AGII (Argo Group): Still a Great Pick
in Property and Casualty Insurance
By:
Wenting (Mavis) Peng,
Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Argo Group underwrites
specialty insurance and reinsurance products in the property and casualty
market worldwide. Even in the tough environment, AGII has shown a solid
improvement of its underwriting results with less volatility.
• AGII offers a diversified
global specialty
insurance platform with niche focus which will continue to contribute to their
reputation in the industry as a leading insurer with strong market position.
• A strong management
team has provided a solid return on capital to shareholders through share buybacks
and consistent dividend payments.
• AGII’s stock chart remains
impressive and it could be heading to a new 52-week high because of the stock
repurchasing program and stronger market share.
Argo Group International Holdings, LTD (NASD: AGII)
remains 'in-play'.
While the catastrophe loss ratio has improved about 5 pts since
2012, favorable development has been a consistent 2.5-3.0 pts benefit
(versus less consistency in earlier years) and catastrophe volatility has been reduced (through both
underwriting and reinsurance buying). I think valuation will better reflect these
results over time as the company continues to demonstrate a sustainable
track record on the expected improvements.
The company has a global business mix primarily focused on
smaller/middle account specialty insurance yet trades at a discount
to on shore and Lloyd's specialty companies. AGII’s mix of business is primarily insurance focused at 92% of total GWP with reinsurance accounting for about 8%. AGII
has a sizable US Excess & Surplus insurance platform and a large Lloyd’s syndicate in addition to a niche
retail commercial business. It serves a wide areas
such as grocery, restaurants, dry cleaners and the mining industry and public entity business. The company reach deeply into the market by its diversified distribution network of independent agents,
MGA, wholesale brokers and Lloyd’s market. AGII is expected to continuously
diversify its business and maintain its strong market position in following
year. Specializing in niche market expansion will also drive up its revenue.
For the three months ended September 30, 2015, AGII repurchased
85,959 common shares for $4.8M, which contributed to 575,055
common shares for $29.7M in the nine months ended September 30. The repurchases were a part of the 2013
Repurchase Authorization to repurchase
$150M in common shares; as of September 30, 2015, there was $63.1M remaining on the authorization. AGII continues to return capital to
shareholders in the form of repurchases and dividends at a similar annual run rate.
How’s the Stock
Performance Recently?
During the past 13 weeks, the stock has increased 8.0%.
During the past 52 weeks, the stock of Argo Group International Holdings Limited has outperformed the three
comparable companies, which saw gains between 7.2% and 11.8%.
Multiples Performance Well Compared to its Peers?
Three major competitors of AGII are as follow:
RenaissanceRe Holdings Ltd. (2014 sales of $1.26 billion of which 47% was
Catastrophe Reinsurance), Validus
Holdings, Limited ($2.09 billion of which 44% was Validus Re Segment), and Endurance Specialty Holdings Ltd. which is based in Bermuda (US$2.01
billion of which 51% was Reinsurance).
During the last 12 months, earnings per share was $6.34. Thus, the Price / Earnings ratio is 9.85. Earnings per share rose 34.2% compared to last
fiscal year. This company's P/E
ratio of 9.9 is very close to the
P/E ratios of all three comparable companies, which are currently trading
between 9.2 and 10.5 times earnings.
Argo Group International Holdings Limited is trading at 1.01 times book value. The company's price to
book ratio is fairly close to the price to book ratios of the three other companies, which are currently trading
between 0.99 and 1.13 times book value. This book value level shows AGII’s
potential to grow and continue to realize shareholders’ wealth maximization.
Past
Year Performance: AGII has increased 20.57% in price value
over the past year, but the stock is nonetheless on the bargain table with book value of
0.99-1.13 times. It also paid $0.8 dividend, yielding impressively 1.4%.
Source: FactSet
My
Takeaway
AGII’s
management team is confident and optimistic about the company’s 2016 earnings. They expect the stock to perform well and above their peers. Even though the insurance industry is
highly competitive and risky due to its uncertainty, AGII still maintains its
strong market position by expanding its business through diversifying business
mix, platform, distribution networks, and products. Moreover, AGII is actively
seeking to improve its capital efficiency, increasing stock buyback, which would
potentially drive AGII to a new high price sooner. This industry leader should continue to lead the pack in 2016 and provide stability to a potentially volatile year in global stocks.
