Argo’s results to be dented by catastrophes & adverse development

Bermuda headquartered international specialty insurance and reinsurance firm Argo Group is expecting its third-quarter results to be dented by catastrophe losses and adverse development from prior years.

The re/insurer pre-announced details of the forecast hit to its results last night, saying that hurricane Dorian and typhoon Faxai would cause an immediate dent to the results of the third-quarter 2019.

Primarily falling into Argo Group’s international insurance and reinsurance operations, the company expects an estimated $19 million of catastrophe losses, pre-tax, which it says will add the equivalent of 4.3% to its loss ratio for the third quarter.

Argo’s estimates of catastrophe losses are typically based on claims costs after ceded reinsurance recoverables and reinstatement premiums, so would already have factored in any sharing of these losses with its growing pool of third-party capital investors.

Argo has been steadily ramping up its use of third-party capital ever since it acquired Ariel Re, resulting in a situation where the company now experiences significant capital efficiencies through the use of lower-cost capital.

In fact, the company had said earlier this year that, across its London and Bermuda underwriting platforms, as much as 50% of its capital is provided by third-party capital providers.

As a result, it’s safe to assume that third-party investors backing these insurance-linked securities (ILS) arrangements and quota share structures will have participated in Argo’s catastrophe losses during the third-quarter and paid some of its claims as a result.

Argo said that the Q3 catastrophe loss impact was largely due to hurricane Dorian, typhoon Faxai and flood losses in the U.S.

In addition, Argo is expecting prior year loss events to come back to bite the firm with adverse development totalling $42 million pre-tax expected to be reported for Q3 2019.

These prior accident year losses will add 9.3% to Argo’s consolidated loss ratio for the third quarter, coming largely from its Bermuda Insurance business unit, as well as European and London operations within Argo’s International Operations.

Argo said that new information received related to the resolution or notification of several large losses, as well as a continued review of International business currently in run-off, led to the need for this reserve strengthening, partially offset by a modest net reserve decrease within its U.S. Operations.

The re/insurer also revealed current accident year losses of around $10 million, adding 6.4% to the year-to-date current accident year loss ratio for its International Operations division.

“The adjustment made to our current and prior accident year loss expectations over the last two quarters is related to large loss activity, business we have previously exited or where we have taken aggressive underwriting actions to improve profitability,” Argo Group CEO Mark E. Watson III commented on the news.

Adding that, “These charges are a result of increased loss occurrence and a more challenging claims environment in some classes of business.

“Despite these challenges, we continue to experience strong results in our U.S. Operations and we are seeing rate improvement across several key lines of business both in the U.S. as well as in our International Operations.”

Argo is making progress with an internal review of its Run-off reserves currently, which it expects to complete later in the fourth-quarter. Alongside this Argo is also exploring possible reinsurance alternatives to address the Run-off reserve issues, on which a decision likely could be taken once the ongoing review is completed.

The increasing use of third-party capital at Argo means investors are going to be supporting the firms catastrophe loss payments from Q3 and may well again once typhoon Hagibis is accounted for in Q4.

Argo is leveraging the appetite of third-party capital investors to help it manage market cycles, particularly in property and catastrophe reinsurance risks. But the fact they also help to moderate its exposure to losses may prove particularly useful this year.