AM Best downgrades Argo over transparency concerns and SEC probe

Rating agency AM Best has downgraded the financial strength rating (FSR) of Argo and its subsidiaries to A- from A because of concerns over the recent Securities and Exchange Commission (SEC) probe, a lack of transparency and unfavourable prior year loss reserve development.

The rating agency said the downgrade is a follow up to actions taken in November 2019 in response to a recent subpoena issued by the SEC as it relates to the non-disclosure of certain compensation-related perquisites involving Argo and its departed CEO, and also considers the fourth quarter earnings and the host of events leading up to this quarter.
“This rating action also touches on the organisation’s recent lack of transparency and the collateral damage caused by these actions,” said AM Best.

During the fourth quarter, Argo management undertook significant changes as part of the new leadership’s ongoing efforts to correct past practices, culture and governance as it relates to the SEC inquiry. While the organisation is still working through the SEC inquiry, Argo recently appointed Thomas Bradley as the new board chairman and appointed Kevin Rehnberg, who had been serving as interim CEO, as chief executive officer.

Both are continuing a board refreshment process after Argo reached a settlement agreement with the activist shareholder Voce Capital, AM Best noted.

The ratings also consider Argo’s fourth quarter 2019 earnings announcement and $77 million of unfavourable prior year loss reserve development posted in that period, which is in addition to the group’s previous reserve charge of $42 million taken in the third quarter of 2019.

“Once again, a portion of this fourth-quarter charge was related to its Lloyd’s operation, which over the years has had a number of challenges,” said AM Best. “Argo’s earnings for the fourth quarter and full year 2019 were well below expectations. Sudden and significant reserve development generally raises questions around risk awareness as it signals a potential weakness in readily identifying problematic areas of its business, which may result in additional reserve surprises in the future.”

AM Best believes that the scope and nature of these events are material from a governance perspective, and said that it looks to Argo’s new leadership and board to enable effective governance in terms of managing future risks, including compliance-related risk, providing sound governance and accountability at all levels of the enterprise, and creating a framework that is transparent and that keeps its stakeholders apprised.

“Over the past several months, Argo has been proactively working through much of this; however, the consequences of these actions will take some time before the effects of these changes are recognised,” said AM Best.