by approximately $60 million return to shareholders in the form of share repurchases and dividends, and approximately $140 million of assets transferred as a result of the loss portfolio transfer on the Syndicate years 2009 and prior which was effective at the beginning of the year.

Net investment income totaled $22.7 million during the fourth quarter, bringing full year 2013 investment income to $100 million; the decline reflects primarily the continued reinvestment at market yields below the portfolio’s book yield, a shift in strategy towards slightly lower shorter duration and a movement of a portion of the portfolio out of traditional fixed income investments.

We ended the quarter with a pretax unrealized gain position of $243 million, down from $253 million at September 30 and down from $305 million at year-end 2012. For the year 2013, we generated a 3.3% total return on the aggregate portfolio; this includes total return for the year of negative 0.5 for the core bond portfolio and 15.8% positive returns from strategies outside that portfolio.

Our equity position at December 31 was approximately $1.56 billion and our total capital was approximately $2 billion. Both our financial and operating leverage remain modest which provides us the flexibility to respond to market opportunities. We ended the year with book value of $58.96 per share, which represents a10.4% annual compound growth rate including cumulative dividends since 2002.

Operator, that concludes our prepared remarks and we’re now ready to take questions.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Ken Billingsley of Compass Point. Please go ahead.

Kenneth G. Billingsley – Compass Point Research & Trading LLC

Good morning I want to do just follow-up on questions on the expense ratio going up specifically and I may have missed if you commented on this. International Specialty’s expense ratio moved up higher year-over-year and then also in Syndicate 1200, could you talk about that especially if you are shrinking some aspects of that business?

Jay S. Bullock

Ken, in International Specialty the change in expense ratio is primarily a function of change in portfolio mix. As we write more premiums in Brazil, it runs at higher expense ratio than the business in Bermuda. That accounts for probably 80% of it and the remainder would be writing a little less premium than planned and the expense associated with that.

Mark E. Watson III

Yes, then the Syndicate, the fourth quarter reflected primarily compensational related expenses based on the strong performance of the Syndicate in the year. So it’s slightly higher than it was last year, if you recall last year the Q4 as everybody recalls was Superstorm Sandy, so we probably would have scaled that compensation expectations in that quarter and that would have knocked the ratio down just slightly.

Kenneth G. Billingsley – Compass Point Research & Trading LLC

I understand. And then on the run-off side, I think you said this is environmental with the large piece of the increase there, it seems like number of firms have been having any charges and it doesn’t seem like you have actually taken much note of it, but has there been a new pathway for clients as the reason then maybe go back and rethink or maybe away some of the frequency or some of severity maybe increasing?

Mark E. Watson III

Everyone has different exposure. In our case, we have ANA exposure from general liability policies that we issued in the 50’s and 60’s mainly in California as well as assumed reinsurance from business underwritten I believe in the 70s and then to a lesser extent in the same business from London.

The primary policies in London have pretty much played out where we are seeing some development is coming from the assumed book where we still haven’t commuted with some of our insurance companies that we re-insured again back in the 70s. The plan thus far has been working on new novel theories of liability, but I think this is mainly just stuff coming through from all of that. Jay, you want to add something?

Jay S. Bullock

Yes, one thing I’d point out that it was $3 million, it was a pretty small number and because it is in the assumed book much of that is going to legal expense these days, we are not leading the effort on the claims and so we aren’t incurring some legal expense, but it was a fairly small number relative to what I have seen come out of some other companies.

Kenneth G. Billingsley – Compass Point Research & Trading LLC

So currently no fundamental shift that we have into categories or evaluate all the claims that are coming?

Jay S. Bullock

No.

Kenneth G. Billingsley – Compass Point Research & Trading LLC

Then the last question and I apologize, if I missed this; the line item in the income statement, the $5.4 million other income, could you talk about that?

Jay S. Bullock

Yes, there is really two components to it, that reflects the net results in our Alteris unit and we’ve started some new businesses in 2013, haven’t yet achieved scale in those businesses. So it’s running at a slight loss and then sort of an anomaly there is the managing agent of this Syndicate is accounted for because most of what comes out of the Syndicate managing agent is fee income onto the third-party capital that we manage, but we also charge certain expenses there and then in the fourth quarter those expenses were higher than they were in the prior year’s quarter. They were mainly compensation related expense again from the very strong performance in the Syndicate.

