Argo : Final Results 2016

Argo Group Limited ("Argo" or the "Company") Annual Report and Accounts for the Year ended 31 December 2016

Argo today announces its final results for the year ended 31 December 2016.

The Company will today post to shareholders and make available its report and accounts for the year ended 31 December 2016 on the Company's website www.argogrouplimited.com.

Key highlights for the twelve months ended 31 December 2016

• Revenues US$6.4 million (2015: US$5.7 million)

• Operating loss US$0.6 million (2015: operating profit US$0.2 million)

• Profit before tax US$0.6 million (2015: loss before tax US$2.9 million)

• Net assets US$20.1 million (2015: US$22.4 million)

Commenting on the results and outlook, Kyriakos Rialas, Chief Executive of Argo said:

"We are extremely satisfied with the solid performance of 2016. Emerging Markets bond funds continue to attract inflows and exhibit stability and reduced volatility, as they now form a significant part of any balanced global portfolio. The positive performance of our fund for the first two months of 2017 confirms this. The balance sheet of our company is strong and the first buyback programme has been a success elevating the book value of the company. The second buyback programme will expire in September 2017. We are investing in the future of the company both in human resources and IT and we hope to attract additional inflows into our Argo Fund going forward."

Enquiries

Argo Group Limited

Andreas Rialas 020 7016 7660

Panmure Gordon Dominic Morley 020 7886 2500

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No 596/2014.

CHAIRMAN'S STATEMENT The Group and its objective

Argo's investment objective is to provide investors with absolute returns in the funds that it manages by investing in, inter alia, fixed income, special situations, local currencies and interest rate strategies, private equity, real estate, quoted equities, high yield corporate debt and distressed debt, although not every fund invests in each of these asset classes.

Argo was listed on the AIM market in November 2008 and has a performance track record dating back to 2000.

Business and operational review

This report sets out the results of Argo Group Limited for the year ended 31 December 2016.

For the year ended 31 December 2016 the Group generated revenues of US$6.4 million (2015: US$5.7 million) with management fees accounting for US$4.3 million (2015: US$5.1 million). The Group also generated incentive fees of US$1.7 million (2015: US$ Nil) during the year. The incentive fees earned during the year were from The Argo Fund and Argo Distressed Credit Fund.

Total operating costs, ignoring bad debt provisions, are US$6.4 million (2015: US$3.5 million). The increase in operating costs is mainly due to bonuses paid to reflect the excellent work undertaken by the team over a number of years leading to the sale of a significant asset and professional costs relating to our share buyback programme. During the year management fee arrears of US$ 2.8 million were recovered from Argo Real Estate Opportunities Fund Limited ("AREOF") against which a provision had been raised in prior years. The Group has provided against management fees of US$2.2 million (€2.0 million) (2015: US$2.2 million (€2.0 million) due from AREOF and US$1.2 million (2015: US$1.1 million) of loans made to AREOF and its group entities. In the Directors' view these amounts are fully recoverable however they have concluded that it would be appropriate to carry a provision against these receivables as the timing of the receipts may be outside the control of the Company and AREOF.

Overall, the financial statements show an operating loss for the year of US$0.6 million (2015: operating profit US$0.2 million) and a profit before tax of US$0.6 million (2015: loss before tax US$2.9 million) reflecting the realised and unrealised profit on current asset investments of US$1.1 million (2015: loss US$3.3 million).

At the year end, the Group had net assets of US$20.1 million (2015: US$22.4 million) and net current assets of US$19.6 million (2015: US$15.7 million) including cash reserves of US$6.1 million (2015: US$3.1 million). The Directors are not declaring a final dividend.

Net assets include investments in The Argo Fund, AREOF, Argo Special Situations Fund LP ("ASSF") and Argo Distressed Credit Fund (together referred to as "the Argo funds" at fair values of US$9.7 million (2015: US$10.2 million), US$0.1 million (2015: US$0.1 million), US$0.01 million (2015: US$0.01 million), and US$2.5 million (2015: US$Nil) respectively.

