Argo scales back third-party capital use, lowers reinsurance retentions

Argo Group, the Bermuda headquartered specialty insurance underwriter, is set to scale back its use of third-party reinsurance capital, as the company looks to retain more of its profitable business and move forwards after the shedding of Ariel Re.

Argo Group has recently refocused its business on its specialty insurance roots after selling off its dedicated reinsurance arm Ariel Re to private equity backers.

The firm’s CEO Kevin Rehnberg said at the time that the sale marked a simplification of Argo’s operations, as it moves towards becoming primarily a U.S.-focused specialty insurer.

While Argo has retained responsibility for Ariel Re’s legacy underwriting portfolio, including the 2020 year of account, the reduction in risk achieved by shedding the heavily catastrophe exposed book is set to make a significant difference to Argo’s reinsurance use.

Part of this is a desire at Argo to shift its book to one where it retains more of the profitable underwriting returns, so a reduced use of reinsurance capital of all forms is likely.

Cessions to third-party reinsurance capital providers, such as insurance-linked securities (ILS) funds or investors are set to reduce significantly as a result, especially in Argo’s International segment, where Ariel Re was reported.

Ariel Re had been using the capital markets within its underwriting for some years, both through private quota share or sidecar arrangements, as well as other private ILS structures.

Argo won’t need this protection on its go-forward book and from comments made by its executives it sounds like the reinsurance of Ariel Re’s 2020 book legacy business may have been restructured as well.

Scott Kirk, CFO at Argo, discussed this in a recent investor presentation saying, “We’re expecting to reduce the level of ceded reinsurance that we purchase in 2021 and beyond.

“We’ve been able to achieve this by through a combination of exiting poorly performing lines, exiting the reinsurance business and reducing our use of third-party capital layer, reducing our property exposures and reducing our gross limit across a number of insurance lines.

“The reduced need for ceded reinsurance increases our earnings without any meaningful change in the trajectory of the groups risk profile.

“This is a key driver of net earned premiums as we move forward through 2021 and beyond.”

As Argo shed Ariel Re, its need for protection against the volatility created from catastrophe exposures has already lessened and will continue to do so going forwards.

This has reduced the need for third-party reinsurance capital on that business and also enabled the company to lower its reinsurance retentions at recent renewals.

Kevin Rehnberg, CEO at Argo explained, “Our exposures as a group were significantly higher last year and as the 2020 year of account for Ariel runs out through this year, we’ve also had the opportunity to reset some of the reinsurance for this business.

“In the past we had a need to buy a lot of cover, based on the cat exposure with Ariel Re.

“When you have a very large program like that your retentions are higher, and those have been lowered over time in the course of the last renewal season. One, because the exposure is not as high and two, the type of reinsurance programs that we have are different.”

However, while Ariel Re has been sold and only legacy business remains, Argo does have a degree of exposure to the recent US winter storms and Texas deep freeze impacts, for which it’s possible some exposure may exist for any third-party capital arrangements still in place on that book of reinsurance.

Rehnberg explained when asked about the winter storms, “The 2020 year of account does play out through the course of this year for risks that were written either at 4/1 or in some instances through 7/1, so those accounts would be exposed through that portion of the year.

“There are always winter storms, we haven’t seen them ever like that in that part of Texas, but those are contemplated.

“But our need for overall insurance and how we put the reinsurance programs together did change, as we reduced the PML’s across the organisation and moved away from Ariel’s book. So across the board it is lower exposure and we do have lower retentions on the new programs going forward.”