Voce Capital Management LLC thinks Argo Group International Holdings Ltd.’s board is letting its chief executive, Mark E. Watson III, misuse the Bermuda-based insurer’s assets at the expense of shareholders. It nominated four directors to the board, according to a letter to Argo shareholders published Monday.
The Wall Street Journal reported Sunday that the proxy fight was imminent.
Voce, Argo’s fourth-largest shareholder with a 5.8% stake, questions whether endeavors allegedly spearheaded by Mr. Watson, such as flying a corporate jet to the Art Basel art fair in Miami Beach, furnishing offices with designer chairs and sponsoring race-car and sailing teams, are justified expenses.
“Exotic race cars and yachts have nothing to do with the rather humdrum business of selling insurance to small and midsize companies,” the hedge fund writes.
Voce says that some of Mr. Watson’s actions appear to violate Argo’s code of conduct and any improper personal use of company assets could have regulatory and tax implications. A person familiar with Argo’s thinking said it has procedures in place to ensure compliance with all laws as it relates to corporate expenses.
This person said Art Basel, which was also attended by Argo clients, relates to the company’s art-title business and that the company has an office in the Miami area. This person also said company sponsorships aren’t a significant portion of its sales and expenses, and that the owner of the Formula E race-car team the company sponsors is a client who generates more in premiums than the cost of the sponsorship.
Argo said in response to the letter’s content that its board and management welcomes input from its shareholders. It didn’t specifically comment on Voce’s allegations concerning Mr. Watson, and Mr. Watson didn’t respond to requests for comment. Argo said its performance has been strong, underscored by the company’s leading total shareholder returns over the past one-, three- and five-year periods. Argo said it has returned more than $645 million in capital to shareholders from 2010 to 2018.
Argo, whose market value is roughly $2.4 billion, underwrites specialty insurance and reinsurance products in the property and casualty market. It was in the news in 2017 for paying out a portion of Disney’s insurance policy on “Star Wars” actress Carrie Fisher, who had died the previous December.
Argo’s shares have risen 36% over the past year, including a small gain after Voce disclosed its position earlier this month, compared with the sector index rise of 30%, according to Refinitiv. But Voce says Argo’s return on equity, a key profitability measure for insurers, is an issue. Argo’s ROE averages less than 6% a year over the past decade, while its peers averaged almost 11% over the same period, Voce says.
Voce says the measure is being weighed down by Argo’s “shockingly high” and “shockingly inappropriate” corporate expenses incurred at the behest of Mr. Watson.
The company’s ROE improved to 3.6% in 2018 from 2.8% in 2017, and it has said it has a long-term ROE target of roughly 10%. Mr. Watson, when asked about the ratio on an earnings call earlier this month, said the company is focused on controlling expenses by doing things like increasing automation and spending less to acquire customers.
Voce says in its letter the issue is the money Argo spends to support what it says are Mr. Watson’s hobbies, tastes and favorite projects. It mentions “vanity sponsorships,” such as the Volvo Ocean Race team it says Mr. Watson traveled to sail with in Spain and the racing team, whose races it says Mr. Watson recently attended in Mexico, Morocco and Italy.
The letter also details what it describes as Mr. Watson’s passion for design and his involvement in designing Argo’s Manhattan office, which garnered a write-up in Interior Design magazine. The article, which notes that Mr. Watson was intimately involved in the design, described lounge chairs upholstered in “Argo-blue” polyester and “LED downlights that cast a soft brightness...more often used in museums on ancient texts.”
Voce questions in its letter why Mr. Watson receives housing benefits from the company for homes in New York and in Bermuda that it deems lavish.
Voce also says the company’s use of three corporate jets hasn’t been detailed to shareholders and appears to be excessive. Voce says that includes exclusive use of a Gulfstream V that recently logged an average of 195 flights a year.
“We believe the G-5 is Mr. Watson’s personal chariot,” Voce writes in the letter.
The person familiar with the company’s thinking said the jet use is normal for a company like Argo with offices all over the world and that executives who use the corporate jet personally reimburse the company.
Voce in its letter criticizes Argo’s board, saying its 10 independent directors have average tenures of more than 12 years and own little stock in the company.
Argo said in its statement it has a “strong and diverse” group of independent directors, including five directors added to the board in the past two years.
On Wednesday, the company named two new independent directors to the board and raised its quarterly dividend by 15%. Voce says it has met with Argo’s management and planned to share its corporate-governance concerns with the board in a meeting this week before the company added the directors without its input.
Voce, founded by J. Daniel Plants, is based in San Francisco and manages roughly $250 million. It has launched several proxy fights in its eight-year history, including at Natus Medical Inc. last year, where it won two board seats.