This reflects material adverse loss reserve development in Argo’s general liability business during 2021
AM Best has affirmed the Financial Strength Rating of A- (Excellent) of Argo Re and its subsidiaries. The ratings affirmation takes into consideration Argo Group’s most recent fourth quarter and full year earnings announcement.
However, the adverse reserve development reported in Q4 and its effects on the group’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), has resulted in a lower BCAR score, which no longer supports an assessment level of strongest.
The ratings reflect Argo Group’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management (ERM).
Albeit weaker than expected earnings for the year, Argo Group’s results over the past five years are still considered adequate by the rating agency.
Operating losses in 2021 were primarily related to material adverse loss reserve development in its general liability business, specifically related to construction defect claims from prior accident years.
Excluding this charge, accident year results were more in line with AM Best’s expectations.
Reduced exposure to cat risk
Improved underwriting margins and reduced volatility are expected as management continues to pursue a corporate strategy that focuses on its core specialty niche businesses while exiting non-core, subscale and/or unprofitable segments.
At the same time, Argo’s exposure to property catastrophe risks are significantly lower. As a result, Argo’s current accident year loss ratio continues to improve while expense ratio reduction targets are also being met.
The rating agency expects the group to take action to improve its risk-adjusted capitalisation in the near term while benefiting from increased earnings fundamentals.
Argo Group’s ERM assessment remains at marginal but management has taken great strides in improving its governance, internal controls, communication and transparency over the past two years.
Some of the initiatives introduced include significant changes to its board of directors, greater accountability, transparency and better engagement among its stakeholders.
Argo also successfully addressed the material weakness in internal controls related to financial reporting, which were identified in its year-end 2020 filing.
Material adverse reserve development in 2021 raises new concerns around emerging risk, risk identification and reserving practices.
On 2 March, the company announced that CEO Kevin Rehnberg would be temporarily unable to perform his duties for health reasons.
Thomas Bradley, who served on Argo’s board of directors since 2018, including as chairman since 2020, has assumed Rehnberg’s authority, duties and responsibilities as CEO.