Argo-Ariel deal creates top 12 Lloyd’s player, helps on compliance costs

The acquisition of Ariel Re adds the scale Argo needs to cope with the costs of operating within the Lloyd's market, the company has revealed, stressing that the deal also makes it one of the top 12 underwriters at Lloyd's.

Bermuda-based Argo Group, an international underwriter of specialty insurance and reinsurance products, entered into an agreement to acquire Ariel Re, a global underwriter of insurance and reinsurance business, for approximately $235 million cash. The acquisition is expected to be completed during the first quarter of 2017 and is subject to relevant regulatory approvals.

Established in 2005, Ariel Re underwrites a global portfolio of insurance and reinsurance business through offices in London, Bermuda, Atlanta and Kansas City on Lloyd's Syndicate 1910 paper. It is currently jointly owned by Brazil's Banco BTG Pactual and the Abu Dhabi Investment Council.

"We need to be a bit larger to really be at scale in terms of affording particularly the compliance cost of a platform at Lloyd's," said Argo group CEO Mark E. Watson III during a conference call after the announcement of the acquisition. "This gets us there now and it puts a nice portfolio on the books in the process. When we put our businesses together we are one of the 12 top underwriters at Lloyd's," he added.

Despite acquiring a reinsurance business, Watson stressed that the move does not reflect a change in the group's strategy. "Argo remains committed to the specialty insurance business," Watson said.

"While this acquisition enhances our scale in the reinsurance market, it does not dramatically change our business mix. We have a well-diversified product and geographic portfolio that on a pro forma basis next year will be approximately 88 percent written on primary insurance risk and 12 percent on reinsurance risks."

Ariel Re has a profitable track record and is well diversified with regards to distribution, regional exposure and perils, Watson noted.

"[Ariel Re] has achieved superior returns by sourcing low frequency, high severity, high margin business," he explained.

Argo and Ariel Re fit well together, Watson continued, and he expects the integration of the businesses to run smoothly not least because of similarities in their strategic set up.

"Ariel Re is a great fit with our existing Lloyd's operations," Watson explained. "We have complementary portfolios in similar disciplines and underwriting policies, selection of clients and risk. Combining these businesses will be very straightforward and will enable us to increase our already strong presence in this very important specialty market," he added.

"Similar to our strategy at Argo, Ariel has effectively used third-party capital that extends their market presence, enhances capital flexibility and provides a stable source of fee income," Watson said.

"We expect the integration to be quick and effective with very little disruption during the transition period which we expect to be over within the next 12 months," Watson said.

Argo also expects a boost from the acquisition as Ariel Re adds new capabilities that can be leveraged through the entire organisation, including Ariel Re's unique modelling and risk analysis tools which will enhance Argo's already robust underwriting analytics, Watson said.