Sunday, March 26, 2023

New Activist Strain, Pursuing a Sale

This shall be a short submit and never probably the most thrilling thought given the present chaotic market backdrop, however I wished 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 some present positions throughout this downturn.  I additionally haven’t got a lot expertise with insurance coverage firms 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 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 lifestyle (company penthouses, artwork assortment, crusing sponsorships, non-public jets, and so on.) that was primarily being expensed by way of Argo.  

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

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

Nevertheless, the perceived gradual pace of the transition and a surprise reserve adjustment in February introduced ahead one other activist pushing for board representation in Capital Returns Management, an insurance coverage targeted hedge fund.  Capital Returns has additionally insisted the corporate put itself up for a sale and the board agreed last week to run a strategic alternatives process 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 inexpensive provide.  In brief, this will likely go from semi-hostile to pleasant, the verbiage from the latest earnings name appears to indicate that as properly:

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

Thanks, Greg, and thanks to all people for becoming a member of us immediately. Earlier than I soar into our outcomes for the quarter, I would prefer to take a second to debate our announcement final week. Over the past 12 months, Argo has instituted various substantive strategic initiatives, actions that we consider have positioned the corporate for a transparent and constant long-term path to secure progress and profitability. The Board of Administrators and administration staff, 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 alternate options. On this evaluation 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 take into account a variety of choices for the corporate, together with, amongst different issues, a possible sale, merger or different strategic transaction.

What could be an inexpensive valuation in a sale?  Once more, I’ve solely seemed significantly at 1-2 insurance coverage firms right here within the final decade.  However under 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 must be within the low 90s, a 1.5x guide valuation appears cheap 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 short thesis on VIC price studying, giving a bit little bit of consolation that different gamers shall be enthusiastic about ARGO and that it ought to commerce at an inexpensive premium to guide.

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

Disclosure: I personal shares of ARGO

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