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Argo defends strategic review as investor pressure mounts

16th November 2022 - Author: Matt Sheehan

Bermuda-based specialty P&C insurer Argo has addressed another letter to shareholders defending its ongoing strategic review process amid mounting pressure from activist investor Capital Returns and its allies, who are seeking to replace two directors on Argo’s Board at next month’s annual general meeting (AGM).

argo globalThe latest criticisms from Capital Returns allege that years of underperformance at Argo owe to numerous “errors in judgement” by its board, including “persistence with a suboptimal business configuration, inadequate succession planning and poor hiring decisions, a lack of expense discipline and untimely and inaccurate financial reporting.”

In response, Argo has written to shareholders to explain in more detail the changes implemented by its strategic review process, which is evaluting options for the future of the company that include a potential sale, with Argo claiming to have already reached out to 80 parties, with assistance from its financial advisor, Goldman Sachs.

The company notes that, over the past two years, it has announced significant divestitures to exit international businesses and to focus on its most profitable business lines, and has also entered into two major risk transfer transactions with Enstar and Westfield.

“Your Board is conducting a thorough, disciplined strategic review process and is committed to leaving no stone unturned,” Argo told shareholders. “Through these discussions, it is evident that the parties have found the latest developments and progress of transformation initiatives impressive, acknowledging that Argo is a healthier, streamlined business. The next step is for interested bidders to put forward proposals with any financing commitments and binding documentation.”

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But Capital Returns has dubbed the strategic review process as “belated” and charges that the “purported ‘transformation'” has “failed to drive value.”

“Seven months after our call for a strategic review, the Board finally embarked on one, but did so sub-optimally – looking to sell assets piecemeal in an increasingly difficult market environment and hiring a leader for the remaining business who has an unbroken record of generating losses,” Capital Returns wrotes in its own presentation to Argo shareholders.

“Effectively admitting that it did not have shareholder support when faced with our Board nominations in February, the Board brazenly delayed the date of the annual meeting nearly as far as Bermuda law would allow. And although the Board bought itself some time in an apparent effort to avoid accountability, the Board did not use this time wisely and the stock is significantly lower today, with shareholders suffering mightily from this Board’s dilatory approach to governance and oversight,” the activist investor continued.

“The Board had an extended opportunity to reposition Argo with a new strategy and new leadership or a meaningful transaction. It has failed to do either and shareholders have suffered further losses in the meantime.”

Last month, Capital Returns and other participants urged shareholders to elect two new directors to Argo’s Board in order to address what they label as “years of underperformance and poor decision-making” at the company.

The calls came as Argo reported worsening losses in its Q3 results, and after a group of investors announced they planned to sue Argo for allegedly misleading them on key performance metrics that led to a huge drop in share price this year.

Capital Returns believes that the installation of its picks for directors would provide “fresh perspectives” for Argo’s Board, replacing two members who, in its view, have “neither the time nor expertise to oversee a complex business transformation or a sale process.”

But Argo says its Board is already fresh, with the average tenure being just three years, and has concluded after a formal interview process that the directors nominated by Capital Returns would “not be additive to your Board’s collective skillset and would diminish the level of expertise and diversity on your Board.”

The company dismissed the first pick – Ron Bobman – as having failed to acknowledge Argo’s purportedly more attractive profile following its major risk transfer transactions. “Mr. Bobman does not deal in facts,” Argo wrote. “His lack of public company board experience is evident in his apparent inability to recognize Argo is conducting a thorough, disciplined strategic alternatives process.”

In regards to the second pick – Dave Michelson – Argo noted that: “during his tenure as a director at FedNat Insurance, the company has suffered a ~98% stock price decline, been delisted from Nasdaq, triggered a default on over $120 million of senior notes and had one of its insurance subsidiaries placed into receivership by the Florida Department of Financial Services.”

Investors will soon have an opportunity to show whether they give credence to these arguments as the issue is set to come to a head at Argo’s annual general meeting scheduled for December 15, 2022, when shareholders will vote on the composition of the Board.

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