The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Specifically, the lawsuit alleges that throughout the Class Period, Defendants touted that they closely monitored Argo’s underwriting policies and had the ability to set appropriate reserves. Argo cultivated a narrative that it had a long history of successfully managing its reserves and that the Company had a “prudent reserving philosophy.”
However, this narrative created by Argo was false and misleading. Argo’s reserves were wholly inadequate, its underwriting standards were not prudent as represented, and Argo had dramatically changed its underwriting policies on certain U.S. construction contracts as far back as 2018. Further, 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.
The truth was partially disclosed on February 8, 2022, when 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. The Company admitted that the largest reserve increases were related to construction defect claims within Argo’s U.S. Operations, in addition to reserve increases in the Run-off segment. The Company also admitted 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.
When investors learned the truth about Argo’s reserves and underwriting practices, the price of its common stock fell $7.11 per share (or 13.7%) in one day, dropping from a closing price of $51.87 per share on February 8, 2022 to close at $44.76 per share, on February 9, 2022. On February 10, 2022, the price of Argo’s common stock declined to $42.82 per share, for a two-day drop of $9.05 per share (or 17.5%) wiping out over $315 million in market capitalization.
Just months later, on August 8, 2022, Argo again shocked its investors when it announced that it had entered into a Loss Portfolio Transfer agreement with a wholly owned subsidiary of Enstar Group Limited covering a majority of the company’s U.S. casualty insurance reserves. On this news, the price of Argo’s common stock declined $9.12 per share (or 28.3%) from an August 8, 2022 closing price of $32.22 to close at $23.10 per share on August 10, 2022. This drop caused the Company’s market capitalization to fall another $320 million. Argo’s stock price is down more than 60% this year, trading near its 52-week low.