Voce Capital Management, an Argo Group shareholder with a 5.8 percent stake in the company, has heavily criticised the specialty re/insurer’s corporate expenses, taking aim at CEO Mark Watson III, in a letter to other stockholders made public on Monday February 25.
Argo’s board of directors has quickly dismissed the claims as misleading, inaccurate, and a “personal attack” on Watson.
Voce, which is the fourth-largest shareholder with 1.9 million shares, has argued that Argo needs to improve its return on equity (ROE), and will not be able to create sustainable, long-term shareholder value with its current strategy and expense structure.
On Argo’s alleged high expense structure, the letter reads: “Argo’s corporate expenses are not only shockingly high – they are also shockingly inappropriate, including extravagant perquisites, personal use of corporate property such as company-owned aircraft and housing, gross misallocations of capital on wasteful items and frivolous vanity sponsorships, and an overall spendthrift culture that misdirects Company assets to support the lifestyle and hobbies of the company’s CEO at the expense of shareholders.”
Voce also claimed Argo’s board of directors is directly responsible for the alleged “waste of corporate assets”, and has nominated four independent director candidates to the board in an attempt to remedy the situation it describes.
In a response to the letter, Argo confirmed receipt of the director nomination notice and provided arguments against the allegations.
Argo’s board suggested the letter ignores Argo’s track record of value creation for its shareholders, citing 1, 3 and 5-year period total shareholder returns of 39 percent, 69 percent and 136 percent, respectively. From 2010 to 2018, Argo returned in excess of $645 million of capital to shareholders.
The board also pointed to its improving margins and that in 2018, it lowered its expense ratio by 260 basis points to 37.8 percent.
“The improving expense ratio, along with strong execution of the company’s strategy, is contributing to the achievement of the company-stated long-term ROE target of 700 basis points above the risk-free rate,” Argo’s board stated.
Argo’s board also defended against criticisms of Watson, arguing the interests of the CEO and board are aligned with all shareholders.
“The CEO is the largest individual shareholder, and the board and executive officers as a group own beneficially approximately 4.9 percent of the company’s shares outstanding. In addition, the company has a strong and diverse group of independent directors, including five new directors who have been added to the board over the past two years,” it said. “The board’s Nominating and Corporate Governance Committee will review Voce’s nomination notice and proposed nominees in accordance with its fiduciary duties under applicable law and the company’s corporate governance guidelines. The board will present its formal recommendation regarding director nominees in the company’s definitive proxy statement and other materials, which will be filed with the Securities and Exchange Commission and mailed to all shareholders eligible to vote at the 2019 Annual General Meeting. The company has not yet scheduled its 2019 Annual General Meeting. Argo shareholders are not required to take any action at this time.”
Argo Group, Voce, Bermuda