Argo’s use of third-party capital continues to rise

Bermuda headquartered international specialty insurance and reinsurance firm Argo Group has continued to expand its use of third-party capital during the second-quarter of 2019.

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, Argo 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.

Using this third-party capital, alongside Argo’s strategic use of traditional reinsurance and retrocession, the company has been managing down its gross premium load, sharing more of the underwritten premium with both traditional and alternative capital partners in return for fee income earned.

That has continued in the second-quarter of the year, with Argo reporting that in its International business net retained premiums declined to just 50.1%, compared to 56.4% for Q2 of 2018.

The company highlighted this as “consistent with prior quarters” and largely due to the “increase in ongoing strategic use of reinsurance programs and an increased use of third-party capital, most notably within Property Reinsurance lines.”

Net earned Property premiums also declined as a result, again due to the “increased use of reinsurance and third-party capital,” Argo said.

A higher level of premiums were retained in Q2, compared to Q1 of the year, likely reflecting the different mix in business renewed and the fact the sidecar transaction completed at the beginning of the year.

The decline in premiums retained will have affected net underwriting income slightly, but been partly compensated for by an increase in fee income earned.

However, none of this will have been sufficient to offset the negative prior-year reserve development, or loss creep, that Argo experienced in Q2.

The company has reported $26.4 million of unfavourable development across certain Liability, Property and Specialty lines of its International book.

This drove the result to an underwriting loss of $30.4 million on the International book and for Argo as a whole for Q2, with a 103.4% combined ratio for the period. Investment income helped to ensure that Argo at least reported positive net income for the quarter.

Earlier this year, Argo renewed its Harambee Re collateralised reinsurance sidecar again for 2019, as part of its strategy to continues tapping into the capital markets for protection and to augment its capacity.

In addition to the collateralised reinsurance sidecar, Argo also enters into private quota shares and makes other cessions to ILS investors, we understand.

Argo is leveraging the appetite of third-party capital providers to help it manage market cycles, particularly in property and catastrophe reinsurance risks.

It’s notable that during Q2 Argo ramped up its premiums by roughly 10% overall, 9.1% of which was in the International book where third-party capital largely features and the majority of that in Property lines.

Third-party capital is being used both as a moderator to the company’s exposures and a lever for growth, allowing Argo to better manage expansion through market cycles with the help of third-party investor support.