Bermuda-based specialty P&C insurer Argo is being sued by a group of investors, who claim that they were misled on major aspects of the company’s performance metrics, which have resulted in a significant drop in stock prices.
Argo’s stock price has fallen by more than 60% this year and the company has come under increasing pressure from shareholders to review its management practices.
Investors now face large losses, and claim that Argo failed to disclose its reserve inadequacies and a lack of prudency in its underwriting standards, among other false or misleading communications.
Law firm of Kirby McInerney, which is representing investors in the lawsuit, points to a timeline of announcements from Argo this year that correlate with its significant decrease in stock price.
Firstly, it notes that in February Argo reported that its fourth quarter results for 2021 would be negatively impacted by $130 to $140 million worth of prior year reserve development and non-operating charges, following which shares fell by 13.7%.
The company admitted that the largest reserve increases were related to construction defect claims within its US Operations, in addition to reserve increases in the run-off segment. It also acknowledged that the prior year reserve increase for construction defect primarily related to the 2017 and prior underwriting years in business lines that had either been significantly remediated or discontinued.
On this news, the price of Argo shares declined by $7.11 per share, or approximately 13.7%, from $51.87 per share to close at $44.76 on February 9, 2022.
In August, Argo then announced that it had entered into a Loss Portfolio Transfer agreement with a wholly owned subsidiary of Enstar Group covering a majority of the its US casualty insurance reserves.
On this news, the price of Argo shares declined 17.7%, and then fell be another 12.9% the following day, causing the company’s market capitalization to fall another $320 million.
The lawsuit levelled by investors, who acquired Argo securities between February 2018 through August 2022, charges that Argo made “false and/or misleading statements and/or failed to disclose that … Argo’s reserves were inadequate and its underwriting standards were not prudent as was represented.”
Disclosures were also false or absent concerning how Argo “altered its underwriting policies on certain US construction contracts as far back as 2018,” the lawsuit alleges, and how “these policies were underwritten outside of the Company’s ‘core’ business including in certain states and for certain exposures that were far riskier than investors understood and that the Company no longer would service moving forward.”
Argo has come under pressure in recent weeks from activist investors who are seeking shareholder support to elect two new directors to Argo’s Board in order to address what they label as “years of underperformance and poor decision-making” at the company.
The moves comes afterArgo confirmed earlier this year that its board of directors had begun to explore ‘strategic alternatives’ including a potential sale, merger, or other strategic transaction, and also that it had “interviewed and is in the process of evaluating” two director candidates for its board, nominated by Capital Returns.