S&P revises Argo US outlook

17-08-2018

S&P Global Ratings has revised its outlook to positive from stable on Argo Group US and its subsidiaries.

Argo Group US is a subsidiary of Argo Group International Holdings. At the same time, S&P Global Ratings affirmed its 'BBB-' long-term issuer credit rating on Argo Group US and its 'A-' long-term financial strength and issuer credit ratings on the company's core operating subsidiaries.

According to S&P over the past couple of years, Argo has undertaken key initiatives to spur growth and improve profitability, and results are starting to show. The investments in its digital infrastructure, along with development of predictive analytics and risk-based pricing tools, are providing increased opportunities for disciplined organic growth and expense efficiencies, especially in its US business. The company has also been acquiring talent, underwriting expertise, and platforms such as Maybrooke Holdings (which operates under the name Ariel Re) to support its international expansion and adding to its efforts to build out its overall underwriting portfolio.

Furthermore, S&P recognises the concerted effort Argo has made to enhance its enterprise risk management (ERM) framework and embed its processes into its strategic planning. The company made a focused effort to improve its underwriting in its primary US business during the past couple of years, as highlighted in its performance. Similar strategies are afoot at its international business, including at its Lloyd's syndicate operations.

Although the rating agency recognises that a level of execution risk exists as the company continues to pursue its strategy, seasoning of these initiatives could lead to improved returns. In the past five years (2013-2017), the consolidated combined ratio averaged 98.4 percent, in line with the sector. However, Argo's average expense ratio of about 40 percent during the same period was at the higher end of the peer group and has been a drag on the company's overall underwriting performance. S&P believes the operating platform can support a higher level of premium volumes, and hence as the platform grows and ongoing investments bring about tangible expense efficiencies, the expense ratio should visibly improve during the next few years.

The underlying accident year loss ratios excluding natural catastrophes of 59.2 percent and 57.8 percent in 2017 and first-half 2018, respectively, were higher than in previous-year periods due to some large non-weather-related losses.

S&P said that underwriting actions along with a broader use of risk-based pricing and better risk selection should help bring the attritional loss ratios back in line.

Under S&P’s base-case scenario, for 2018-2020, S&P expects gross premiums written to increase mid-to-high single digits. In addition, S&P forecasts a combined ratio of 95-98 percent in 2018 and 94-97 percent in 2019-2020, reflecting expense and underlying loss ratio improvements while assuming a normalised catastrophe load of about four percentage points. The rating agency also expects Argo to maintain very strong capitalisation redundant at the 'AA' confidence level, financial leverage of about 25 percent, and fixed charge coverage greater than 4x. Lastly, the rating agency expects the group to continue enhancing its ERM framework during the next few years.

S&P said that the affirmation reflects Argo's strong competitive position and very strong capitalisation, partially offset by moderate volatility in its earnings profile. In a statement it said that: “We will continue to anchor our ratings to the group's US operations, which are seeing increased profitable growth momentum. We expect greater focus on international operations as the company looks to enhance its business profile. However, despite some pricing gains, post-2017 catastrophe losses, headwinds in the re/insurance market and pricing pressures in some lines of business (including Lloyd's of London) make it a challenging environment for Argo to execute its strategy.”

S&P added that the positive outlook reflects the potential for further advancement in Argo's ERM program and continued progress in the company's strategic initiatives that result in improved underwriting earnings.

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