Company News

Argus Group Holdings (AGH) provides a broad range of insurance, retirement, and financial products and services dedicated to the needs of both individuals and businesses. The company’s segmented revenue and earnings for the latest fiscal period are as follows (in millions):

In December 2006, Argus Group acquired the entire share capital of Tremont International Insurance Limited for a total consideration of $8.8 million. The company is engaged in variable annuities and life insurance policies, with a focus on hedge fund strategies, and has been amalgamated into the Group’s International Life Division.

Argus reported record earnings for fiscal year-end 2007 of $37 million, representing an increase of 37% over the previous year. Revenue climbed almost 15% to a new high of $154 million. The company’s strong growth was due to a variety of factors, including:

• The continued outperformance of Argus Group’s “shining star”, the Life and Pension Division, which returned $22 million, or nearly 60% of total earnings. Investment income for this segment benefited handsomely from a strong capital markets environment.
• The acquisition of new business and an improvement in underwriting ratios due to rising premiums, combined with moderate increases in deductibles and stricter risk selection.
• The lack of catastrophic events and a below-average level of overseas medical claims. Claims and adjustment expenses rose just 4% in 2007, as compared to a 20% jump in 2006.

Argus Group Holdings, like its competitor BF&M, has compiled an impressive track record of revenue and earnings growth over the past two fiscal years. We anticipate some instability in future earnings due to three main factors:

• The company’s adoption of new Canadian accounting provisions, specifically the “mark-to-market” rule, which mandates the inclusion in net income of securities classified as “held for trading”. For example, if the value of the company’s equity portfolio were to decline significantly during a market downturn, this decrease would be reflected in reported net income figures.
• The possibilities of both catastrophic events (hurricanes, windstorms) and of increases in the levels of domestic motor claims and overseas medical claims.
• A continued volatility in global capital markets, specifically the tightening of credit spreads due to liquidity concerns, and an ensuing “flight to quality” into safer, lower-yielding investments.

Going forward, we expect a more normalized growth rate for Argus due to a marginal increase in expenses and slightly less-favourable underwriting ratios. Notwithstanding some concerns, Argus is well-positioned to continue on its path of sustainable growth, both through organic measures and through strategic acquisitions. With a current payout ratio of just 33%, the company has ample room to raise its dividend, despite our expectations for greater variability in future earnings.

By applying a 10.0x multiple to our fiscal 2008 earnings-per-share estimate of $1.80, we generate a target price of $18.00. LOM rates AGH stock as a “buy”. We note that the company recently announced a dividend increase of $0.08 per annum and a 1-for-10 stock dividend payable to shareholders of record October 4, 2007.