What About Argo Group Issues?

Earlier this week furcal asked about the insurance company Argo Group (ARGO) baby bonds and reset rate preferred.

I have avoided them because of their small market cap–about $772 million and I tend to shy away from some insurance companies–in particular ‘specialty insurers’. You may recall Atlas Financial, which was a specialty insurer, who went broke a year or so ago–I learned a lesson there.

Argo has a 6.50% baby bond outstanding (ARGD)which currently trades at $24.27 for a current yield of 6.76% This issue matures in 2042. This issue traded lower as all issues did, but bounced back strongly until their earnings release after which is tanked some again. The issue is rated BBB- (investment grade) by Standard and Poors.

They also have a 7% reset rate preferred outstanding (ARGO-A) that has fallen hard after the earnings release–currently yielding 7.59%. The reset rate is in 2025 and is at 6.721% plus the 5 year treasury–which today would mean a 5 year coupon (the reset is every 5 years) of 9.70%–wow. This issue is rated BB by Standard and Poors.

Argo has about $10 billion in assets, but has had a string of bad underwriting decisions in recent years and the financials have been ‘subpar’. They have recently been taking actions to jettison some bad policies and to sell some non core assets. They also have a newer management team and board of directors.

So are these tasty issues worth a bit of a nibble or are they yield traps?

The most recent 10-Q (quarterly earnings filing) can be read here.

My inclination is to take a very small position in the resettable preferreds and then watch. My assumption is that this issue will not be outstanding after 9/15/2025 (assuming what we know about interest rates holds true) as the coupon would be sky high. I am also assuming they get their underwriting fixed and they maintain current credit ratings.

Any thoughts?

23 thoughts on “What About Argo Group Issues?”

  1. Does anyone know if S&P has reaffirmed the rating anytime recently? ARGO makes no mention of their bond ratings on their website or any documents which is odd. They don’t have any publicly traded bonds I can find either.

    1. Landlord–the last update was a year ago and they reaffirmed.

      Baby bonds
      US$125 mil med-term nts due 09/25/2042

      Local Currency LT

      BBB-
      Regulatory Disclosures
      18-Sep-2012

      16-Aug-2021

      Preferred
      US$150 mil 7.00% ser A

      Local Currency LT

      BB
      Regulatory Disclosures
      08-Jul-2020

      16-Aug-2021

      1. But what they also reaffirmed at that time, Tim, was that they were continuing to leave ARGO on negative credit watch where it still stands today.

        1. 2wr–I didn’t see that but am not surprised. The key is if they have gotten things on the right track–I suspect things will improve from here – is the bad judgement underwriting behind them?

          1. Here’s the link – https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/2706081

            Speaking of insurance companies trying to right themselves, did you happen to notice the price action on Friday on that tiny little odd insurer with a baby bond outstanding, CNFR and CNFRL? CNFR was up 42% Friday, I guess primarily because of reports of insider buying by one of the three brothers in charge… I’m not sure if it was Larry, Curly, or Moe…. Also a third party bot in as well, but signs of the business turning around are still, uh, shall we say, slow in materializing. Also, I guess their previously announced plans to refinance CNFRL didn’t work out either as there has been no announcements of progress toward that end. Maybe it quickly turned into a meme stock, I don’t know.

            1. I just looked at them and I notice they give two sets of numbers in their results. The normal numbers every business gives, and then a set that show how they are doing once they remove lines of business which they are paying their way out of. I would guess that is probably hurricane insurance in FL or something of that nature.

              If they are truly shedding themselves of that wing of the business then the numbers aren’t bad. If they are still making bad underwriting decisions which just haven’t bit them yet then the numbers are terrible.

              BTW, how long does it usually take to arrange financing like they had previously announced? IIRC, there was maybe a year until maturity on those baby bonds so they have a deadline to get it done. Looks like the price on the BB moves around a bit for swing trading but I a sure it is very thinly traded.

            2. Thanks all. I wonder if that credit watch negative turns into a downgrade after their loss reserve increase in Q4 and the two writedowns from the most recent quarter ($100M + $21M).

            3. 2wr–yes I did notice that. These tiny insurers are issues to stay away from–I believe they have revenue of just around $100 million.

  2. I bought ARGD in 2018–300 shares. Sold ARGD in 2020 and bought 400 shares. of ARGO-A. Happy with it historically and will continue to hold for now. But, I have started to closely watch the company and the common stock. I glanced at the recent financials. Operations and cash appeared okay. Looks like sizable losses on offload of International assets.

