Hedge fund and Argo Group shareholder Capital Returns Management has called on its board to consider a sale.
The activist investor said the Bermuda-based international underwriter’s “exceptional US specialty business” was being held back by capital constraints and its “lackluster” international businesses.
“We believe Argo’s long-established and profitable US specialty business, with more than $2 billion of gross written premiums, is extremely valuable and possesses significant growth opportunities. The outstanding performance of the US specialty business is, however, being restricted by capital constraints and obstructed from view by Argo’s lackluster international business and misguided focus on global growth initiatives,” the fund’s manager Ron Bobman wrote in an open letter to the board.
He continued: “The result is a stock that has declined over the last three bull-market years. The Company has also underperformed its peers during Kevin Rehnberg’s tenure as CEO, and over the last three and five-year periods. Today, Argo’s stock trades at just book value, and 12x projected consensus estimates of 2022 EPS, while its specialty insurance peers enjoy an average valuation of 2.2x book value and 19x projected 2022 earnings.”
Noting recent reports that Argo was exploring alternatives for its Lloyd’s of London business, Bobman said the fund estimated that this was tying up approximately $850 million in capital “and producing little return”.
“The fact is, in these businesses, Argo has no demonstrable advantage, a long history of consistent disappointment, and volatile results.”
Previous “piecemeal” sales had either failed, the letter argues – citing attempts to sell specialist workers’ compensation mining unit Rockwood and Argo Italy – or, in the case of the sale of Ariel Re completed in November, “yielded no return for shareholder”.
It concludes: “Exploring the sale of the entire Company is the optimal and necessary next step to maximize shareholder value.”
Argo’s Lloyd’s of London syndicate accounts for about three quarters of Argo’s international business’s premiums and capital and has generated underwriting losses every year since 2016.
“Together, the Lloyd’s of London syndicates and Bermuda operations, by our estimate, require more than $850 million of capital to generate very little operating profit,” the letter continues.
“We believe they should have been sold or runoff years ago.”
Despite this, the strong US business would support a valuation of $2.5 billion, according to Bobman, and be worth at least $2.8 billion to the right acquirer. Its suggested sale price would provide shareholders with at least $80 per share.
“The certainty of significant value creation through a sale of the whole company is attractive to us. And while this approach may ultimately displace Argo’s executive team and Board of Directors, it is surely the best risk-adjusted way for shareholders to benefit from Argo’s current market footprint and capabilities,” the letter states.
Capital Returns Management describes itself as “one of the largest shareholders” of Argo Group International Holdings, Ltd. It is not among the top ten largest shareholders disclosed for the company, however.
Argo, Capital Returns Management, Sale, Specialty, GWP, Insurance, Reinsurance, Ron Bobman, Bermuda