Dear Shareholders,
We are delighted with the way the Argus Group has successfully navigated the financial and operational complexities of the past 12 months and delivered another year of strong economic performance.
Our operating earnings – which is our key measure of the profitability of the Group – for the year is $18.2 million. Once again, each core part of the Group has performed well and delivered strong underlying profitability.
The headline net income result for the year is $25.7 million compared to $10.1 million in the previous year. Both the current and the prior year reported net income are impacted by market interest rate movements – in 2021 this caused a drag on income whereas our 2022 results have benefitted from these movements. More on this later in this report.
Key Performance Metrics
We are pleased with the return on average equity for the year to March 31, 2022. Average annual return on equity over the last 4 years is 12.3% based on reported net income, and 15.1% on an operating earnings basis. We remain focused on continuing to deliver attractive and sustainable returns for our investors and seek to put surplus capital to work through judicious investment and strategic growth opportunities.
Our Equity
Since March 2018, our shareholders’ equity has increased from $105.9 million to $143.0 million as of March 31, 2022. During this time, we have returned $19.6 million to shareholders through dividends and a further $2.5 million through share repurchases. The decline in shareholders’ equity since March 2021 is primarily due to market value declines in our fixed income
portfolios that support our long-term products. As illustrated, our longer-term track record for building shareholder value has been solid against a backdrop of challenging times. We have achieved this through solid operating earnings, revenue diversification and continued commitment to careful and diligent custodianship of policyholder and shareholder assets.
Our strong balance sheet and careful capital management have allowed us to invest in our strategy to create long-term sustainable value and growth. In addition, our statutory capital remains well in excess of the capital required by regulators.
Our Business Performance
The headline net income for the year only tells part of the story. To understand the financial results for the year we must separate out the core business performance from the other shorter term factors that impact the reported result. The key components of our business performance are described over the next few pages.
The key performance metrics for the year have remained strong, despite the economic and operational challenges that exist across the world today.
Let’s first take a closer look at the financial results of the core business for the year. Our core business has delivered net income for the year of $14.8 million whilst successfully navigating the operational and financial challenges presented as our business and our communities return to some normality post the onset of COVID-19. More recently the economic turmoil and inflationary pressures brought about by the current geopolitical situation present a new set of navigational challenges.
The strength in our core insurance operations is reflected in the combined operating ratio, which is a metric to track the overall performance of our underwriting operations by comparing premium income to the cost of claims and operating expenses. For the year to March 31, 2022, the combined operating ratio for the insurance businesses within the Group was a healthy 77.8 percent compared with 70.4 percent and 80.8 percent for the years ended March 2021 and 2020, respectively.
Insurance Premium Revenue
Let’s look at our insurance premium income. The Argus Group underwrites insurance risks for corporates and individuals across a broad range of health, life, property and liability insurance covers.
We focus on quality over volume in our underwriting. Our selective approach to the premium we write and our disciplined approach to pricing has been key to our track record of superior underwriting results. Net insurance premium revenue within our core business increased $10.0 million or approximately 10 percent compared to the prior year.
As illustrated in the Gross Premiums Written chart, health insurance is the largest contributor to our insurance revenue. Our general insurance premiums generated in Bermuda and Europe and our Group Life premiums are also meaningful contributors to Group income.
Across the globe, healthcare costs have been consistently rising. In order to mitigate this risk and ensure we can deliver fair and consistent margins we reprice our policies each year, considering changes in key drivers such as utilisation, population health, advances in medical technology and benefit changes. Our special premium rebate programme in 2021 was hugely appreciated by our clients, helping to further deepen our long-term client relationships and maintain high client retention levels.
Fee and Commission Revenue
Fee and commission income represent a stable and capital efficient source of revenue for the Argus Group.
We generate fees and some commission income through our delivery of professional services to support the financial and physical health of our corporate clients, corporate members and individual customers.
In addition, we generate commission income from reinsurers. This significantly reduces our exposure to large risk events and results in low risk, capital efficient commission income
Commission and fee income generated by our core business has increased by $7.4 million or approximately 15 percent compared to the prior year. We continue to grow new sources of fee-based income, and build resilience and diversification in our revenues through complementary products and services.
Over the last five years we have acquired insurance brokers, a medical care management company, and primary healthcare practices. Not only have these acquisitions generated significant additional sources of revenue, but they have also brought complimentary capabilities and services to our Group.
As illustrated in the Commission & Fee Income chart, health related fees have become the largest component of our fee income and are expected to grow as we build out our medical administration and healthcare delivery businesses. Over one quarter of our commission and fee income is generated by our pension and wealth management products, and a further one quarter is commission received from reinsurers.
Income from our European insurance brokerage operations have remained robust. During the year we merged our two insurance brokerage businesses in Malta and united them under the Antes brand, creating Malta’s largest domestic insurance broker.
Benefits and Claims Expenses
Each and every day our claims team delivers on our commitment to put our customers at the heart of everything that we do. We pay claims fairly and treat our customers with empathy and deep humanity during times of stress and anxiety.
Economic activity returned to more normal levels during the past year. As a result, benefit and claims costs across our core businesses for the year increased $15.8 million or approximately 27 percent compared to the prior year.
Health Benefits
Health insurance benefit expenses returned to more normal levels during the past year following notably lower than normal claims in the year to March 2021, due to lower economic activity caused by the COVID-19 related lockdowns and travel restrictions.
