S&P ups Argo outlook on profitability measures

S&P Global Ratings has revised its outlook to positive from stable on Argo Group US and its subsidiaries, reflecting the potential for further advancement in Argo's enterprise risk management (ERM) programme and progress in the company's strategic initiatives that result in  improved underwriting earnings.

The investments in Argo’s 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, according to S&P analysts. 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 points to 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, S&P said. Similar strategies are afoot at its international business, including at its Lloyd's syndicate operations, the ratings agency added.

These initiatives could lead to improved returns, S&P said. 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.

For 2018-2020, S&P expects gross premiums written to increase mid-to-high single digits. In addition, the ratings agency forecasts a combined ratio of between 95 percent and 98 percent in 2018 and 94 percent and 97 percent in 2019-2020, reflecting expense and underlying loss ratio improvements while assuming a normalized catastrophe load of about four percentage points.

At the same time, S&P Global Ratings affirmed Argo’s '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.

Argo Group US is a subsidiary of Argo Group International Holdings.

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