Saturday, October 1, 2022
HomeValue InvestingNew Activist Stress, Pursuing a Sale

New Activist Stress, Pursuing a Sale


This will likely be a short submit and never essentially the most thrilling thought given the present chaotic market backdrop, however I needed to toss something on the market because it has been some time since hitting publish. I’ve largely simply been sitting tight, ready for occasions to play out and including to a couple present positions throughout this downturn.  I additionally do not have a lot expertise with insurance coverage corporations so be simple on me within the remark part.  

Argo Group Worldwide (ARGO) is a specialty insurer (~$1.5B market cap) that first popped up on my radar display screen in 2019 when it confronted a proxy contest from Voce Capital, their largest shareholder (9-10%), which ultimately added three representatives to the board.  Voce put out an entertaining deck that outlined the now ex-CEO’s lavish way of life (company penthouses, artwork assortment, crusing sponsorships, non-public jets, and so forth.) that was basically being expensed via Argo.  

Within the ~2 years since Voce refreshed the board and the ex-CEO resigned, Argo has gone about shedding unprofitable or unstable enterprise traces to focus on the robust U.S. targeted specialty insurance coverage enterprise. 

The crown jewel is their extra and surplus enterprise line that focuses on dangers that commonplace insurance coverage markets are unwilling or unable to underwrite.  This the non-commoditized, much less regulated nook of the insurance coverage market and thus needs to be extra worthwhile.  The transformation purpose has been to uncover and spotlight this enterprise: 

Nonetheless, the perceived gradual velocity of the transition and a shock reserve adjustment in February introduced ahead one other activist pushing for board illustration in Capital Returns Administration, an insurance coverage targeted hedge fund.  Capital Returns has additionally insisted the corporate put itself up for a sale and the board agreed final week to run a strategic options course of which incorporates exploring a sale of the corporate.  Whereas, Capital Returns argues the board does not have pores and skin within the sport (in combination they personal ~1% of the corporate), there are three Voce representatives on the board they usually’ve moved the enterprise down Voce’s steered path.  My guess is Voce is in settlement that now is an effective time to pursue a sale and the board is unlikely to withstand an affordable supply.  Briefly, this will likely go from semi-hostile to pleasant, the verbiage from the current earnings name appears to suggest that as effectively:

Thomas A. Bradley Argo Group Worldwide Holdings, Ltd. – Chairman of the Board & Appearing CEO

Thanks, Greg, and thanks to everyone for becoming a member of us right now. Earlier than I soar into our outcomes for the quarter, I would wish to take a second to debate our announcement final week. During the last 12 months, Argo has instituted a variety of substantive strategic initiatives, actions that we consider have positioned the corporate for a transparent and constant long-term path to secure development and profitability. The Board of Administrators and administration group, nonetheless, don’t consider these initiatives are adequately mirrored within the firm’s present market valuation.

After a lot considerate and deliberate dialogue and evaluation, our Board with the help of our advisers has initiated an exploration of potential strategic options. On this evaluate course of, our goal is easy: to maximise the worth of the corporate’s technique and its appreciable long-term prospects for the good thing about all shareholders. To that finish, the Board will contemplate a variety of choices for the corporate, together with, amongst different issues, a possible sale, merger or different strategic transaction.

What can be an affordable valuation in a sale?  Once more, I’ve solely regarded significantly at 1-2 insurance coverage corporations right here within the final decade.  However beneath is a listing of U.S. based mostly friends that I took from Capital Returns’ proxy, and the info is from TIKR.

That is admittedly rudimentary, however for a enterprise that is proforma mixed ratio needs to be within the low 90s, a 1.5x e-book valuation appears affordable for a strategic purchaser?  Kinsale Capital (KNSL) is a pure play extra and surplus insurer which trades for a excessive valuation, there’s a KNSL quick thesis on VIC price studying, giving somewhat little bit of consolation that different gamers will likely be focused on ARGO and that it ought to commerce at an affordable premium to e-book.

The sale course of may take a while, possibly we hear one thing in 5-7 months, so once more, there are doubtless extra speedy/actionable alternatives within the present market dislocation, however hold this one on the watchlist.

Disclosure: I personal shares of ARGO

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