AM Best Reviews Argo Group’s Ratings in Reaction to SEC Probe, Watson Exit

November 8, 2019

AM Best has placed the credit ratings of Argo Group International Holdings Ltd. and its subsidiaries under review with negative implications. These actions are a reaction to the sudden departure of Mark E. Watson III, Argo’s chief executive officer, but more importantly, to the recent subpoena issued by the Securities and Exchange Commission (SEC), which is probing Argo’s disclosures of executive compensation involving its departed CEO.

AM Best said it had affirmed Argo Group’s ratings on Oct. 9, 2019, but was unaware that the SEC subpoena had been issued to Argo some time before this date. “Once discovered, Argo management portrayed this inquiry to AM Best as non-material, and as a formal request for additional documentation,” said the ratings agency in a statement.

By putting the company under review with negative implications status, AM Best said it is considering the serious nature of the SEC inquiry as well as diminished credibility among Argo stakeholders. AM Best pointed to the board’s actions “to keep this inquiry confidential while undergoing an extensive internal investigation on compensation governance matters related to Argo and its former chief executive officer.”

“Perhaps of most concern to AM Best are the pending conclusions of the SEC investigation and the potential for this inquiry to extend beyond Mr. Watson,” the ratings agency said.

Further shareholder discontent “could lend itself to management and board distraction, the emergence of class action lawsuits and renewed shareholder activist activity.”

Argo has been embroiled in a shareholder dispute with Voce Capital Management LLC, a hedge fund that owns close to 6% stake in the insurer. Voce alleged that Argo had excessive corporate expenses, which included corporate jet travel and housing for CEO Watson.

Argo has denied these accusations and Voce in May dropped plans to replace members of Argo’s board, accusing the insurer of “underhanded tactics” to manipulate shareholder votes.

In its ratings notification, AM Best said: “Argo estimates that the cumulative amounts of the charges are not expected to be material and the company has put into escrow a portion of Mr. Watson’s restricted shares to cover ultimate reimbursement costs as part of his separation agreement.”

This action also highlights the importance of enterprise risk management (ERM), corporate governance and the role that management and the board play to ensure that a proper risk management framework is in place to protect against these types of issues, AM Best affirmed.

The ratings are likely to remain under review pending follow up discussions with management and the conclusion of the SEC inquiry and its findings.

AM Best noted that Watson’s departure was disclosed in Argo’s Form 8-K, dated Nov. 5, 2019. The 8K also revealed that Kevin J. Rehnberg would be Watson’s replacement, becoming interim chief executive officer, pending approval by Bermuda regulators.

The AM Best ratings review includes the Financial Strength Rating (FSR) of “A” (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a” of Argo Re Ltd. and its subsidiaries. AM Best also has placed under review with negative implications the Long-Term ICR of “bbb” and the Long-Term Issue Credit Ratings (Long-Term IR) of the parent, Argo Group International Holdings, Ltd.

Additionally, AM Best has placed under review with negative implications the Long-Term ICR of “bbb” and the Long-Term IR of San Antonio, Tex.-based Argo Group US Inc. Argo US’ senior unsecured notes are fully and unconditionally guaranteed by Argo Group, said the ratings agency.

Breaking down the ratings review, AM Best said the FSR of A (Excellent) and the Long-Term ICRs of “a” have been placed under review with negative implications for Argo Re Ltd. and its subsidiaries:

  • ArgoGlobal SE
  • Argonaut Great Central Insurance Co.
  • Argonaut Insurance Co.
  • Argonaut Limited Risk Insurance Co.
  • Argonaut-Midwest Insurance Co.
  • Argonaut-Southwest Insurance Co.
  • ARIS Title Insurance Corp.
  • Colony Insurance Co.
  • Peleus Insurance Co.
  • Colony Specialty Insurance Co.
  • Rockwood Casualty Insurance Co.
  • Select Markets Insurance Co.
  • Somerset Casualty Insurance Co.

The following indicative Long-Term Issue Credit Ratings (Long-Term IR) of the Bermuda-based parent, Argo Group International Holdings available under various shelf registrations, have been placed under review with negative implications:

  • Argo Group International Holdings. Ltd.

— “bbb” on senior unsecured debt
— “bbb-” on subordinated debt
— “bb+” on preferred stock

  • Argo Group US Inc.

— “bbb” on senior unsecured debt
— “bbb-” on subordinated debt

  • Argo Group Statutory Trust –

— “bb+” on preferred stock

The following Long-Term IR has been placed under review with negative implications:

  • Argo Group US Inc.

— “bbb” on $143.75 million 6.5% senior unsecured notes, due 2042.

Source: AM Best

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