Argo Group Has To Rebuild Confidence After Renewed Concerns About Underwriting And Reserves

 

It's rare for turnarounds to go off without a hitch, but when it comes to turning around an insurance company, investors are understandably concerned when there are sizable adverse reserve developments - underwriting issues take time to fix, and the fear of another shoe to fall tends to linger. And so it is with Argo Group (ARGO); while I still believe management is doing the right things to reposition the company around better businesses for the long term and reduce costs, the sizable adverse development stripped away a lot of the benefit of the doubt that management had built.

These shares have been hit hard since my last update, falling about 25% on the outsized negative reserve developments announced for the fourth quarter. That's a far worse performance than those of Arch Capital (ACGL), Everest Re (RE), or W. R. Berkley (WRB) - three highly-regarded insurers with at least some overlapping business with Argo.

Argo will likely continue to trade below book unless and until underwriting results return to profitability on a consistent basis and the Street is confident there aren't more problems in the back book, and that could take a year or more. I do still see high-single-digit core earnings growth potential and fundamental upside in the shares, but as the last quarter showed, the ghosts of past underwriting mistakes can show up to haunt the present.

 

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Argo Group Has To Rebuild Confidence After Renewed Concerns About Underwriting And Reserves