Beyond integration: Argo plots steady growth

A year ago, Mark Watson III, chief executive of Argo Group, was working on the group’s acquisition of Ariel Re, which finally closed in February 2017. Following that, Watson had to create a new structure and integrate the businesses—a process he says is now complete.

“Until recently, Ariel Re and Argo Re were operating in parallel fashion but now is the time to bring everything together,” he said at the 2017 Monte Carlo Rendez-Vous.

Watson also had to change the management structure. In February, Ryan Mather, Ariel Re’s former CEO, was appointed global head of reinsurance for Argo; Matthew Wilken, the deputy head of Ariel Re, was appointed president.

“I want to make sure we can integrate the capital supporting all of our business together instead of in two separate pools. I’ve been focused on that; I’ve been more in buyer mode than seller mode,” says Watson.

Argo Group, the Bermuda-based international underwriter of specialty insurance and reinsurance products, entered into an agreement to acquire Ariel Re, a global underwriter of insurance and reinsurance business, for approximately $235 million cash.

Established in 2005, Ariel Re underwrites a global portfolio of insurance and reinsurance business through offices in London, Bermuda, Atlanta and Kansas City on Lloyd’s Syndicate 1910 paper. It was jointly owned by Brazil’s Banco BTG Pactual and the Abu Dhabi Investment Council before being bought by Argo.

The acquisition was an important deal for Argo giving it the scale it needs to better cope with the costs of operating within the Lloyd’s market. It also makes Argo one of the top 12 underwriters at Lloyd’s yet did not dramatically change its business mix.

“Most of the elements of the two companies are integrated now,” Watson stresses. “Most importantly we have all of Argo Re’s risk sitting on the Ariel Re risk management system, which was one of the interests we had. A few things were of interest to us at Ariel—the team, the reinsurance book of business and the system.”

Building on success

With the integration now complete, Watson wants Argo Group to continue to build on its success as it maintains a focus on sustainable profits.

He is looking to achieve this in the context of the recent hurricanes. In his view, losses from Hurricane Irma will be manageable for the industry and he is focused on restructuring capital to support Argo Group’s 2018 business plans, leveraging the two brands in the process.

“We finished rolling all the Argo Re risk on to the Ariel Re system as of August, and now Ryan and Matthew and their team can focus on moving ahead. The last piece of the puzzle is making sure that we can restructure our capital, supporting our underwriting so that it’s more efficient—a lot of that capital being reinsurance or retro,” Watson says.

“What we’re aiming for in 2018 is a good question. Just post-Irma we initially thought that a few participants in the market might be leaving, but at the moment our guys have a good following.”

Looking to the future, Watson says Harvey and Irma have illustrated some of the potential opportunities for those ready and able to take them. He stresses that the areas affected by the storms are just a small part of Argo’s business.

“Only 15 percent of our premium is reinsurance—85 percent of our business is in insurance and we’ve been growing our professional liabilities by double digits. Our commercial surety business has been growing by double digits, as has our digital business, so there are some real opportunities for further growth.”

Examining the nature of that digital business in more detail, Watson says that it primarily focuses on two things: professional liability in the US and Brazil and the digitisation of Argo’s existing business, using technology more and evolving the way the company deals with its customers. This is done mainly by using web-based applications.

“You have to be continuously investing in technology but you can also get out too far ahead of your customers,” Watson says.

“In 1999 we provided real-time, online claims reports for our policyholders. The problem was that half of our clients didn’t have web browsers and half of our brokers didn’t have email. We were a little too ahead of our time.

“In 2000 we went paperless—if you wanted to get a physical policy from us and you didn’t want to have your broker email it to you, we would print one for you, but then we’d charge you for it. We saved a million dollars in printing costs in a six-month period.”

He added that many people now interpret ‘digital’ as meaning ‘direct to consumers’. But the definition varies, he stresses, noting that only some companies will thrive as technology evolves.

“If you go back and look at all the direct-to-consumer startups that were there in 1999 to 2000, how many of them have survived? Just e-sure. We’ve been involved in the tech world for some time now and digital means different things to different people.

“It’s very expensive to acquire customers online and I think many people underestimate the cost of that—so we’ll see how it goes. Many people are vacillating—some want it to go away and others become obsessed with it.”

International expansion

Watson points out that 2017 has not been a more active hurricane year, but it is a year when more hurricanes have made landfall in the US.

“If Hurricane Matthew, last year’s big storm, had come up the Eastern seaboard 20 miles west of where it did, this year’s conversation would have happened last year. I don’t think this year is any more active than other years, but it’s seen more landfalls in more populated areas,” he says.

Another area of interest for market participants has been emerging markets. According to Watson, Argo has been looking at that area for a decade. One of its fastest-growing regions of business is Brazil, although he adds the caveat that there is a lot of overhead there, because the company still establishing itself there. Argo is also involved in business in Dubai and Shanghai.

However, Watson stresses, Argo is not looking at emerging markets to the exclusion of everywhere else; well-established markets such as the US still hold a great deal of promise, as well as profit.

Whereas in its early years Argo Group enjoyed fast growth, it has now grown to the point where it can be more selective in where it chooses to do business, he says.

“If you look at our business plan today versus a year ago, or five or 10 years ago, it’s pretty much been the same: to leverage the resources that we have, leverage the platform that we’ve created and continue growing where we can.

“Over time, we think we can generate an acceptable return on our capital over a 10-year period on any one class of risk,” he concludes.