Friday, November 18, 2022
HomeValue InvestingNew Activist Stress, Pursuing a Sale

New Activist Stress, Pursuing a Sale

This might be a short put up and never probably the most thrilling concept given the present chaotic market backdrop, however I wished to toss stuff 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 corporations so be straightforward 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 finally added three representatives to the board.  Voce put out an entertaining deck that outlined the now ex-CEO’s lavish life-style (company penthouses, artwork assortment, crusing sponsorships, personal jets, and many others.) that was primarily being expensed by means of Argo.  

Within the ~2 years since Voce refreshed the board and the ex-CEO resigned, Argo has gone about shedding unprofitable or unstable enterprise strains 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 normal 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: 

Nevertheless, the perceived sluggish pace 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 would not have pores and skin within the recreation (in mixture they personal ~1% of the corporate), there are three Voce representatives on the board they usually’ve moved the enterprise down Voce’s urged 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.  Briefly, this will likely go from semi-hostile to pleasant, the verbiage from the latest earnings name appears to suggest that as effectively:

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

Thanks, Greg, and thanks to everyone for becoming a member of us in the present day. Earlier than I soar into our outcomes for the quarter, I might wish 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 development and profitability. The Board of Administrators and administration group, nevertheless, 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 assessment course of, our goal is straightforward: 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 think about a variety of choices for the corporate, together with, amongst different issues, a possible sale, merger or different strategic transaction.

What can be an inexpensive valuation in a sale?  Once more, I’ve solely seemed significantly at 1-2 insurance coverage corporations 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 information 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 guide 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 brief thesis on VIC price studying, giving slightly little bit of consolation that different gamers might be eager about ARGO and that it ought to commerce at an inexpensive premium to guide.

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

Disclosure: I personal shares of ARGO



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