The day after Argo Group International Holdings announced CEO Mark Watson III was retiring “immediately,” investors seemed ecstatic, driving the company’s stock price up 5.6 percent on Nov. 6.
Watson’s departure as CEO is a good thing for the bigger picture, some observers say.
“The market is viewing [Watson’s] exit positively,” KBW analyst Christopher Campbell told Carrier Management via email. “The shares were up 5.6 percent the day after his retirement. I think many investors viewed his leadership as impeding beneficial changes and improved financial results.”
The stock news capped the end of a controversy that spilled into the open in February, when activist shareholder Voce Capital Management pushed for greater board oversight after alleged spending abuses such as a corporate art collection and luxury home/corporate jet travel for Watson. Argo, a Bermuda-based specialty insurer and reinsurer, has consistently denied any wrongdoing, though Argo disclosed in October its independent directors are reviewing its governance and compensation policies. As well, it acknowledged a subpoena by the U.S. Securities and Exchange Commission about executive compensation.
While Watson will continue to serve as a board member and company adviser until the end of 2019, Kevin Rehnberg, president of Argo Group U.S. Inc., head of the Americas and chief administrative officer, has been named interim CEO, subject to Bermuda regulatory approval.
Campbell said that Watson’s departure arose from concerns about alleged “misappropriation of corporate resources,” adding that “the SEC’s investigation into these issues may have driven more immediate board accountability.”
Moving ahead, Campbell surmised that there are big changes coming for Argo, particularly in areas that have been struggling, such as International operations.
“Near term, we think it’s likely that Argo undergoes a significant strategic and operational review of its International operations…Longer term, we think the new CEO coming from its more successful U.S. operations—where combined ratios have averaged under 90 since 2015—should be a positive catalyst for Argo’s shares.”
Meanwhile, Voce Capital Management, owner of 5.8 percent of Argo’s shares, still appeared unhappy with the company, expressing displeasure with how Watson’s departure was handled as well as the leadership that remains.
“The abrupt ‘retirement’ of Argo’s CEO yesterday does not resolve our concerns about [Argo’s] operations, strategy and corporate governance; in fact, it raises more questions than it answers,” the firm said in a Nov. 6 statement.
Voce said that the disclosure of the SEC probe underscores statements it made in October that Argo needs “immediate and sweeping changes.” Then and now, Voce said, it continues to also distrust the existing board’s ability to enact reform.
Voce also questioned Argo’s choice of an internal executive to replace Watson. In its Nov. 6 statement, Voce urged Argo to conduct “a full evaluation” of all of its “strategic alternatives” moving ahead.
Amid Argo’s dramatic CEO transition, the company released its 2019 third-quarter earnings on Nov. 6—a collection of mixed results. Investors remained calm, with the stock staying in positive territory by midday.
Argo booked a $25.1 million net loss, translating to negative $0.73 per diluted share, compared to $40.6 million in net income, or $1.17 per diluted share in the 2018 third quarter. The results include pretax charges of $51.8 million connected to an increase in current and prior accident-year losses of $10 million and $41.8 million, respectively.
Gross written premiums grew 5.1 percent to $882.7 million versus $839.9 million in the 2018 third quarter. U.S. operations grew 9.8 percent to $529.9 million compared to $482.6 million in the 2018 third quarter. International operations, on the other hand, dipped 1.2 percent to $352.9 million versus $357.2 million in the 2018 third quarter.
Net investment income for the quarter came in at $40.2 million, a 16.5 percent jump from the $34.5 million produced in the 2018 third quarter.
Soberingly, Argo’s combined ratio was 111.4 for the quarter versus 99.7 over the same period a year ago. At the same time, catastrophe losses dipped to $19.3 million for the quarter versus $24.6 million a year ago. Losses during the quarter stemmed from Hurricane Dorian, Typhoon Faxai and U.S. weather-related events, Argo said.
Rehnberg, in prepared remarks, said he was “optimistic about the future of the company” but acknowledged there is work to be done.
“We see potential for much stronger results,” Rehnberg said. “We are clearly not satisfied with losses we experienced in the quarter.”
Rehnberg noted that the company is growing in profitable areas, addressing challenged areas, and “taking steps to control our loss and expense ratios.”
He added that U.S. growth is stemming from “ongoing investments we’ve made in technology, process improvements and the strong team we have working at Argo.”