Seeking Alpha: Argo Group Coming Along, But The Going's Tougher

Argo Group (NASDAQ:AGII) is taking a page from Aspen's (NYSE:AHL) book; trying to leverage strong core underwriting across a somewhat disjointed and sub-scale collection of operations. So far, it hasn't been a bad plan as the company has seen its shares climb more than 100% over the past three years, outdistancing larger players like Aspen, Allied World (NYSE:AWH), ACE (NYSE:ACE), and W. R. Berkley (NYSE:WRB) by rather healthy margins.

I am starting to wonder, though, if it is going to get harder for Argo to continue its path toward higher returns. The excess and surplus, specialty, and reinsurance markets have gotten a lot more challenging of late, with companies finding it more and more difficult to push higher rates - an important part of Argo's drive to write more profitable business upon renewal. I do still think that Argo can get its adjusted ROE above 10% over the next five years, and there is about $5/share of upside for every 1% improvement to long-term ROE, but the roughly 17% move since my last update has captured a lot of the undervaluation that I saw at the time.

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Argo Group Coming Along, But The Going's Tougher

Seeking Alpha: Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Allied World Assurance (NYSE:AWH) has done pretty well since last I wrote about this small specialty insurance company. The shares have risen more than 20% since that late April 2014 article, basically matching fellow specialty underwriter W.R. Berkley (NYSE:WRB) and surpassing the likes of Arch Capital (NASDAQ:ACGL), ACE (NYSE:ACE), and Aspen (NYSE:AHL) that have all seen sub-10% returns over that time.

Every insurance story offers its own little twists. Arch Capital is looking to grow its mortgage insurance business, while ACE is looking to overseas markets and Aspen is looking forward to achieving the benefits of scale as numerous relatively new business lines reach scale. For Allied World, there would still seem to be many attractive market entry/share expansion opportunities (even as rates weaken) and the company's balance sheet appears to be in very good shape.

I do have some concerns that the business that Allied World is writing today won't be as profitable as the business it wrote over the last few years and the sizable reserve releases will start to shrink, but that's a common industry concern now. That said, I like the company's leverage to specialty lines and overseas markets and the shares do look undervalued now.

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Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Seeking Alpha: Arch Capital Getting Attractive As Its Markets Get Less So

Arch Capital (NASDAQ:ACGL) is often lauded as a well-run insurance and reinsurance company and a good stock to own for those seeking more defensive exposure to insurance. Interestingly, while Arch Capital may be labeled as defensive because of management's disciplined underwriting and strong capital management, Arch Capital's shares have underperformed peers like ACE Limited (NYSE:ACE), RenRe (NYSE:RNR), and XL Group (NYSE:XL) by more than 10% on a year-to-date basis.

I didn't like the valuation all that much six months ago, but down another 5% from then I'm starting to warm up to the stock. I like the potential for Arch to be a share-taker in the mortgage insurance industry, and I expect the company's specialty insurance business to be stickier through this tough pricing cycle than others apparently expect. The reinsurance business is a risk and I do worry about an overall downward shift in valuation and sentiment for insurance stocks, but these shares are starting to look tempting.

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Arch Capital Getting Attractive As Its Markets Get Less So

Seeking Alpha: Allied World Delivers A Good Underwriting Result, Spiked With Reserves And Investments

About four months ago, I pointed out Allied World Assurance (AWH) as a high-quality specialty liability-focused insurance company that was trading a little rich for my tastes. With the stock having lagged the S&P 500 by about 6% since then, due in part to concerns about reserve strengthening in the professional healthcare liability space and overall worries about P&C insurance, now the valuation is starting to look a little more interesting.

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Allied World Delivers A Good Underwriting Result, Spiked With Reserves And Investments

Seeking Alpha: Allied World Has A Good Story, But Less Value

As I've remarked more than once in recent months, the melt-up in the insurance sector has taken most of the value out of the sector. So it would seem to be with Allied World Assurance (AWH). I really like what this company has done with its transition towards small/mid-market specialty casualty underwriting, and I think the company's reserve quality and balance sheet are both high quality. I also like the company's plans and prospects for ongoing premium growth in a variety of specialty niches and segments. All of that said, even projecting double-digit earnings growth and ROE isn't enough to generate a truly compelling fair value today.

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Allied World Has A Good Story, But Less Value