As health insurers we are custodians of our clients’ health dollars – a responsibility we take very seriously. Over the past three years we have had some demonstrable successes in mitigating the rising cost of healthcare through diligent case management and enhancements to our overseas health network.
We continue to analyse emerging health data to understand the potential for an increase in the frequency or severity of future health claims as a consequence of lower utilisation of preventative and diagnostic healthcare over the COVID-19 period.
General Insurance Claims
As economic activity normalised over the past year so too did our general insurance claims
Our economic model for our general insurance business involves ceding much of the insurance risk to reinsurers. Our extensive reinsurance programme significantly reduces our exposure to large risk events and results in low volatility underwriting income – even when catastrophes occur. Thankfully during the last year our communities avoided major storms or other major events.
Operations
There’s so much more than meets the eye in our business. Our team’s focus goes far beyond current operations and short-term economic performance.
We’ve been making big changes to our operations to ensure our long-term cost of delivering our products and services remains competitive and builds a solid foundation for growth. We continue to make investments in our people, technology, risk management, and information security tools necessary to enable us to deliver value to our customers, support future growth and operational resilience and efficiencies. Some investments are yielding immediate returns whilst others will emerge over a longer horizon.
We remain committed to careful and judicious management of operating expenditure: investing where it matters most – in people and innovation – whilst taking meaningful steps to eliminate low value activities and expenses to reduce the ongoing cost of doing business.
Our strong operations allowed us to support the communities where we operate with donations and in-kind support for many individuals and organisations. Together we strive to operate a responsible and sustainable business, working with local market partners to promote social and economic development for tomorrow’s society and environment.
We continue to make investments in our people, technology, risk management, and information security tools necessary to enable us to deliver value to our customers.
Annuity Business
The annuity business remains well managed supported by best-in-class investment managers and a tea m of professional actuaries. The Group’s high-quality fixed income portfolio remains well-matched to the interest rate sensitivity of our long-term annuity liabilities.
Our annuity business generates attractive long-term profits and returns on capital deployed, but current accounting and valuation rules introduce volatility in the reported net income figure, especially over shorter periods.
The net profit for the year of $8.1 million contributed by our annuity business – driven by short-term market factors that impact reported net income under current accounting rules – only tells part of the story.
A more complete view of the profitability of the annuity business can be derived by looking at the total comprehensive income (which brings together the annuity liability and asset movements) over a multi-year period. As illustrated in the ‘Annuities: Total Comprehensive Income’ chart the annuity business has averaged approximately $1.4 million of income over the past 4 years.
We expect that the accounting standards IFRS 17 and IFRS 9 that are due to be introduced next year will provide users of financial statements greater transparency into the economics of this business and allow the reported result to better reflect the fundamental stability of this product.
Investments
Our commitment to careful and diligent custodianship of policyholder and shareholder assets is central to the Argus Group’s investment philosophy.
Our investment portfolio is designed to ensure funds are readily available to satisfy our obligation to policyholders and to enhance shareholder value by generating appropriate long-term, risk-adjusted yields. We have a clear objective to maximise returns without taking inappropriate levels of risk.
During the quarter ended March 31, 2022, we saw inflation pressures building significantly around the world. Then, the war in Ukraine in late February caused a global shock, both from a humanitarian perspective as well as financially.
Commodity prices soared given Russia is a key producer of several important commodities including oil and gas, and both Russia and Ukraine are big wheat producers globally. Elsewhere, renewed COVID-19 outbreaks in China led to new lockdowns in a few major industrial cities, which brought another wave of supply chain issues.
This all contributed to a further surge in inflation, which caused equity and bond prices to decline sharply. Whilst this caused unrealised losses in the value of our fixed income portfolio in particular, we generally hold our bonds to maturity and so in the longer term this should be a temporary decline only. Our investments continued to provide stable income, recorded through the income statement and, overall, the Group’s portfolio performed in line with expectations.
Combined investments generated a total loss of $14.5 million; $11.9 million was reported through the income statement and $26.4 million of unrealised losses was reported as other comprehensive income on the balance sheet.
The Group continues to hold a high quality, diversified, global investment portfolio. 92 percent of the Group’s investments are in fixed income bonds, of which 99 percent are classified as investment grade.
Our investments continued to provide stable income, recorded through the income statement and, overall, the Group’s portfolio performed in line with expectations.
Dividends
The headline net income for the year only tells part of the story. To understand the financial results for the year we must separate out the core business performance from the other shorter term factors that impact the reported result. The key components of our business performance are described over the next few pages.
Dividend Yield
(Dividend yield is calculated based on the closing price as at the year end date)
3.3%
2021: 4.2%
2020: 8.3%
Earnings per share
$1.20
2021: $0.47
2020: $0.67
Share Price
We’ve been pleased to see our share price continue to grow over the past year and are heartened that the market has started to take note of the value we’re building.
We want to keep telling the Argus story, to grow the value of our shares, enhance liquidity for our shareholders and broaden our shareholder base to support future growth. I’m really pleased to report our 2022 results and very proud to represent the fabulous team whose dedication and hard work have achieved this. We are in a strong position with an exciting future, filled with opportunity for our team, our customers, and our shareholders. Thank you for your continued support and confidence in us.
Annualised Shareholder Returns
38%
march 2021 - 2022
23%
march 2019 - 2022
Peter J. Dunkerley
Group Chief Financial Officer
Argus Group