Kenneth G. Billingsley – Compass Point Research & Trading LLC

And most of it was compensation related Syndicate. So on the Alteris unit, this is a net result from the Alteris unit or is there something that we need to anticipate maybe a little bit more in 2014 as that wouldn’t develop?

Jay S. Bullock

Well, I think we have strategies in place to generate to move that unit for profitability during 2014 and so it could be that it takes a quarter or two to get there, but I think the strategies are in place and being executed.

Kenneth G. Billingsley – Compass Point Research & Trading LLC

Okay. So we should anticipate maybe there could be some lead through into first part of 2014?

Jay S. Bullock

Very small numbers.

Kenneth G. Billingsley – Compass Point Research & Trading LLC

Great. Thank you for taking my questions.

Operator

The next question comes from Bijan Moazami of Guggenheim. Please go ahead.

Bijan Moazami – Guggenheim Securities, LLC

Good morning everyone. Couple of questions for Jay, just clarification; first the 4 points on a combined ratio from unrelated fire losses. Is that on the overall company combined ratio or is it just for Excess and Surplus Lines.

Jay S. Bullock

It’s just for Excess and Surplus Lines and it’s just for the fourth quarter number.

Bijan Moazami – Guggenheim Securities, LLC

Okay, perfect. And in terms of corporate, you mentioned that there was options and warrant issues, you went through your comments very quickly, but could you walk me through the impact of those items on the corporate overhead in the fourth quarter?

Jay S. Bullock

Well, it’s not just corporate overhead, it’s throughout the organization for people that are compensated in part with equity compensation, stock price was up dramatically during the year. The total number in the P&L was about $22 million accounting for that. It wasn’t options issued in the year, it was options that have been issued more frankly than it would have been over the last seven years because generally our options have a seven year term.

So it’s outstanding options and the strong increase in the stock price that led to that impact to the P&L. There are no warrants issued in the company that I’m aware of. No. It would be options and restricted stock.

Mark E. Watson III

Yes.

Bijan Moazami – Guggenheim Securities, LLC

So just to clarify, when you have a big increase in the stock price, would that cost about the allocated to the subsidiary or is it carried at the corporate overhead. And the reason I want to figure that out is that, obviously the corporate overhead increase quite dramatically in the fourth quarter, just want to see if we are going to go back to the historical trend, right and the big increase that we had in the last three months of the year?

Jay S. Bullock

Yes, the largest component of that would be in the corporate segment if you will. That’s where a meaningful portion of that equity compensation resides.

Bijan Moazami – Guggenheim Securities, LLC

Okay, perfect. Thank you.

Operator

(Operator Instructions) The next question comes from Amit Kumar of Macquarie Capital. Please go ahead.

Amit Kumar – Macquarie Capital, Inc.

Thanks and good morning. Just a few follow-up questions. The first question goes back I guess to the discussion that you’ve had in the past as well as I guess some of the prior questions alluded to it, how should we think about a normalized expense ratio going forward? I think we’ve spent some time talking about the improvement, what sort of ranges are we thinking about on that?

Jay S. Bullock

Well, I think that the expectation is – let me go back to what I said in my comments, right. We are trying to figure out how to get 5 points of margin through our P&L and that’s going to come from the loss ratio, it’s going to come from the expense ratio.

We had a good year on an underwriting basis this year and we had some anomalies on the expense side. I think if you take out those anomalies, the expense ratio was running in the mid 38 range and we need to start to move it below 38 this year, but what I think is most important is that the combination of those two things by 2015 is looking more like 95 and it is even 97.5. That said, 97.5 is really nice improvement over where we have been.

Mark E. Watson III

Right. And keep in mind for some of our business, they are going to run at a higher expense ratio. The Syndicate is a good example of that. It’s always going to run in the mid to high 30s with our mix of business and given that most of the business comes from wholesalers. And as long as that’s a significant part of the P&L, it’s going to run a bit higher than you might see at other competitors.

Amit Kumar – Macquarie Capital, Inc.

