Message to Shareholders
Argo is on course.
It’s great to acknowledge that the continuous improvements we are making to become a high-performing company are paying off.
As always, the proof is in the details. Gross written premiums were up 7.6% to $2.16 billion from $2.01 billion in 2015. Our after-tax adjusted operating income1 rose from $108 million last year to $121 million in 2016. Our net income was almost $147 million, compared to last year’s $163 million. Our combined ratio was 96.2%, compared to 95.0% in 2015, with major catastrophe losses near the end of the year causing much of that variance. In fact, while our overall loss ratio moved from 55.8% to 57.4%, when we exclude catastrophe losses and positive prior-year loss development, the loss ratio for 2016 improved a full percentage point to 55.4%1, which is in the top quartile of underwriting performance for our industry. Our book value per share grew 10% for the year to $59.73 at year-end, the 10th consecutive year of improvement. Finally, our adjusted operating earnings1 of $3.92 per share grew 14% from 2015. We achieved these results notwithstanding catastrophe losses that were two and a half times higher this year due to Canadian wildfires, the largest hailstorm in Texas history, Hurricane Matthew and a series of smaller events around the world.
I’m happy to note that investment income – even in a challenging environment – was $115.1 million, compared to $88.6 million last year, an increase of almost 30%, with our alternative investment portfolio contributing solidly to that result. We ended the year with cash and investments totaling $4.4 billion.
I begin with our results in the United States. As you may know, we have spent considerable time and resources building and rebuilding various parts of our U.S. portfolio. A remarkable turnaround in our Commercial Specialty segment was one of the year’s highlights. Led by Kevin J. Rehnberg, our U.S. operations posted a record underwriting income1 of just under $112 million in 2016, more than at any other time since I invested in the company. My thanks go to everyone in the United States for doing a fantastic job.
Excess & Surplus Lines
The continuing focus in our Excess & Surplus Lines (E&S) business this year was execution. Our success in earning $49 million of underwriting income was due in part to new technologies that help us better analyze and select risk, allowing us to increase the value of the business we process. Thanks to close collaboration between our technology and engineering teams, we were able to introduce a number of improvements to our underwriting. We reduced cycle times substantially through automation, exponentially increasing the number of submissions we respond to, while freeing our underwriters to reach out to new clients. This led to what otherwise would have been a decline in premiums, given prevailing market conditions. Our core casualty business grew over 10%, which contributed to our overall E&S growth of 4.1%. Needless to say, we let a fair amount of underperforming business go. Gross written premiums in E&S were $585.8 million. Catastrophe losses rose to $11.6 million from $5.5 million the year before, accounting for 2.4 points on a combined ratio of 89.9%.
In 2016, we saw improvement in most businesses within our Commercial Specialty segment. Growth came mainly from program, surety and professional lines businesses that leveraged our digital tools, focused on real-time market research and aggressively pursued potential markets. Trident Public Risk Solutions found innovative ways to grow our public-entity business across the United States. Argo Surety logged its ninth consecutive year of growth. ARIS gained momentum as the industry’s only insurer to underwrite true title insurance for fine art and other important collectibles. Across the segment, enhanced collaboration generated innovative responses to emerging market opportunities, and the figures reflect our success. In 2016, gross written premiums were $691.9 million for this segment, up $109.2 million or 18.7% over the same period last year. Underwriting income was $62.5 million, compared to $30.1 million in 2015. The combined ratio of 82.8% compares to 91.3% in the previous year.
While our U.S. results drove our overall growth in 2016, our international businesses are holding steady, notwithstanding market headwinds and above-average catastrophe losses. Organized now under Jose A. Hernandez – our new head of international business – Argo’s London, Bermuda, Latin America and emerging-market businesses are now collaborating to drive business worldwide. Our long-term investment in Brazil is working well for us, with the digital platforms and products we prototyped there now making money and being replicated elsewhere. Having said that, competition remains fierce at Lloyd’s, where we compete in the toughest market of the last two decades. Even so, our advantage lies both in our data and in our relationships, deepened over time by collaboration, solid underwriting and outstanding service. In London, we are now recognized by key brokers as a leading underwriting firm, and the announcement of our acquisition of Ariel Re has earned widespread interest. For 2016, our International Specialty business earned gross written premiums of $261.3 million, and our Syndicate 1200 generated gross written premiums of $625.5 million for a total of $886.8 million, with an overall combined ratio of 95.4%.
A world of new possibilities
Our industry rides on the tide of commerce. As geopolitical decisions influence the shape and scope of global business, the nature of risk itself changes dramatically. Our duty is to know where conditions are in flux, and to assess if we can help businesses mitigate their risks with sensibly priced coverage.
