S&P Affirms Argo Group US & Operating Companies Ratings; Outlook Stable

July 16, 2014

Standard & Poor’s Ratings Services has revised its outlook on U.S.-based intermediary holding company Argo Group US Inc. (AGUS) and its U.S. operating subsidiaries to stable from negative.

S&P also affirmed our ‘BBB-‘ issuer credit and senior unsecured debt ratings on AGUS, and our ‘A-‘ issuer credit and financial strength ratings on its operating companies (collectively, Argo).

The ratings report explained that the “outlook revision reflects Argo’s improved operating performance over the past 18 months, as well as management’s demonstrated progress towards meeting its stated goals of enhancing the efficiency and profitability of the group’s business platform while bettering its enterprise risk management (ERM) capabilities.”

AGUS is a wholly owned subsidiary of Bermuda-based insurance and reinsurance holding company Argo Group International Holdings Ltd. (AGII). The consolidated group (at the ultimate holding company level, AGII) “reported a generally accepted accounting principles (GAAP) combined ratio of 98 percent in 2013 and 96 percent in first-quarter 2014. The group’s return on revenue (ROR) also improved to 10 percent in 2013, and 11 percent in first-quarter 2014, from 5 percent in 2012.”

S&P explained that “while the improved operating performance is partially due to lower catastrophe losses during the period, we believe it also reflects recent actions taken by management to boost operating efficiency and reduce earnings volatility.”

Credit analyst Laline Carvalho said: “The ratings on AGUS and its operating subsidiaries reflect our view that Argo has a strong business risk profile built on a strong competitive position in specialty line. The ratings also reflect our view that the group has a strong financial risk profile based on very strong consolidated capital and earnings at the ultimate holding company level. This is partially offset by the group’s moderate risk position, reflecting potential moderate earnings and balance sheet volatility due to catastrophe losses.”

The report explained that the stable outlook reflects “the group’s strong competitive position and very strong capital and earnings, as well as our expectation that management will continue to make gradual but steady progress to improve Argo’s operating results and expense structure over the next couple of years. We also expect the group to further enhance its ERM framework during this time.

“We could take negative rating actions over the next 12-24 months if the group’s operating results are significantly weaker than our expectations and management’s targets; its ERM capabilities deteriorate materially, or are not in line with the group’s risk profile; the group experiences significant management turnover; there is material adverse reserve development; or capital adequacy declines significantly.

Carvalho added that S&P believes “there is little chance for any positive rating actions over the next 24 months.” She indicated, however: ” We could take a positive rating action if the group demonstrated a successful track record of competitive earnings and expenses relative to peers and it continues strengthening its ERM capabilities while maintaining a strong, and improving, competitive position, very strong capital and earnings, and stable management.”

Source: Standard & Poor’s

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