Argo Growing Its Business, But Profitability Remains A Concern

Argo Group (AGII) has been an interesting, albeit frustrating, stock to follow for a number of years. There are a lot of positives, including strong underwriting quality, dividend growth, and recently reinvigorated premium growth, but there are also ongoing concerns related to issues like persistently sluggish tangible book value growth and weak returns on earnings. To that end, the shares are only up about 10% from my last write-up in early 2016, and investors would have done better with other insurers like Arch Capital (ACGL), Chubb (CB), Travelers (TRV), or W.R. Berkley (WRB).

I can't say that I really like the valuation on Argo today. I do think the company's efforts to grow its premiums will eventually help its expense leverage (a long-sought goal), and I likewise think that expanding its Lloyds business through M&A should help long-term leverage there. Offsetting that are worries about industry loss trends and the company's persistent issues with generating attractive operating leverage. While I do believe that Argo can generate double-digit EPS growth over the long term and eventually get its return on tangible equity above 10% on a consistent basis, I think the valuation amply reflects that.

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Argo Growing Its Business, But Profitability Remains A Concern