Third-party capital a valuable tool with a lower cost-of-capital: Arch Capital CEO

Arch Capital continues to leverage third-party capital within its business and sees it as a valuable tool with a lower cost-of-capital, according to CEO Nicolas Papadopoulo, while the firm’s CFO has highlighted that profit commissions from Arch’s third-party capital platform show up in beneficial ways in its reporting.

The executives were speaking during Arch Capital Group’s third-quarter earnings call last week. You can read more about Arch’s Q3 2026 results over at our sister publication Reinsurance News.

Arch Capital has been active in the insurance-linked securities (ILS) and third-party reinsurance capital market for some years now, with this business expanding of late and most of this activity being understood to sit within its Arch Re division.

The Arch third-party and ILS capital platform includes risk-sharing arrangements such as reinsurance sidecars, its sponsorship of catastrophe bonds and mortgage insurance-linked securities, the development and management of other ILS structures such as funds to enable investors to access risks it underwrites, as well as acting as a fronting service provider to certain ILS market participants or investors.

It’s a broad-based offering, one we understand to be growing in stature and in the amount of third-party capital being managed for investors, which presumably is driving attractive fee income for the company. But it is not a business activity that is discussed with any regularity by the firm’s management team.

Given where we are in the market cycle and perhaps due to Arch Capital’s activities in ILS and managing or facilitating third-party investor capital growing in stature, it’s perhaps notable that the latest earnings call saw a good deal more discussion of this business activity than we have typically seen in the past.

Nicolas Papadopoulo, CEO of Arch Capital Group, commented on this a number of times during the Q3 2026 call.

Discussing the reinsurance business unit, Papadopoulo explained, “Gross premiums written declined approximately 8% compared with the same quarter last year, reflecting abundant reinsurance capacity, particularly in property and short-tail lines. Consistent with our cycle management approach, we are reducing participation where returns no longer meet our objectives and increasingly leveraging third-party capital to manage net exposure and optimise returns on our own capital.

“We will not chase growth for the sake of growth. We will remain patient and deploy capital where pricing and terms and conditions appropriately reflect the underlying risk. Our objective is not to become an index of the overall market.

“Our global reach, underwriting expertise, and third-party capital platform allow us to take advantage of opportunities as they emerge and to construct a portfolio that delivers our required risk-adjusted returns.”

Clearly Papadopoulo sees the third-party capital platform as a beneficial input to Arch’s underwriting and capital decision-making, something that often becomes all the more relevant in cycle management.

Asked specifically about what Arch is seeing in terms of private capital interest in reinsurance, Papadopoulo said, “Third-party capital, it is a helpful tool for us, I think for the industry in general. As pricing goes down, it is a capacity that has a lower cost-of-capital, and the industry has been using it to provide solutions to brokers and insureds.

“Arch is doing that, on the property side it has been there for a while. The supply comes and goes, as a carrier we have to be able to manage that. But I think it is an interesting and valuable tool to have. On the casualty side, on the reinsurance side, it is a little newer and untested. The question is, who has the tail risk in those structures, that is still a question.”

Further discussing casualty opportunities, Arch’s CEO said that the most promising may be on the insurance side, while on casualty reinsurance he commented, “The role of third-party capital, it adds another dimension to the supply on the reinsurance side. So I think it contributes to more supply, which makes it more difficult to find growth.”

One of the analysts on the earnings call asked the Arch management about operational expenditure, noting that the OpEx ratio has improved, but asking what might be a driver for that.

Arch Capital’s CFO François Morin responded to this question, “The nuance or maybe the difference for reinsurance is there’s certainly some profit commissions on third-party capital that come into play here, and it’s been a relatively benign cat environment the last couple of years. Is that a run rate? That’s for you guys to decide whether in a more normalised cat year we would probably have slightly less in terms of profit commissions.

“The rest, again, our teams are working hard to manage the expense base and kind of have that line up with the growth in premium. That’s again, just back on the profit commissions, that may be the one thing on reinsurance that is something to think about.”

Which clearly spells out that the third-party capital business is driving positive income for Arch, which it helping to lower its expense ratio. Unfortunately the company does not break out the dollar value of the income generated through its third-party capital and ILS activities, but it’s reasonable to assume it is a meaningful enough amount and another valuable lever for the company’s earnings.

Later in the call, one analyst asked how Arch might look to navigate the current soft cycle in reinsurance, to which CEO Papadopoulo stated, “We have different tools today than we had back then. If you look at our gross number and ceded number and net number on the reinsurance side, a large portion of our premium is already ceded to sidecars or third-party capital.

“For us, the philosophy is to really manage the net portfolio and ultimately stay in front of our clients. We have a leadership position and really figuring out and working with third-party capital, which I mentioned have a lower cost-of-capital, to be able to find solutions for cedants and brokers. That’s how we see it.”

Which shows the CEO and company recognise how third-party capital access and management can be an especially useful tool in cycle management.

Finally, Arch Capital’s CEO Papadopoulo also made some comments on the outlook for reinsurance renewals and property catastrophe risks in particular.

Papadopoulo commented, “Clearly, we expect some continued pressure on the short-tail book, catastrophe, excess of loss, and other property, which is a big part of the portfolio in reinsurance, a much bigger part than in insurance. That will put pressure on the top line.

“But we like the market we are in, I think we are trading well. We have a big book, we have great brands, we are still finding opportunities and we also take underwriting actions as pricing is going down. You have to put all of this together and figure out where we are going to end up at 1/1. The market on the property side, due to the fact that it has been a light catastrophe year, you can expect continued pressure on the rates.”