Use of third-party capital has continued to increase at Bermuda headquartered international specialty insurance and reinsurance firm Argo Group, with its net premiums dipping as a result of sharing more of its underwritten risk premiums (and likely losses) with third-party investors.
Argo has been steadily ramping up its use of third-party reinsurance capital ever since it acquired Ariel Re, leading to a situation where the company now experiences significant capital efficiencies through the use of lower-cost capital including from capital market investors.
In fact, Argo said in early 2019 that, across its London and Bermuda underwriting platforms, as much as 50% of its capital and capacity is provided by third-party providers.
By originating risks for third-party capital providers, Argo has benefited from earning fee income while pushing catastrophe risks out to a range of capital markets and other third-party capital providers in recent years.
Reporting its quarterly and full-year results this week, Argo said that within its international operations it underwrote $247.6 million of gross premiums in the fourth-quarter of 2019.
However, net earned premiums in the fourth-quarter were only $154.6 million, down $26.5 million or 14.6% from Q4 2018, which Argo explained were, “Due to the ongoing strategic use of reinsurance programs and an increased use of third-party capital, most notably within Property Reinsurance lines.”
So the trend, of sharing increasing amounts of property reinsurance (likely catastrophe exposed) with third-party capital providers has continued at Argo into the end of last year.
The use of third-party capital may also go some way towards explaining the lack of catastrophe losses within Argo’s international business unit.
For Q4 2019, Argo reported just $3.1 million of catastrophe losses incurred in the quarter, largely driven by typhoon Hagibis in Japan.
That seems relatively low, for a global player, but perhaps the reason for this is Argo’s ability to share premiums and losses with reinsurance and third-party capital providers?
Argo is leveraging the appetite of third-party capital investors, alongside its reinsurance panel, to help it manage market cycles, particularly in property and catastrophe reinsurance risks.
The fact that they also help to moderate Argo’s gross exposure to catastrophe losses is also likely proving an increasingly useful lever.