On the whole, insurance is a pretty boring industry for most
investors. It's the type of sector where surprises tend to skew to the
negative and where management can't really change the business for the
better in the scope of a year or two - there's no "one more thing"
moment where a company introduces a new product that shifts market share
almost overnight and changes the industry. That said, good management
and steady self-improvement can do a lot, and the five-year stock
returns of Argo Group (NASDAQ:AGII), Arch Capital (NASDAQ:ACGL), and W.R. Berkley (NYSE:WRB) are nothing to apologize for, as all of these well-run insurers have outdone the Nasdaq over that time period.
In my view, the story at Argo remains one of steady improvement. The
company still needs to "grow into" its expense structure, but the
company's underwriting performance remains strong. Weak pricing is a
challenge within the property and casualty insurance sector, but Argo's
focus on smaller clients helps shield it a bit from pricing pressure,
while low reinsurance prices give the company the option to offload some
risk at attractive prices.
I've liked Argo for a while now
and the shares have done pretty well. I'm not as excited about the
valuation, though, as I think it already incorporates a jump to 10%
returns on equity in the coming years. To that end, while Argo does
trade at a discount to many peers on a price/book value basis, it also
generates lower returns and deserves at least some of that discount. I
still like this business and the long-term prospects, but I'd probably rather buy Chubb (NYSE:CB) at a discount today than pay full value for Argo.
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Argo Group Making Steady Progress In Improving Its Business
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