Argo shifts more reinsurance premium to third-party capital in Q3

International specialty insurance and reinsurance firm Argo Group has passed on more of its gross premiums written to third-party capital partners in the third-quarter of 2018, as the firms shift towards originating risk for third-party investors continues.

Argo adjusted the capital structure supporting its international reinsurance business at the start of 2018, after the completion of the integration of Ariel Re, strategically shifting its strategy to underwrite more risk for third-party investors through quota shares and insurance-linked securities (ILS).

Argo already had its Harambee Re collateralised reinsurance sidecar, having renewed it for 2018, which it says helps it to increase underwriting capacity for certain of its key business units, enabling it to provide an enhanced product offering to clients.

At the same time the Ariel Re team that Argo acquired has been building out relationships with third-party investors and ILS players, originating risk for them in order to earn the fee income associated with underwriting services rendered and profits generated.

This shift has, alongside further changes made to the Argo catastrophe reinsurance program, helped the company to a profitable Q3 despite the impact of global loss events.

“At the beginning of 2018, following the integration of Ariel Re, we restructured our reinsurance program to mitigate risk exposure to catastrophe events and reduce earnings volatility. In this year’s third quarter, the industry was hit by heavy catastrophe losses on a global basis. At Argo, our program performed as planned. The company produced an overall underwriting profit for the quarter, and operating earnings of $23.5 million or $0.68 per diluted share,” explained Argo Group CEO Mark E. Watson III.

“Our U.S. Operations are generating strong profitable premium growth reflecting our strategic growth and digital initiatives. In our International Operations, we are targeting growth in select markets, taking corrective underwriting actions in lines of business where needed, and utilizing third-party capital to support our Reinsurance business. The combination of improving margins, top-line growth, and strong investment results should generate improved returns for our shareholders, as we’ve already seen evidenced this quarter, with a 9% annualized return on equity,” he continued.

Leveraging third-party capital assists Argo and other similar re/insurers by providing them with capital to augment their own underwriting capacity, especially important in peak catastrophe zones where rates have declined, allowing them to offer broader capacity and products to clients, while earning underwriting fee income and shares of profits.

It’s a way to enhance the firms relevancy with its client base, while maintaining or even growing underwriting activities without taking on too much additional risk and it creates new revenue streams as well.

While the new capital structure, including the introduction of third-party reinsurance capital, has the effect reducing gross written premiums for Argo, the firm receives remuneration for originating risks and for the underlying underwriting performance, the company explained.

For the third quarter of 2018, Argo reports that roughly $53.4 million of its gross written premiums are attributable to third-party capital partners, which is higher than in Q2 when the firm reported just $30 million of gross premiums underwritten were attributable to the third-party investors.

The use of third-party capital is also helping Argo to manage its probable maximum losses (PML’s) and this may have helped in Q3 2018, as the firm reported an underwriting profit despite the impact of major losses during the period.

Argo reported a loss ratio of just 66.9%, compared to 113.0% for Q3 2017, while the current accident year ex-CAT loss ratio for the third quarter of 2018 was only 54.3%, down from 60.9% for Q3 2017, part this was due to catastrophe and other reinsurance purchases in 2017, the company said.

Another part of helping Argo to manage its exposure to loss events will be the third-party capital, as the investors backing these arrangements will help Argo in paying claims from major global catastrophe events, such as those see in recent months.

In the end Argo only reported $19 million of Q3 catastrophe losses, from events including Hurricane Florence, Typhoon Jebi and other catastrophe and weather-related events.

This is down on the $25 million the firm pre-announced, which at the time CEO Watson said was helped by the restructuring of the reinsurance program and likely the third-party capital as well.