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Elevated current & prior-year losses dent Argo’s underwriting result in Q2

6th August 2019 - Author: Luke Gallin

Argo Group International Holdings has reported a combined ratio of 103.4% for the second-quarter of 2019, as elevated current and prior-year losses in its international operations failed to offset improved underwriting income in the U.S.

Argo Group logoArgo’s Q2 2019 combined ratio weakened from the 96.3% recorded in the second-quarter of 2018, and includes a loss ratio of 66% and an expense ratio of 37.4%, compared with 58.8% and 37.5% in Q2 2018, respectively.

Overall, catastrophe losses reached $6.5 million in Q2 2019 compared with just $1.7 million a year earlier, while net unfavourable prior-year reserve development of $22.3 million also dented the firm’s performance, and compares with favourable prior-year reserve development of $2.4 million in the second-quarter of 2018.

Argo’s net income fell in the second-quarter of this year to $28.8 million compared with $41.8 million in Q2 2018. The insurer and reinsurer notes that its Q2 2019 net income includes a pre-tax charge of $32.2 million related to the increase in both current and prior year losses. In addition, the quarter included roughly $7.5 million of expenses associated with proxy solicitation and related activities.

A closer look at the company’s Q2 performance by segment reveals that an improved performance in the U.S. was offset by a decline in Argo’s international segment.

Argo’s U.S. operations recorded underwriting income of $29.4 million, which is up more than 11% on the prior year quarter, and which the firm attributes to an improved current year ex-CAT loss ratio, an increase in net favourable prior-year reserve development, an increase in underwriting income driven by higher net earned premiums, somewhat offset by higher cat losses and a modest increase in the expense ratio.

Within its U.S. operations, gross written premiums (GWP) grew by 10.6% to $453.6 million in the second-quarter, net retained premiums were 65.1% while net earned premiums grew by 6.4% to $284 million.

The loss ratio improved slightly to 57.4% and is a result of the current accident year ex-CAT ratio improving to 57.7%, compared with 59% in Q2 2018. The U.S. segment also recorded net favourable prior-year reserve development of $5.1 million, which is up $2 million year-on-year. Catastrophe losses increased to $4.2 million compared with $1.3 million in Q2 2018.

At 32.3%, the expense ratio in the segment increased when compared with the 31.8% reported in Q2 2018.

The improvement in the U.S. in the second-quarter was offset by Argo’s international operations, which fell to an underwriting loss of $30.4 million, compared with underwriting income of $6.4 million for the second-quarter of 2018.

This was driven by $26.4 million of net unfavourable prior-year reserve development in Q2 2019, compared with favourable development of $0.5 million in Q2 2018. Argo states that the unfavourable development relates to certain liability, property, and specialty lines of business.

Catastrophe losses increased from $0.4 million in Q2 2018 to $2.3 million in Q2 2019. Within its international operations, Argo’s loss ratio weakened significantly from 58.9% to 81.9% and was driven by unfavourable reserve development, elevated cat losses, and a 62.4% current accident year ex-CAT loss ratio, which is up on the 58.9% recorded in Q2 2018.

GWP in the segment increased by 9% to $319.2 million, while net retained premiums were 50.1% compared with 56.4% in Q2 2018. In line with this, net earned premiums declined by almost 2% to $147.6 million. Argo notes that the decline in net retained and net earned premiums was mostly driven by its ongoing strategic use of reinsurance and a greater use of alternative, or third-party reinsurance capital, most notably in property.

At 38.7%, the segment’s expense ratio increased by 1.9 points when compared with the same periods in 2018.

Argo’s Chief Executive Officer (CEO), Mark Watson, commented on the firm’s performance: “For the first half of the year, Argo’s book value per share growth plus dividends paid was 10.6% and our annualized return on shareholders’ equity was 13.1%, which reflects strong contributions from our investment portfolio. We continue to deliver strong shareholder value creation despite some isolated claims volatility impacting the second quarter of 2019.

“Our focus on increasing efficiency through digital enhancements and growing profitable business lines continues to yield positive results, with 10% gross written premium growth in the quarter.”

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