    1. LarryL–yes hopefully these losses clean things up–going to stick to a small position (on Monday) until we get further data.

  3. Tim sssshhhh….just kidding.

    I have been accumulating both of these issues and don’t want anybody else to buy yet! I am leaning more on the BB then the Pfd.

    In all seriousness, the best thing about this website is that when I find something good it shows up on III a few days later. This usually means that I am on the right track. Great minds think alike?

  4. Tim, I hold a small amount of ARGO-A (200) shares, of all my preferred issues I would say it is the one with the most risk. I don’t think there is a short term problem with paying the dividend, but if they cut or quit paying the 5.62% dividend on the common I will probably bail. Like Grid, I rode it up from 22.75 to 25.00 and then down, but it did regain some lost ground today, so I will be keeping an eye on it for sure.

  5. A small bite might be worth the risk for the preferred, but as I near retirement I am steering clear of non-investment grade securities to the best of my ability. I have recently purchased some thinly traded PCG preferred given current yield, and recent history of emerging from bankruptcy scars me, but I have taken the risk given it is a large utility. I believe the securities are currently rated B1 by Moodys. This is my yield reach.

  6. I’ve owned ARGD since 2017 and it has always traded cheap relative to others rated equivalently. Back in April, they announced they were exploring “strategic alternatives” for the company…. I took that opportunity to lighten up what I owned at essentially the same level it is now, but I chose to keep a small position. As I remember, at that time “going dark” was much on my mind and I was concerned that a strategic alternative, if any, could end up leaving ARGD delisted… Since I’m not figuring on being around 20 years from now, it just made for an easy decision. Obviously so far nothing’s come of their explorations but then again, signs of decent turnaround have not been terribly visible either… I’m content with what I own but will probably not add…. I did the same things with QRTEP but for other reasons, started lightening up an oversized position above $100 in December and probably worked it down to an average sale price in the mid 90’s but rightsized what I should own… Still, its recent jump seemed so obvious that I’m kicking myself for not ordering some more fries with my QRTEP Big Mac … I guess I’ll just have to enjoy the Egg Harbor 4lbs. Bags Oven-Ready Fried Calamari my wife just ordered from QVC instead.. We’re still doing our best to keep those revenues flowing in to pay the preferred.

    1. From what I have read, Argo was disappointed in the lack of interest in anyone “kicking their tires”.

  7. I’ve own the BB in my IRA for several years now. I also own less of the preferred in my taxable account that I bought in 2020 when it was first issued.

    During the spring I did a Roth conversion of some of my IRA shares. YUK

    The stock price even before the dismal earnings this week had already taken a dive so that would affect the market cap.

  8. Tim, I owned the baby bond recently for a quick buck flip rise flip, then bought a small amount of the A reset at $23, watched it go over $25 only to head south. I bought 100 more today at $22.75 and watched it drop harder only to recover. But, I own it in my high risk bucket and I only have 350 shares, the smallest sized issue I have. Im no insurance analyst and no insurance balance sheet reader. And I have no intentions of buying any more. But I lean towards issues with resets that have high future adjustments and some live floaters. It fits that bill even though I am not sticking my neck out here. Just a little yield spicer gamble play for me.

    1. Thanks Grid–as I mentioned I am leaning toward a small taste. I am great on a typical corporate balance sheet–but insurance companies and mREITs are different animals.

      1. Tim, Im sticking my neck out here so shortly that I own about twice as much SLMBP and I dont like Sallie Mae either, ha. That one is a real reach though. Gotta have some fun, ha.

    2. Grid, I’m hoping you still are long our illiquid Phoenix Company INC NEW 7.450 % Due 01/15/2032 CUSIP 71902E208
      Next Call Date 01/15/2023 Callable Last Trade Price $18.45
      Phoenix’s parent Nassau has $18.1 billion of assets and a 106% solvency ratio https://assets.nfg.com/documents/Nassau_Corporate_Profile.pdf
      I truly am uncertain why the bonds have not been bought up on the open market by Nassau and then called
      PLEASE DO YOUR OWN RESEARCH; Any ideas or strategies discussed herein should not be undertaken by any individual or company without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial objectives, needs and risk tolerance.
      I am Azure

      1. Yes still in the Azure. They recently offered a tender at $20 for X amount. I dont know how many tendered or if the allotted amount was purchased. But I took that as a positive sign the company wanted to buy some back. They did get a credit upgrade late last year, also.

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