Got it, and that’s helpful. The other question I had and maybe the answer is no. Q1 to-date has seen sort of a wide variety of smaller losses all over the place, do you have a view how that could impact your numbers?

Mark E. Watson III

I’m sorry, I don’t think I understood the question.

Amit Kumar – Macquarie Capital, Inc.

The fourth quarter, we’ve seen some strong losses, some floods and it has been all over the place. Is there anything which could flow into your numbers and could impact the numbers versus maybe what the street has for you straight now?

Mark E. Watson III

I will start by saying, we haven’t seen anything, but I will say, yes, because there always seems to be something that flows through. We haven’t seen any particular large loss, so it’s likely to be something that hits one of our non-U.S. businesses that has risk back here in the U.S. but I couldn’t tell you exactly what that might be.

Amit Kumar – Macquarie Capital, Inc.

Got it, and that’s helpful. The only other question I have is, and you’ve addressed some of these points. In terms of the reserves, obviously it looks like we turn a corner things look pretty, good now. I mean is there anything which you are noticing in terms of loss cost trends which makes you sort of sit back or is everything on the reserving side now where you would have wanted it to be, I think after all the noise we use to see in Heritage et cetera?

Mark E. Watson III

Well, we haven’t seen a change in loss cost trends so far. With the economy both in the U.S. and globally remaining somewhat stagnant, I don’t see that, that changing in the near-term either. When I look at where we’ve had loss emerging, mainly it’s been positive. There are only two places where we’ve seen negative – well actually we haven’t really seen anything negatively out of the Syndicate in a couple of years now.

Amit Kumar – Macquarie Capital, Inc.

Yes.

Mark E. Watson III

So that was more a function of underwriting than it was loss emergence. And the same was true within the Commercial Specialty segment a year and a half ago. It was in – I think the first quarter of 2012 that we adjusted our loss reserves to take that in the consideration. And you look at the difference between – I think for the year 2012, we had just over $20 million of negative development in Commercial Specialty, and this year it was only I think $1 million. So I’m pretty comfortable with where our reserves are. Certainly at a group level, I’m very comfortable with where they are.

And I think that our pricing actions that we’ve taken over the last few years and we continue to take. We are still getting rate increase right now across the board and the exception of course would be property cat reinsurance, but remember that’s less than 10% of our business and of course we’re the beneficiary of that as a net buyer of reinsurance. So I’m pretty positive with where I see pricing today and relative to loss cost trend.

Amit Kumar – Macquarie Capital, Inc.

Got it, that’s helpful. That’s all I have. Thanks for the answers and good luck for the future.

Mark E. Watson III

Thank you.

Jay S. Bullock

Thank you.

Operator

The next question comes from John Thomas of William Blair. Please go ahead.

John F. Thomas – William Blair & Co. LLC

Hi, in Excess and Surplus Lines where you see, seeing the most new business growth. Where is the growth coming from?

Mark E. Watson III

So I will give you different answers. Most of the premium growth, I think I’ve said in my remarks earlier was in our causality business, but we are getting submission flow activity from really every part of our operation. We happened to think the margins are better in our casualty business more so than some of the other parts which is why you are seeing more growth there, but the opportunity to grow is in just about every part of E&S that we do and we’ve got over 10 business segments within E&S.

John F. Thomas – William Blair & Co. LLC

Okay. And then Commercial Specialty looking onto 2014, I guess what kind of growth do you think you are going to get there?

Mark E. Watson III

I don’t see us growing Commercial Specialty in the aggregate that much and that’s because well, I think we’ll see some growth outside of Argo Insurance. I think that Argo Insurance will probably still contract for the first couple of quarters during the year as we continue to optimize that portfolio and remove some low margin business.

John F. Thomas – William Blair & Co. LLC

All right, thanks.

Operator

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mark Watson, President and CEO for any closing remarks.

Mark E. Watson III

Thank you. I would like to just end by giving a few remarks really to our employees. Everyone has worked really hard over the course of 2013. They’ve put in I think a solid performance and I think that we’re in a very good place for 2014 and I just want to express my appreciation to our employees for helping make Argo a better company today than a year ago. And operator, that concludes my remarks.

Operator

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

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