Argo Group is making a strategic shift to originate more risks for investors, as the company finds increasing interest from third-parties in accessing the returns of the re/insurers underwriting performance, according to CEO Mark E. Watson III.
It’s a sign of the continuing development of Argo’s strategy, as its specialty insurance and reinsurance platform has expanded with the acquisition of Ariel Re just over a year ago, as well as a reflection of developing business practices in the reinsurance space.
Putting your underwriting abilities to work, leveraging your intellectual capital or risk expertise, in order to share returns of portfolios of underwritten risks with third-parties that often have a lower cost-of-capital to your own, is becoming a core strategic mandate for many re/insurers.
Argo already has its Harambee collateralized reinsurance sidecar vehicle, through which it shares access to its underwriting portfolio. The Harambee vehicle has been Argo’s main ILS style third-party capital vehicle, but we understand the firm has also entered into some quota share type arrangements with investors and of course channels underwriting returns to capital market investors through its Lloyd’s platform as well.
Discussing the developing strategy, Watson explained during Argo’s recent earnings call, “There are different forms of capital that we have to support our business.
“We use a fair amount of reinsurance as capital to support a lot of the cat activity in our books, and one of the goals of acquiring Ariel Re and having Ryan Mather and his team join us was putting together their risk, their underwriting portfolio with ours.
“The result has been that we’ve found a lot of interest in people, of investors and non-traditional reinsurers that have paid us to originate risk for them.”
Signalling that Argo is now embracing this strategy more wholeheartedly in 2018, Watson continued, “So it’s been a pretty intended strategic shift for January 1st and I think it’s probably more appropriate to refer to Ryan and his team as asset managers as much as risk takers. Or certainly risk originators.”
By working with efficient sources of third-party capital Argo is able to leverage its reinsurance underwriting experience, writing business that may not have sat as well on its own balance-sheet, while earning fee income from that.
“For some of the reinsurance programs that we have in other portfolios, a lot of them are structured in such a way that again we are getting paid to originate risk for others,” Watson explained.
Re/insurers can leverage the third-party investors appetites for catastrophe risk as a way to pass on the capital-intensive exposures associated with growth in property underwriting, while retaining the risks that are more suited to their business profile.
Argo is clearly increasing its use of third-party capital to back its underwriting, at a time when many other companies of similar size are also opting to do so.
“As of January 1st we were able to use a fair amount of third-party capital to support our property cat underwriting. In fact, about 80% of our property cat risk now is supported by third-party capital at one of our syndicates at Lloyd’s,” Watson said.