Standard & Poor’s hit Argo Group International Holdings Lt. with a negative ratings outlook, due to an SEC subpoena about executive compensation and the abrupt “retirement” of longtime CEO Mark Watson III.

The action comes a few days after A.M. Best placed the credit ratings of Argo Group and its subsidiaries under review with negative implications, citing similar concerns.

“In our view, these developments suggest potential shortcomings in Argo’s governance framework, including the effectiveness of board oversight,” Standard & Poor’s said in the announcement of its decision to revise the outlook of Argo and its subsidiaries to negative from stable “due to governance-related risks.”

A.M. Best’s action also took into consideration Watson’s “sudden” departure and the SEC subpoena, but it expressed particular annoyance with the timing of Argo’s disclosure of the SEC action and how it framed the news after it was discovered.

“A.M. Best 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,” the ratings agency recapped. “Once discovered, Argo management portrayed this inquiry to A.M. Best as non-material and as a formal request for additional documentation.”

Earlier in November, Argo announced Watson’s immediate retirement as well as its decision to name Kevin Rehnberg, president of Argo Group U.S. Inc. and chief administrative officer, as its interim CEO. The change came as the Bermuda-based specialty insurer and reinsurer booked a $25.1 million net loss, due in part to catastrophe costs related to Hurricane Dorian, Typhoon Faxai and U.S. weather-related events.

Standard & Poor’s was more concerned about Argo’s governance issue, however, which became public in February when activist shareholder Voce Capital Management pushed for greater oversight after alleged spending abuses such as a corporate art collection and luxury home/corporate jet travel for Watson. Argo has denied anything improper, though the company’s independent directors are reviewing its governance compensation policies.

S&P said it could lower Argo’s ratings within the next year or two if it sees any material adverse developments regarding ongoing governance and disclosure reviews by the board or SEC investigation. Another trigger would be if the SEC determines that “governance and internal risk controls are not sufficiently enhanced to address existing deficiencies.”

While Argo downgraded its outlook for Argo and its subsidiaries, it has affirmed its long-term issuer credit and financial strength ratings, at least for now.

At present, S&P has assigned a “BBB-” long-term issuer credit rating for Argo Group U.S. and an “A-” long-term financial strength and issuer credit ratings for Argo U.S.’s core operating subsidiaries.

A.M. Best said Argo’s new “under review with negative implications” status takes into account “the serious nature of the aforementioned SEC inquiry and the diminished credibility among Argo stakeholders in light of the board’s actions to keep to keep this inquiry confidential while undergoing an extensive internal investigation on compensation governance matters related to Argo and its former chief executive officer.”

Beyond that, however, A.M. Best said the matters it arguably found of most concern “are the pending conclusions of the SEC investigations and the potential for this inquiry to extend beyond [Watson].”

Source: Standard & Poor’s, A.M. Best