In the past year, we witnessed a handful of sweeping political changes. The announcement of Britain’s vote to exit the European Union in June had deep implications. No matter how hard or soft Brexit implementation proves to be, important questions of jurisdiction and authority will see shifts in power that change trade alliances, rates and routes. That said, with insurance entities licensed in both the United Kingdom and continental Europe, we do not expect significant disruptions in our own insurance activity. We believe that regulatory changes affecting our business will be introduced over years, not months. As changes become better known, we will take any steps needed to accommodate a restructured international configuration.
The change of administration in the United States has also opened speculation on where business is headed, what opportunities will emerge, and whether prosperity is better served by competition or protection. The broad issue in both Europe and America is the struggle between global interest, regional interest and national interest, which lately have been characterized as divergent, incompatible ideologies. In my view, they may be conflicting but they are not irreconcilable. Where prosperity is concerned, access to capital and sharing of risk are of intrinsic value to the national good. Most nations do not on their own have enough capital to drive and protect all the growth required or possible. That’s why insurance was invented. That’s why Lloyd’s was founded. That’s why Bermuda became a center of reinsurance. If tariffs, taxes and selective prohibitions become the tools of national interest they once were, access to insurance could be unduly limited as it once was. Without insurance, communities, businesses and projects will grind to a halt. Even if promised infrastructure improvements are backed by public funding, their engagements will carry risks that will have to be hedged with adequate insurance. However the debate on governance style is resolved, our industry must be allowed to carry on its role as a prudent risk-taker that allows the wheels of commerce to turn smoothly. We are the grease that makes that happen. The platforms we’ve built for Argo in the United States, Bermuda, London, Europe, Asia and Latin America allow us to take advantage of opportunities as they arise. But insurance has rightly become a global community of underwriters who share risk and protect those who need it. We must be allowed to continue.
A related issue is capital. The low-rate investment climate continues to perplex. Investors are scratching their heads, uncertain of where they should put their money to work. Having watched the U.S. 10-year bond annual yield slip steadily from over 15% in 1982 to below 2% in 2016, and now sensing a fully subscribed equity market, many corporations are placing capital in areas of business in which they are not already exposed. We have seen this trend in our own industry, where new technology has driven the convergence of insurance companies and capital markets. Innovative disruption of the value chain from policyholder to ultimate risk-taker could shake things up, but I contend that this convergence will ultimately prove to be to the benefit of the policyholder and those who possess superior technology and the know-how to use it. As we continue to make our own business more simple and intimate through technology, I am confident that our own deep-domain expertise will allow us to thrive as a specialty insurer in an industry where new entrants cannot easily compete without such expertise.
Getting there together
At Argo, our companywide focus this year was on learning how to engage the full talents and creativity of our team, and we were not disappointed. Together, we found ways to collaborate and produce impressive results. The most visible evidence of our strategy was our late-year acquisition announcement of Ariel Re, which gives us a second Lloyd’s syndicate while positioning Argo as a market leader with immediate opportunities to expand into new geographies. We have worked hard to become data-driven. Ariel Re has inspired us to be even more so. As one entity, we will be able to exploit our combined ability to take on innovative risks, find new modes of insurance and reinsurance, and compete well in an increasingly competitive market.
Our team continued to improve through an expanding program of training and professional development. Talented people continued to join us from other high-performing companies – notably, experts such as our head of international Jose A. Hernandez, our chief financial officer for the U.S. Oscar Guerrero and our chief actuary Robert Katzman, all from AIG; and our head of digital Andy Breen from American Express. Together, our team found new ways to execute nimbly while innovating in every corner of the company. Encouraged by our program to seek out brilliant new ideas, Argo staff helped us change the way we communicate with clients, design and launch new apps, build risk-analysis tools, launch ingenious quote-and-bind solutions, accelerate claims resolution, and even reach whole new markets through complementary sponsorship programs. Through collaboration, innovation is changing us from within.
Finally, commitment to the communities in which we live and work has always been a priority at Argo. In 2016, we proved that commitment in important, practical ways. In London, we raised funds for a local hospital. In São Paulo, we donated food to the homeless and helped cancer patients. In cities across the United States, we supplied underprivileged kids with necessities, helped women build skills of self-promotion and sent school supplies to foster kids. We helped raise funds to support those with Down syndrome, and ran a United Way campaign in San Antonio sending funds to local frontline charities. In Bermuda, we reached an impressive milestone as Argo’s overall charitable giving topped $1.25 million.
To sum up, our company continues to improve and grow, with overall underwriting revenues ahead of plan and a strong Argo brand built through the discipline, generosity and innovative spirit of our exceptional team. We have become efficient, creative and resourceful, and we are achieving the success we planned for five years ago. Our vision to be a leading specialty underwriter is clearer now than ever before.
1. Please see reconciliations of non-GAAP measures to their most directly comparable US GAAP.