Watson warns against unsustainable market situation in Argo report
Mark Watson, CEO of Bermuda-based Argo Group, has warned in a letter to shareholders that the pricing situation in the London market and others like it is unsustainable.
“The pressure on pricing in those geographies will ease only when our industry as a whole takes responsibility and makes some deliberate changes,” he said in the letter, which forms a part of Argo’s mid-year 2017 report. “We must no longer refuse to adopt processes and protocols that make us more efficient. We all must commit to addressing the real, evolving needs of customers rather than dusting off well-worn products for their consumption.”
Watson said that there is more supply than demand in the London subscription market, adding that it is currently one of the most complex and competitive markets Argo had seen for some time, with sustained pressure on pricing tempting some syndicates to make unwise decisions.
According to Watson, brokers that are sitting close to their customers must acknowledge a duty to ask about changing needs, consider them and help the market to respond, adding that the latter must also resist the temptation to sell short-term solutions for the long-term needs of policyholders.
“Those policyholders too must admit that as long as they insist on paying bottom dollar, they will have neither the coverage nor the service they will surely need when a catastrophe hits,” he said. “Lastly, investors in our industry must be rational in their expectations for returns given the environment in which we do business. Ours is an industry designed to help businesses stay in business. We won’t lose sight of our mission.”
Watson said that during the first six months of 2017, Argo had achieved profitable growth in its US operations, Bermuda and Latin America, managed a complex and difficult market at Lloyd’s, and generated strong investment returns.
“Steady on our strategic course to be a leading, global specialty underwriter, we once again achieved strong results for our shareholders,” Watson said. “In our first six months, gross written premiums grew to $1.28 billion, up 19 percent compared to $1.08 billion over the same period last year. Due to a number of non-recurring expenses such as transaction and restructuring costs for Ariel Re in the first quarter, our combined ratio was 98 percent compared to 95 percent for the 2016 first half.”
According to Watson, the loss and expense ratios were 58 percent and 40 percent respectively, compared to 56 percent and 39 percent for the 2016 first half, adding that these figures reflect a number of sizeable one-time expenses in the first quarter. As a result, net income was $82.7 million, compared to $58.6 million for the 2016 first half. Adjusted operating income, however, was $62.6 million, compared to $66.9 million for the 2016 first half. Similarly, loss ratio excluding catastrophes and reserve development was 57 percent, compared to 55 percent for the 2016 first half.
Watson added: “We took deliberate steps to broaden the scope of our investment activity, and I’m pleased to report that investment income in these first six months rose more than 30 percent over last year’s first half to $74.1 million from $56.9 million. This was due in part to our buying and then selling a sizeable share in a surety company. Given our overall performance, our book value per share has grown 6.7 percent from the end of the second quarter of 2016, and the annualised return on average shareholders’ equity was 9 percent at June 30, 2017. For the last 15 years including dividends paid, the compound annual growth in book value per share has been 10 percent.”
