Argo Group International Holdings, already reeling from a tough 2019 fourth quarter and year, now must deal with downgraded credit ratings from A.M. Best.

The Bermuda-based specialty insurer and reinsurer had its long-term issuer credit ratings downgraded for the main company and its U.S. operations (to “bbb-” from “bbb”). As well, Argo Re’s financial strength rating is now “A-,” downgraded from “A” (Excellent). All areas had been under review with negative implications, and there is also now a negative outlook for the credit ratings.

A.M. Best said its rating action is in response to the U.S. Securities and Exchange Commission’s decision last fall to subpoena Argo about executive compensation policies, including those for now-former CEO Mark Watson III. Another factor: A.M. Best criticizes the company’s “recent lack of transparency” involving those compensation policies and how they were dealt with.

Confronting Past Performance

That’s something that new Argo CEO Kevin Rehnberg confronted head on in his remarks included as part of the company’s Q4 2019 earnings released on Feb. 24.

Rehnberg said he was disappointed with the company’s money-losing Q4 results, including a $114 million underwriting loss, but reiterated a commitment to confronting issues activist shareholder Voce Capital Management LLC first raised in early 2019 about results, spending and executive compensation practices.

“We believe our organization has great potential, but our results for 2019 are not indicative of our future direction,” Rehnberg explained. “Immediately upon my appointment as Interim CEO in November, we started a review process of all of Argo’s operations. That review process is ongoing. The company has a strong foundation of specialty insurance and reinsurance businesses, focused largely on the most attractive specialty market: U.S.-domiciled risks. The core of this foundation is not going to change, but it can certainly be enhanced. Some of our businesses are performing very well today, while others are not meeting return expectations. We are acting swiftly to address areas where the available return prospects are not achievable in the near term and do not fit our focused strategic direction.”

Rehnberg added that the company going forward is “insisting upon a culture of results and accountability” along with more focus and efficiency. He also said Argo is “eliminating unnecessary spending and will deploy capital more strategically going forward.”

In turn, board Chairman-Elect Thomas Bradley expressed support for Rehnberg and his strategy as CEO.

“The board is fully supportive of Kevin’s vision for the company and impressed by all that has been achieved over the past few months,” Bradley said in prepared remarks.

Q4 2019 Disappoints

Argo reported a $103.3 million net loss in Q4 2019, or negative $3.01 per common share. That compares to a $43.6 million net loss the year before, or negative $1.29 per common share. Its consolidated combined ratio was 126.7 during the quarter compared to 99.5 in the 2018 fourth quarter.

Argo’s U.S. operations booked a 104.8 combined ratio compared to 92 in Q4 2018. Its international combined ratio was 149.1 versus 104.5 a year ago.

Consolidated gross written premiums reached $712.8 million during the quarter versus $702 million the year before. Consolidated net written premiums surpassed $399 million, but that’s down from $424.5 million in the 2018 fourth quarter.

Broken down, U.S. gross and net written premiums saw increases, but international operations declined on both fronts.

On the U.S. side, Argo said it faced increases in liability, professional and property lines loss ratios. Internationally, Argo blamed its struggles on the ending of some programs and classes of business, though it said some of that was partially offset by rate increases and organic growth in other areas. It attributed international loss ratio increases partially to changes/updates in actuarial estimates.

Efforts Acknowledged

A.M. Best noted that Argo’s new management has worked hard to right the ship, pointing out, for example, the company’s previously stated eagerness to work with the SEC on its inquiry, appoint a new board chairman, update its board and replace its CEO. The ratings agency also cited Argo’s settlement agreement with Voce as a positive development.

At the same time, A.M. Best said Argo’s Q4 2019 results are troubling.

“The ratings [changes] also consider Argo’s fourth-quarter 2019 earnings announcement and $77 million of unfavorable prior-year loss reserve development posted in that period, which is in addition to the group’s previous reserve charge of $42 million taken in the third quarter of 2019,” A.M. Best wrote. “Once again, a portion of this fourth-quarter charge was related to its Lloyd’s operation, which over the years has had a number of challenges. Argo’s earnings for fourth-quarter and full-year 2019 were well below expectations. Sudden and significant reserve development generally raises questions around risk awareness as it signals a potential weakness in readily identifying problematic areas of its business, which may result in additional reserve surprises in the future.”

A.M. Best said it expected Argo’s new leadership and board to “enable effective governance in terms of managing future risks including compliance-related risk, providing sound governance at all levels of the enterprise, creating a framework that is transparent and one that keeps its stakeholders apprised.”

Argo also gets some credit from A.M. Best for “proactively working” through its issues. A.M. Best’s expectations are measured, however, with the ratings agency noting that “the consequences of these actions will take some time before the effects of these changes are recognized.”

Sources: Argo Group, A.M. Best