A Decent Opportunity In This Insurance Issue

Below I outline a potential opportunity. Of course the issue is not investment grade and is non cumulative so it may not appeal to many–on the other hand where can you lock up 7.07%? The risk/reward seems reasonable.

Today the 7.00% resettable preferred stock (ARGO-A) from insurer Argo Group International closed at $24.91. This price is down from close to $26 a month ago. The coupon is fixed at 7% until 9/2025—thereafter it resets every 5 years at the 5 year treasury with a nice 6.721% spread. The issue is rated BB by Standard and Poor’s.

Reasonably this issue should trade around $26 or so.

A couple of comparable issues for reference. American Equity Investment 6.625% fixed-rate reset preferred (AEL-B) spiked up today to $26.27. The coupon is fixed until 9/2025 and it is rated BB. After this it resets every 5 years at the 5 year treasury plus a spread of 6.297%.

The Enstar 7% fixed to floating rate preferred (ESRGP) carries the 7% rate until 9/2028 and then floats at 3 month Libor plus a spread of 4.015%. The issue closed at $26.27 today which was a drop of 75 cents. This issue is rated BB+.

As always this is not a recommendation–just an idea.

8 thoughts on “A Decent Opportunity In This Insurance Issue”

  1. ARGO – not a bad company but after looking at the financials, trends, etc. I decided to reduce my position.

  2. At first look I got excited about this but I was thinking of the AGO IG issues…………. real bummer

  3. Bermuda based Argo is liable for business interruption claims arising from Covid 19 business suspensions. Better testing such as rapid tests, compliance with safe practices, early treatment, better therapeutics, and widespread distribution, timing and use of credible, efficacious, durable multiple vaccines by the general population for multiple variations of Covid 19 are determinants of Argos future business interruption claims.
    Perhaps the price is discounted by the uncertainty of future claims and the uncertainty of passage of the economic stimulus bill???? Just my opinion.
    The SEC investigation announced earlier this year probably has not helped either. The CEO has subsequently been removed by the Board.

    https://www.ft.com/content/cf9b81ae-6652-4782-b793-1b6710db18a2

    1. Hi Dave–yes they have taken some charges on that–maybe that is the reason for the swoon, but like most insurance companies they have good quarters and bad–just thinking there may be opportunity here.

    2. Yeah, I think their combined ratio was over 100% in Q2 due to Covid impacts. Most of their Covid exposure is in Europe. Unless Covid spirals out of control, I don’t see the Covid impacts being an issue for the preferred stock. Certainly a lot is already priced into the common stock trading in the mid-30s while the book value is in the mid-50s. The other issue is their former CEO was corrupt and was giving himself all kinds of excess comp/perks. The new CEO seems to be getting them back on track with good corporate governance.

    3. “Argo is liable for business interruption claims arising from Covid 19.” Please don’t assume that to be the case, most insurance policies have for years had exclusions for pandemics, similar to nuclear war and terrorism exclusions. A good question for management of this company is “do your policies have the standard exclusion for pandemics?” If they don’t, then watch out. But if they do, the have no liability.

      I have been an expert witness on insurance litigation for decades, and am still active. The COVID-19 business interruption litigation, if I had to handicap it, will not result in favorable settlements for the insureds. I expect the insurance industry to generally prevail. The cost of defending the litigation, on the other hand, will be a factor, but not ruinous.

      1. Their US policies likely won’t have much in claims, since insurance policies have been ironfisted against pandemics since the aftermath of the 2003 SARS. I don’t know enough about the European insurance market to know if this is the case there as well.
        There will be some interesting commercial interruption litigation in the next few years, and there have been some partial victories for the business owners in various jurisdictions, but not near what they were looking for in compensation.
        And the defense litigation costs should be fairly manageable, as the litigation should practically disappear absent some legislative change or unexpected court victory for a plaintiff.

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