AM Best affirms Argo Re’s rating post Ariel deal but warns on execution risk

17-11-2016

AM Best has affirmed the financial strength rating of Argo Re (Bermuda) and its subsidiaries in the aftermath of its parent’s acquisition of Ariel Re – but warned the deal does present an element of execution risk.

The rating agency said Argo’s A (Excellent) rating reflects its solid capitalisation, historically strong operating performance and robust enterprise risk management programme.

According to AM Best, the rating also reflects the diversified re/insurance platforms within the Argo group of companies and the financial flexibility afforded by its publicly traded parent, Argo Group.

Argo Group acquired Ariel Re on November 13, 2016, for $235 million in cash. The transaction is expected to close in the first quarter of 2017. The potential effect of the transaction and the related integration plans were considered in the rating decision.

These positive rating factors are partially offset by execution risk related to international expansion, and in particular, the future integration of Ariel Re, the rating agency said.

“Also partially offsetting the rating strengths is potential volatility in the group’s underwriting results due to weather-related losses, as well as competitive pressures and the effects from sluggish economic conditions, which includes low investment yields,” AM Best added.

“Argo Re utilises demonstrated product expertise in niche focus areas, proven solid underwriting fundamentals across numerous lines of coverage and a strong business profile focused on writing surplus lines and specialty commercial business.

“These are managed holistically with respect to capital, investment strategy and market presence. The acquisition of Ariel Re is expected to enhance the group’s presence in the Lloyd’s market.

“Key drivers that could lead to upward movement in the ratings over the long term would be the ability to further enhance the underwriting and operating results of Argo Re with an accompanying increase in risk-adjusted capital.”

However, the rating agency also stressed that downward pressure on the ratings or a revision of the rating outlooks to negative could result if there is material deterioration in the organization’s underwriting performance due to material adverse loss reserve development or outsized losses in relation to its peer group that results in a material decline in risk-adjusted capital.

AM Best, Argo Re, Bermuda, Argo Group, North America, Insurance, Reinsurance, Ratings, M&A, Ariel Re, Risk management

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