Wednesday, July 20, 2022
HomeValue InvestingNew Activist Strain, Pursuing a Sale

New Activist Strain, Pursuing a Sale

This will probably be a short put up and never essentially the most thrilling concept 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 a couple present positions throughout this downturn.  I additionally do not have a lot expertise with insurance coverage firms 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 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 on.) that was basically being expensed by Argo.  

Within the ~2 years since Voce refreshed the board and the ex-CEO resigned, Argo has gone about shedding unprofitable or risky 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 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 ought to be extra worthwhile.  The transformation purpose has been to uncover and spotlight this enterprise: 

Nonetheless, the perceived gradual 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 alternate 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 prompt path.  My guess is Voce is in settlement that now is an efficient time to pursue a sale and the board is unlikely to withstand an inexpensive supply.  In brief, this will likely go from semi-hostile to pleasant, the verbiage from the latest earnings name appears to suggest that as nicely:

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

Thanks, Greg, and thanks to all people for becoming a member of us immediately. Earlier than I leap into our outcomes for the quarter, I might prefer to take a second to debate our announcement final week. During the last 12 months, Argo has instituted quite a few substantive strategic initiatives, actions that we imagine have positioned the corporate for a transparent and constant long-term path to steady progress and profitability. The Board of Administrators and administration group, nonetheless, don’t imagine 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 assessment course of, our goal is straightforward: to maximise the worth of the corporate’s technique and its appreciable long-term prospects for the advantage of 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 could be an inexpensive valuation in a sale?  Once more, I’ve solely seemed critically 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 information is from TIKR.

That is admittedly rudimentary, however for a enterprise that is proforma mixed ratio ought to 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 quick thesis on VIC value studying, giving slightly little bit of consolation that different gamers will probably be focused on 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 seemingly extra fast/actionable alternatives within the present market dislocation, however preserve this one on the watchlist.

Disclosure: I personal shares of ARGO



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