AM Besthas removed from under review with negative implications and downgraded the Financial Strength Rating (FSR) to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to "a-" from "a" of Argo Re Ltd. (Argo Re) (Pembroke, Bermuda) and its subsidiaries. AM Best has removed from under review with negative implications and downgraded the Long-Term ICR to "bbb-" from "bbb" and downgraded the Long-Term Issue Credit Ratings (Long-Term IR) of the parent, Argo Group International Holdings, Ltd. (Argo Group) (Pembroke, Bermuda) [NYSE: ARGO]. Additionally, AM Best has removed from under review with negative implications and downgraded the Long-Term ICR to "bbb-" from "bbb" and downgraded the Long-Term IR of Argo Group US, Inc. (Argo US) (headquartered in San Antonio, TX). Argo US' senior unsecured notes are fully and unconditionally guaranteed by Argo Group. The outlook assigned to all of these Credit Ratings (ratings) is negative. (See below for a detailed listing of the companies and ratings.)
The ratings reflect Argo Re's balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management (ERM).
The downgrade is a follow up to actions taken in November 2019 in response to a recent subpoena issued by the Securities and Exchange Commission (SEC) as it relates to the non-disclosure of certain compensation-related perquisites involving Argo and its departed CEO, and also considers the fourth quarter earnings and the host of events leading up to this quarter. This rating action also touches on the organization's recent lack of transparency and the collateral damage caused by these actions as previously noted in AM Best's November press release.
During the fourth quarter, Argo management undertook significant changes as part of the new leadership's ongoing efforts to correct past practices, culture and governance as it relates to the SEC inquiry. While the organization is still working through the SEC inquiry, Argo recently appointed a new board chairman and a new CEO. Both are continuing a board refreshment process after Argo reached a settlement agreement with the activist shareholder Voce Capital. This process is intended to bring on a variety of new complementary individuals, including those with corporate governance experience, as was the case with the most recent nomination of Dr. Bernard Baily.
The ratings 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. 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 the 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.
AM Best believes that the scope and nature of these events are material from a governance perspective. AM Best also looks to Argo's new leadership and board to enable effective governance in terms of managing future risks, including compliance-related risk, providing sound governance and accountability at all levels of the enterprise, creating a framework that is transparent and one that keeps its stakeholders apprised.
Over the past several months, Argo has been proactively working through much of this; however, the consequences of these actions will take some time before the effects of these changes are recognized. Based on the aforementioned and increased execution risk in the year ahead, AM Best has lowered the ERM assessment from "appropriate" to "marginal".
At the same time, the negative outlook reflects Argo's weakening balance sheet strength, largely driven by the fourth quarter results and the potential for additional reserve development. Some credit is afforded to Argo given its financial flexibility as a publicly traded company listed on the New York Stock Exchange, with ready access to global capital markets.
The group's operating performance is generally in line with its peers when considering its specialty U.S. insurance operations and international platforms. This is tempered somewhat by the group's expense ratio, which, although improving, is consistently higher than its peers. The ratings also consider the group's diversified operations and multi-prong distribution strategy, as well as its investment in technology and initiatives to innovate and optimize efficiency.
The FSR has been removed from under review with negative implications and downgraded to A- (Excellent) from A (Excellent) and the Long-Term ICRs downgraded to "a-" from "a" with negative outlooks assigned for Argo Re Ltd. and its following subsidiaries:
- ArgoGlobal SE
- Argonaut Great Central Insurance Company
- Argonaut Insurance Company
- Argonaut-Midwest Insurance Company
- ARIS Title Insurance Corporation
- Colony Insurance Company
- Peleus Insurance Company
- Colony Specialty Insurance Company
- Rockwood Casualty Insurance Company
- Somerset Casualty Insurance Company
The following indicative Long-Term IRs available under various shelf registrations have been removed from under review with negative implications and downgraded with a negative outlook assigned:
Argo Group International Holdings. Ltd. --- to "bbb-" from "bbb" on senior unsecured debt-- to "bb+" from "bbb-" on subordinated debt-- to "bb" from "bb+" on preferred stock
Argo Group US, Inc. --- to "bbb-" from "bbb" on senior unsecured debt-- to "bb+" from "bbb-" on subordinated debt
Argo Group Statutory Trust --- to "bb" from "bb+" on preferred stock
The following Long-Term IR have been removed from under review with negative implications and downgraded with a negative outlook assigned:
Argo Group US, Inc. --- to "bbb-" from "bbb" on $143.75 million 6.5% senior unsecured notes, due 2042
This press release relates to Credit Ratings that have been published on AM Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best's Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper media use of Best's Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best's Credit Ratings and AM Best Rating Action Press Releases.
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