At the year end the Argo funds (excluding AREOF) owed the Group total management and performance fees of US$2,441,281 (31 December 2015: US$819,451). Since the year end the Group received US$1,849,986 as part settlement of these management and performance fees.

The Argo funds ended the period with Assets under Management ("AUM") at US$110.6 million, 18% higher than at the beginning of the year. Management believe that the markets in which the Funds operate have now established a recovery following the 2008 economic collapse. The current level of AUM remains below that required to ensure sustainable profits on a recurring management fee basis in the absence of performance fees. This has necessitated an ongoing review of the Group's cost basis. Nevertheless, the Group has ensured that the operational framework remains intact and that it retains the capacity to manage additional fund inflows as and when they arise.

The number of employees of the Group at 31 December 2016 was 27 (2015: 24).

The Group has provided AREOF with a notice of deferral in relation to amounts due from the provision of investment management services, under which it will not demand payment of such amounts until the Group judges that AREOF is in a position to pay the outstanding liability. These amounts accrued or receivable at 31 December 2016 total US$Nil (2015: US$Nil) after a bad debt provision of US$6,401,507 (€6,069,505) (2015: US$7,164,702 (€6,569,505)). AREOF continues to meet part of this obligation to the Argo Group as and when liquidity allows. AREOF settled total fees of €2,776,000 (€2,500,000) during the year. In November 2013, AREOF offered Argo Group Limited additional security for the continued support in the form of debentures and guarantees by underlying intermediate companies. Argo Group Limited retains this additional security. The AREOF management contract has a fixed term expiring on 31 July 2018.

Fund performance

The Argo Funds

Fund	Launch date	2016 Year total	2015 Year total	Since inception	Annualised performance	Sharpe ratio	Down months	AUM
%	%	%	CAGR %	US$m
The Argo Fund	Oct-00	52.30	-17.42	203.94	7.95	2.07	58 of 195	63.1
Argo Distressed Credit Fund	Oct-08	32.69	-9.71	98.85	9.37	0.72	47 of 99	35.1
Argo Special Situations Fund LP	Feb-12	-12.03	-76.21	-87.00	-28.22	0.90	51 of 59	12.4
Total	110.6

AREOF's adjusted Net Asset Value was minus US$25.8 million (minus €24.5 million unaudited) as at 30 September 2016, compared with minus US$23.4 million (minus €20.9 million audited) a year earlier. The adjusted Net Asset Value per share at 30 September 2016 was minus US$0.04 (minus €0.04) (30 September 2015: minus US$0.03 (minus €0.03)). Although AREOF's consolidated statement of financial position indicates the AREOF group is insolvent on a consolidated basis, the structural ring-fencing of the underlying SPVs eliminates the impact on the Group of negative equity at subsidiary level.

For several years, AREOF has traded with a negative equity position and significant cash shortages at the holding company level. In 2017, AREOF hopes to complete a significant restructuring which will go some way towards reversing its negative equity position. Initial measures are already underway. The Board hopes the restructuring will be completed during the first half of 2017. As part of the restructuring, Argo Group Limited would accept a reduction in the management fee from AREOF. The reduction will see the annual fee fall from €2m currently to €1m. Even after this reduction, it is still expected by the Board that AREOF will struggle to meet its management fee obligation to Argo Group Limited.

2016 proved to be a better year for most emerging economies than expected. The US postponed its interest rate rise and the greenback rally stalled. This prompted many emerging market central banks to cut interest rates, boosting activity. Moreover, investors went back on the hunt for higher yielding assets and capital flowed back into emerging markets, bond issuance reaching a record high in 2016.

This favourable backdrop created an opportunity to reinvest in emerging markets at lower prices. In response to the more positive prevailing attitudes towards credit funds we have relaunched TAF and expect to do the same for ADCF soon, as two distinct mandates with different liquidity profiles that will make them more attractive propositions to new investors.

