Monday, February 22, 2016

38th AIM Student Equity Update: Argo Group (AGII): "Insurance Never Looked So Good!"

AGII (Argo Group): Still in Play!
By: Wenting (Mavis) Peng, student at Marquette University

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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 International Holdings underwrites specialty insurance and reinsurance products in the property and casualty (P&C) market globally. AGII’s Excess and Surplus Lines segment underwrites casualty, property, and professional liability coverage for contractors, manufacturers, distributors, property owners, retailers, restaurants, environmental consultants and contractors, and smaller medical facilities.

A rising tide will lift boats in the industry. When compared to other industries out there, the Property & Casualty Insurance segment is boosting securities now.
Even in the tough environment, AGII is seeing a solid earing estimate over the past month, suggesting that it has good potential in both short-term and long-term.
Stock repurchasing and stronger market share provides up-trend for AGII.
• Alteris, a member of Argo Group, announced that it would serve as insurance administrator for newly formed CalMutuals Joint Powers Insurance Authority and work with nonprofit water systems in California. 

  
 Argo Group International Holdings, LTD (NASD: AGII) Should be a surge. Although 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). In fact, in the past month, the current quarter estimate has risen from 74 cents per share to 80 cents per share. Meanwhile, the current year estimate has risen form $3.2 per share to $ 3.23 per share, an improvement of 12.3%. I think the estimate will better reflect these results over time because the industry is bullish and the company continues to demonstrate a sustainable track record on the expected improvements.

Argo Group has a very unique business mix and high quality business model, serving special customer segments. 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. Most noticeably, AGII’s mix of business is primarily insurance that focuses on 92% of total GWP with reinsurance accounting for about 8%.

In addition to a niche retail commercial business AGII offers a sizable US Excess & Surplus insurance platform and a large Lloyd’s syndicate to its customers. It also serves for wide areas such as grocery, restaurants, dry cleaners and the mining industry and public entity business. The company is expected to continuously diversify its distribution network of independent agents, MGA, wholesale brokers and Lloyd’s market and to maintain its strong market position in the following year. In a word, the diversified global specialty insurance platform with niche focus will continue to contribute to AGII’s reputation as the industry leading company with strong market position.

For the three months ended September 30, 2015, AGII repurchased 85,959 common shares for $4.8M. 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.

Alteris, a member of Argo Group, serves as the Insurance Administrator for the new joint. This will create products stability, responsive insurance coverage, and attractive pricing for the water companies from California. This is also a win-win for both mutual water companies and insurance providers.

How’s the Stock Performance Recently?
During the past 52 weeks, the stock of Argo Group International Holdings Limited has outperformed the three comparable companies, which saw gains between 1% and 14.6%. During the past 12 months, the earnings per share was totaled $6.34. Thus, P/E is 8.85, which is the lowest among its major competitors. It shows the potential to buy AGII right now.

Past Year Performance: Each of the previous years, this stock increases in value. At the end of 2011, AGII was at $23.93; however, the 52 weeks ending January 15 2016, the stock price of AGII was up 15% reaching $56.13. The stock is nonetheless on the bargain table with a relatively low book value of 0.99-1.13 times. Moreover, AGII paid $0.8 dividend, giving you a promising “fixed income” of 1.4%.

Source: FactSet
                                                                                                                         
My Takeaway

The company’s management team are confident and optimistic about AGII’s stock performance and its earning’s momentum in short-term and long-term perspective. Because the bullish trend of Property & Casualty Insurance industry, I firmly think AGII will maintains its strong profit performance and its solid market position by expanding its business through diversifying business mix, platform, distribution networks, and products. Moreover, AGII is actively to improve its capital efficiency, increasing stock buyback, which would potentially drive AGII to a new high price sooner. In short, AGII should be a solid choice for investors. 

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