Last fall in the blog post “What is Up with Argonaut Insurance Company”, I raised the alarm that changes in ownership, lack of reserves and capital levels, and internal reorganization might lead to policyholders with legacy liabilities receiving short shrift. I called on Argonaut Insurance Company policyholders to be ready to show up in force if the Illinois Insurance Department received any request by the new owners to reorganize. Specifically, I am worried that an attempt will be made to isolate holders of legacy liability insurance coverage in a separate run-off vehicle, separate and remote from the ongoing business. These types of reorganization never end well for policyholders. 

My previous opinions were based on information up through Argonaut’s third quarter statutory financial statements. I have now had a chance to review their full-year financials and have a few further observations to share.

First, the good news is that capital levels have improved as a result of capital contributions from the parent, Argo Group US Inc. A total of $280.4 million was invested in 2023, of which $215.0 million was in the fourth quarter. As a result, there has been a significant uptick in key capital adequcy ratios, specifically the risk-based capital ratio: now 301% versus 252% at year-end 2022. This is still a far cry from the 597% ratio back in 2013, or even 439% in 2018. As a result of poor profitability in 2022 (combined ratio >120%) in combination with weakening risk-based capital ratios, the company was required to submit to the Illinois Insurance Department a plan to increase the ratio above 300%. This has now been achieved. The company now has an AM Best Credit rating of A- (the lowest credit rating compatible with active underwriting). While the AM Best website indicates that the rating is under review and the outlook is “developing,” the capital infusion and improved risk-based capital ratio removed pressure that a downgrade might be imminent. 

The retroactive reinsurance deal that the company executed with an Enstar subsidiary in 2022 greatly complicates normal financial analysis of its profitability. (Do I hear a request for a separate blog post on accounting for retroactive reinsurance?) However, putting all of the pieces together — underwriting, investment performance, and retroactive reinsurance — net income was $14 million. 

But I remain seriously concerned that the company is under reserved for legacy liabilities. The writing is still on the wall. I anticipate that the company will try to isolate legacy liabilities into a separate run-off vehicle. The current business model is founded on “specialty insurance in niche areas of the property-casualty market, providing a variety of specialty products”.  It goes on to disclose that it offers “insurance products tailored to the needs of customers business and risk management strategies.” Who knows what that means? It is quite a different business from the general liability corporate policies it underwrote decades ago and from the construction risk it had focused on until quite recently. Legacy liabilities are clearly an inconvenience as the company seeks to reinvent itself.

As to my doubts about the adequacy of their reserves, there is no mention at all of emerging classes of legacy liability, such as PFAS, opioids, or sex abuse. But even for that everlasting toxic tort — asbestos-related disease — they appear seriously under reserved and at risk. Argonaut’s three years survival ratio of 5.5 for the 2022 year put the company among the lowest reserved by that measure of the top 30 US property-casualty insurers.[1] Argonaut made large asbestos claims payments in 2023 relative to prior years, so its 2023 survival ratio of 5.2 will compare even more unfavorably. 

Reinsurance protection for asbestos (regular or “prospective” — not the retroactive sort referred to above) is just 10%, which is a very low percentage by industry standards. It’s symptomatic perhaps of a reinsurance commutation strategy and the fact that more than half of the exposure is from assumed risks (insuring other insurers). Assumed risk is also generally considered more volatile due to less data being available. 

Likewise, the formal statement of actuarial opinion for the filing year, along with the statutory accounts, draws attention to asbestos reserving. In particular, it notes that the company relies on internal data and not industry data in forming reserves, and it concedes that reserves would be higher if industry data were used. I find this astounding. Of course they should be considering industry data in setting reserves. What are they thinking! 

Here’s the bottom line. The injection of capital is a good sign, but in a sense, it was an inevitable step given that they were already committed to improving risk-based capital to above 300%. But I remain every bit a as concerned now as when I wrote about Argonaut in November. The new private equity owners have no insurance industry reputations to protect. Corporate strategy appears extremely fluid. There are significant, and it appears under reserved, legacy liabilities that are clearly inconvenient and a significant drag on earnings. The temptation to engineer an exit to legacy commitments must be intense. I continue to believe that it is only a matter of time before the new owners begin the process, by petitioning the Illinois Insurance Department to approve splitting Argonaut  into a legacy run-off vehicle and a separate underwriting insurance company. And when they do, policyholders must scream BLOODY MURDER. Be ready. 

[1] AM Best December 18, 2023, Market Segment Report