Early in the year the Argo funds generated a positive return from trades linked to the 2015 disposal of their stake in an Indonesian oil refinery. In June 2016 the Argo funds further benefited from the sale by AREOF of one of its real estate assets in Romania. As well as contributing to the strong performance of TAF and ADCF, this provided much needed liquidity to the funds and allowed AREOF to repay US$2,776,000 (€2,500,000) of management fee arrears.

TAF is the Group's flagship fund and has a 16 year track record. Going forward, TAF will focus on liquid bond securities, both sovereign and corporate, and will be the focus of the Group's marketing efforts.

Following the declines experienced by emerging markets over the previous two years, the Board believes they offer attractive investment opportunities. Furthermore, the economic fundamentals in emerging markets are robust. Emerging Markets Corporates are expected to deliver significantly stronger economic growth than those in developed markets in 2017 while enjoying attractive risk profiles thanks to lower levels of government indebtedness and relatively high foreign exchange reserves. Both TAF and ADCF performed well during 2016 with NAV per share increasing by 52.3% and 32.69% respectively.

The two markets in which AREOF operates were mixed. Conditions in Romania were largely favourable as the local economy continued to expand thereby boosting the local property market. In Ukraine the political crisis abated somewhat with the replacement of almost the entire government and the economy is now on a modest recovery path.

The Group invested in additional human resources by recruiting a dedicated investor relations professional and an experienced research analyst in expectation of increased activity in The Argo Fund trading and risk management. Furthermore, operational systems were upgraded with the help of an IT consultant.

Following the growth in assets under management at Argo Capital Management Limited, the subsidiary has submitted an application to the Financial Conduct Authority for a full scope Alternative Investment Fund Manager (AIFM) licence in January 2017.

In January 2017, The Argo Fund, the Company's flagship fund, won the Eurohedge Award for Best Emerging Manager and Smaller Fund in 2016.

Dividends and share purchase programme

The Directors are not declaring a final dividend, but intend to restart dividend payments as soon as the Group's performance provides a consistent track record of profitability.

During the year the Directors undertook a share purchase programme and authorised the repurchase of 19,330,000 shares at a total cost of US$2.9 million which provided substantial market liquidity for share trading.

Under the current Share Buyback Programme II, the Company intends to use up to £2 million to acquire Ordinary Shares in the market over a twelve month period commencing on 28 September 2016 and expiring no later than 19 September 2017 (one year from the date of the 2016 AGM which authorised the 2016 Share Buyback Programme II). The minimum price that Argo will pay is 8p per Ordinary Share. The aggregate number of Ordinary Shares which may be acquired on behalf of the Company in connection with the 2016 Share Buyback Programme II will not exceed 23,676,987 Ordinary Shares, which broadly represents the number of shares in public hands. The Company has spent US$0.07 million (£0.06 million) to buy back 375,000 Ordinary Shares on this programme so far.

The Directors firmly believe that a return of excess cash to shareholders through buy-backs will send a positive message to investors.

Outlook

The Board remains optimistic about the Group's prospects particularly in light of the significant increase in the liquidity of Argo funds following the sale of illiquid assets. A significant increase in AUM is still required to ensure sustainable profits on a recurring management fee basis and the Group is well placed with capacity to absorb such an increase in AUM with negligible impact on operational costs.

Boosting AUM will be Argo's top priority over the coming year. The Group's marketing efforts will continue to focus on the re-launch of TAF which has a 16 year track record as well as identifying acquisitions that are earnings enhancing. TAF's prospectus was amended on 1 March 2016 to eliminate trading in level 3 illiquid assets and concentrate trading and investments in emerging market bonds and other liquid assets.

Over the longer term, the Board believes there is significant opportunity for growth in assets and profits and remains committed to ensuring the Group's investment management capabilities and resources are appropriate to meet its key objective of achieving a consistent positive investment performance in the emerging markets sector.