Voce Capital Management LLC‘s J. Daniel Plants on Monday escalated an ongoing campaign at Argo Group International Holdings Ltd., (ARGO) with a minority, four-person director election contest and letter taking issue with CEO Mark Watson and the insurance company’s board oversight.
In the letter, Plants questioned whether Watson has misused the company’s assets by employing a corporate jet, a Gulfstream V, also known as a G-5, as his “personal chariot,” furnished offices with designer chairs and sponsored race car and sailing teams, among other expenses.
The Deal had suggested in a Feb. 4 report that Plants, who had filed a Schedule 13D reporting a 5.6% stake at the time, could nominate directors in advance of a March 8 deadline.
Voce is Argo’s fourth largest investor with a 5.8% stake. Watson owns about 2.5% of Argo, while existing directors don’t own much. Argo isn’t a dual-class share company, which means that Voce doesn’t have a huge block of insider votes to contend with as he seeks backing for his director candidates.
According to a person familiar with the situation, Voce has received inbound calls from other institutional investors expressing some of the same concerns as it has raised.
The activist and members of the corporate board were set to meet in New York on February 27th to discuss Voce’s concerns, according to people familiar with the situation. However, Plants called off the meeting after Argo on Feb. 20 decided unilaterally to expand its board to 13 members and add two directors, Samuel Liss and Tony Latham, without discussing Voce’s issues in advance, they added.
The insurance company was in the news in 2017 after it paid out a segment of Disney’s insurance policy on Star Wars actress Carrie Fisher, who had died the previous December.
Its shares rose 1.2% Monday on the campaign escalation. Voce’s Plants has one major obstacle to his campaign – Argo Group‘s shares have generally been on an upward trajectory over the past five years and traded recently at $70.70 a share.
In response, Argo said it was “disappointed” that Voce has not decided to engage with the company “constructively.” The insurer added that it had produced total shareholder returns of 39%, 69% and 136% over 1, 3 and five years, respectively and that it will review Voce’s nominations. “The company’s success is the result of a business that is growing at a very favorable pace with a strong underwriting business and improving underwriting margins,” Argo said.
Nevertheless, in the letter, Plants contends that Argo has return on earnings, or ROE, which is less than its peers, partly because the company’s expenses are unusually high, owing to what he sees as wasteful spending. For example, Plants points out that Argo paid Watson a $2.9 million relocation payment when it acquired a business based in Bermuda. However, Plants adds that Argo also has a long-term lease for a waterfront compound and villa in Bermuda called “The Jungle” which Plants contends serves as one of Watson’s private homes. “Why are Argo shareholders footing the bill for any of the CEO’s living expenses?” Voce asks.
Plants believes Argo’s board is overtenured, lacks key skills and is rife with conflicts. According to relationship mapping service BoardEx, a service of The Deal, a number of Argo’s directors are overtenured, including Sedgwick Browne, 77, who has served for 16 years and Mural Robert Josephson, 71, who has been a director for 15 years.
Directors who have lengthy tenures are generally seen by governance experts as potentially being too chummy with the CEO to the point where they won’t provide adequate oversight of the business.
Also, there are other reasons to suggest that some directors may not be providing independent oversight of Watson and Argo. Plants reports that two directors, Gary Woods, 76, independent chairman, and Hector De Leon, 72, had previously served as directors at insurer Titan Holdings Inc., which had been run by Watson’s father, Mark Edmund Watson Jr. In addition, Watson Jr., Argo’s CEO, received a board seat at Titan when he was 27 years old, Voce says.
Finally, Argo director John Tonelli spent 4.5 years between 2003 and May 2008 working with Argo CFO Jay S. Bullock in the financial institutions group at Bear Stearns Inc., according to BoardEx.
Plants notes that Argo’s board may lack operational oversight skills, noting that four of Argo’s directors are attorneys, three are accountants by training, one is a retired strategy consultant and two more are investment bankers.
Liss, one of the new Argo-installed directors, is managing principal of Whitegate Partners LLC, an advisory firm to operating companies and private equity in the financial services and business services sector. Latham, the other new director, has had several board positions across the insurance industry.
Plants doesn’t discuss in his letter whether he would like to see Argo consider strategic options. However, it is possible that Watson could consider selling the business instead of face Voce’s director battle. A sale is a possibility consider that a wave of M&A and activism has impacted the insurer space in recent months. For example, AXA SA in March agreed to acquire XL Group Ltd. in a $15.3 billion deal to create the world’s biggest property and casualty insurance group.
Aneliya Crawford, a partner specializing in activist events at Schulte Roth Zabel, provided legal advice to Voce.
Voce was a top winner in The Deal’s annual report about insurgent rankings. People familiar with the situation noted that Plants’ fund was up 6% net of fees in 2018, with a mix of activist, passive, long and short positions, a rare win in a year full of activist losses and one in which nine of its positions were up for the year.
Argo did not return a request for comment.