Activist investor urges Argo Group sale
A major institutional shareholder in Bermuda-based Argo Group International Holdings Ltd has called on its board of directors to commence a strategic alternatives process and objectively consider a sale of the full company.
In a letter sent to the Argo board today, Capital Returns Management LLC president Ronald Bobman wrote: “Exploring the sale of the entire company is the optimal and necessary next step to maximise shareholder value.”
New York-based Capital Returns said it believes that such a sale could yield a price of $80 per Argo share, or more, based on a sum-of-the-parts analysis and comparable trading multiples.
Shares in Argo were trading at $51.43 per share on the New York Stock Exchange this morning, up $1.57 on the day.
At a minimum, Capital Returns said, the board should think about disposing of Bermuda and Lloyd’s business.
The letter said: “Exploring a sale of the disappointing Lloyd's business is the most modest step this board can take to improve shareholder value.
“At a minimum, the board should also consider selling Argo's Bermuda-based underwriting activities, which are noncore, commoditised lines of insurance that have failed to consistently produce profits or provide strategic advantage to Argo while tying up an estimated $300+ million of capital.”
Capital Returns said Argo’s Bermuda operations “have no discernible competitive advantage and sit nowhere near the risks being underwritten nor the claims being settled.
“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.
“These business lines are largely commodity businesses in which Argo has exhibited no competitive advantage, let alone competitive strength, and no track record of underwriting success.
“We believe they should have been sold or run-off years ago and the belated decision to explore alternatives with Argo's remaining Lloyd's of London business is little solace for shareholders who have suffered for years as Argo has attempted to generate profits from these ill-conceived and poorly managed far-flung operations.”
The letter added: “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 lacklustre international business and misguided focus on global growth initiatives.
“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.”
Capital Returns said Argo “faces two major strategic issues: its international business has no identifiable competitive advantage, and its US business is severely capital constrained and suffers from executive management distraction.
“Based on media reports, the board and executive team appear to be attempting to resolve these problems with a plodding and risky approach: selling some of the international businesses and redeploying capital to the US business.
“This approach has already produced two failures, the disclosed collapse of the Argo Italy sale transaction as well as the reported cancellation of the Rockwood unit sale.
It added: “(It also appears there is some curious desire to try to grow in Bermuda and London with the hiring of new underwriters for the entry into new lines of business and the formation of underwriting consortia.) It is not lost on us that this complicated approach to Argo's challenges ensures that management and the board will continue to have a company to run.”
Capital Returns said it believes “that there are numerous buyers for all of Argo – insurance companies that could both consolidate and improve Argo's international operations while providing significant additional capital to its profitable, but reinsurance-dependent, US business.”
It added that Argo’s “core US unit would be a prized asset for many North American, Bermudian, European and Asian insurers”.
Mr Bobman said he has been in contact with “two such strategic buyers and believe they would eagerly participate in a sale process”.
The letter added: “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.”
Capital Partners said Argo’s US business “should be worth at least $2.8 billion to the right acquirer”.
Mr Bobman concluded by writing that he “would like to address the board on these topics, as soon as possible”.
Capital Returns said it is a “long-term” shareholder in Argo and “currently one of the largest shareholders among actively managed funds”. It said the company is an insurance industry investor with decades of expertise in the sector.
Argo Group Holdings Ltd, through its spokesman, declined comment.