An Argo Group shareholder is nominating four new directors to counter what it alleges are “shockingly high” corporate expenses including pricy real estate, an office art collection, and CEO Mark Watson III’s personal use of company-owned aircraft and housing.

Argo, a Bermuda-based underwriter of specialty insurance and reinsurance, denies the accusations from Voce Capital Management LLC, framing them as out of line.

Voce Capital Management LLC owns 5.8 percent of Argo shares, which it asserts makes it the company’s fourth-largest shareholder. The nominations would be taken up at the company’s 2019 annual meeting.

Pricy Real Estate, Yachts and Art

Voce details its concerns about the company in a Feb. 25, 2019 letter to shareholders. In it, Voce said Argo needs a “dramatic improvement in its return on equity” to “create sustainable, long-term shareholder value.” Voce accuses the company of falling short in this area through its current strategy and expenses.

Argo has “shockingly inappropriate” corporate expenses, including personal use of corporate property, “gross misallocations of capital on wasteful items and frivolous vanity sponsorships, and an overall spendthrift culture that misdirects [Argo] assets to support the lifestyle and hobbies of [Watson] at the expense of shareholders,” the Voce letter said.

“His tastes in art, architecture, racing, yachting and luxury travel, among other things, are well documented, and he appears to be quite the bon vivant. We in no way begrudge Mr. Watson, or any executive, the right to allocate his personal time or money in pursuit of private passions,” the Voce letter states. “But we’re deeply concerned that Mr. Watson’s hobbies, pet projects and the cult of personality he apparently wishes to create for himself have commandeered and corrupted Argo’s priorities. We believe that Argo’s corporate assets—including Mr. Watson’s professional time, the company’s focus and its capital—are being grossly misspent and misdirected, in furtherance of Mr. Watson’s personal agenda at shareholders’ expense.”

Voce accuses Watson of having a “penchant for dramatic and expensive real estate” such as Argo’s San Antonio office space, which was the old headquarters of AT&T. Watson, Voce said, oversaw every detail of the project and saw it as a place to “showcase his creativity and display the corporate art collection acquired at his behest.”

“Argo’s website (and YouTube channel) are home to scores of professionally produced, slick videos showcasing Watson’s many passions, including a series called ‘On the Ground’ trumpeting the cushy digs and prestigious office locations that Argo occupies around the world,” the Voce letter asserts. “From San Antonio,” one of the executives says on camera “if you think about some of the neat things about the San Antonio office, it is the array of artwork that we have in the office.” Another staffer chimes in, “there’s so much artwork, and there’s so much beauty about how our office is constructed.”

Art Prints Would Suffice

Voce questions why “a small company like Argo” has an art collection and argues that prints ordered online would suffice. Voce challenges the company’s need for expensive office space in Manhattan in the city’s trendy Meatpacking district.

Watson, Voce added, “appears to have squandered not only a significant amount of shareholder capital but his own valuable time as CEO on this folly,” Voce said.

Beyond Manhattan, Voce takes issue with Argo’s real estate choice in London, down the street from Lloyd’s and near “much larger global insurance entities” such as Willis, Swiss Re, Aon and Tokio Marine.

Watson “continues to complain of the low returns available from underwriting in London while at the same time sinking enormous sums of shareholder capital into ostentatious quarters there,” according to the Voce letter.

Additionally, Voce said the company is wasting money for sponsorships such as the Argo Gold Cup, a sailing match in Bermuda at the Royal Bermuda Yacht Club where Watson is a member.

Voce, in its letter, accuses the board of lacking independence, property experience and being misaligned with shareholders. As a result, Voce blames the board for “this waste of corporate assets” and said it “must be held accountable” for the problem.

Further, Voce said that Argo stock is below its peers and that the company has failed in recent years to boost its return on investment (3.6 percent in 2018).

“Argo has only posted a double-digit ROE once in the past decade,” Voce claims.

With this in mind, Voce said that Argo has frivolously covered Watson’s personal living expenses, reportedly including a $1.5 million relocation allowance for his family to move to Bermuda and another $1.4 billion bonus for agreeing to relocate in the first place. Voce also takes issue with Watson allegedly living when he is in Bermuda at a 1.7 acre waterfront compound and villa made possible through an Argo long-term lease. The compound, Voce said, includes “a swimming pool, lush grounds and a private boat dock” with neighbors including Michael Bloomberg.

Argo: Voce Accusations Are Misleading

Argo issued a statement confirming receipt of the director nominations but also strongly denying the Voce accusations.

“Argo’s board of directors and management welcome input from all our shareholders and take into account their views. In that spirit, we were looking forward to continuing our dialogue with Voce but are disappointed that Voce has decided not to engage us constructively,” Argo said in its response. “Instead, Voce has sent a letter to shareholders that contains a number of misleading and inaccurate statements and personally attacks the company’s CEO, ignoring Argo’s track record of strong value creation for all shareholders.”

Argo also noted it has had “leading 1-, 3- and 5-year period total shareholder returns of 39 percent, 69 percent and 136 percent,” respectively, and that it has “returned in excess of $645 million of capital to shareholders from 2010 to 2018.”

What’s more, Argo said, its board and management team continue to focus on improving margins, and results are coming in through a lower expense ratio and a “company-stated long-term ROE target of 700 basis points above the risk-free rate.”

Argo added its board and CEO interests are “aligned with all shareholders” and that Watson is the largest individual shareholder, with the board and executive officers together owning 4.9 percent of outstanding shares.

Argo said it would review Voce’s nomination notice and proposed nominees and offer its formal recommendations in the company’s proxy statement, to be filed with the Securities and Exchange Commission and mailed to all shareholders eligible to vote at the 2019 Annual General Meeting.

Sources: Argo Group, Voce Capital