AM Best reviews Argo’s ratings in context of CEO departure

Following the shock departure of Mark Watson III, Argo's chief executive officer, this week, rating agency AM Best has placed the Financial Strength Rating (FSR) of A (Excellent) of Argo Re and its subsidiaries under review with negative implications.

AM Best said the move does relate to Watsons’s departure and and concerns related to a recent subpoena issued by the Securities and Exchange Commission (SEC) as it relates to the non-disclosure of certain compensation-related perquisites involving Argo and its departed CEO.

Watson's departure was disclosed in Argo's Form 8-K dated November 5, 2019. The 8K also speaks to Watson’s replacement, Kevin J Rehnberg, becoming interim chief executive officer pending approval by Bermuda regulators.
AM Best affirmed Argo Group's ratings on October 9, 2019, but was unaware that the SEC subpoena had been issued to Argo some time before this date. AM Best said that once discovered, Argo management portrayed this inquiry to AM Best as non-material, and as a formal request for additional documentation.

“The under review with negative implications status considers the serious nature of the aforementioned SEC inquiry and the diminished credibility among Argo stakeholders in light of the board’s actions to keep this inquiry confidential while undergoing an extensive internal investigation on compensation governance matters related to Argo and its former chief executive officer. Perhaps of most concern to AM Best are the pending conclusions of the SEC investigation and the potential for this inquiry to extend beyond Mr. Watson,” said AM Best.

“Also in question is the potential for further shareholder discontent, which could lend itself to management and board distraction, the emergence of class action lawsuits and renewed shareholder activist activity. Argo estimates that the cumulative amounts of the charges are not expected to be material and the company has put into escrow a portion of Mr. Watson's restricted shares to cover ultimate reimbursement costs as part of his separation agreement.

“This action also highlights the importance of enterprise risk management (ERM), corporate governance and the role that management and the board play to ensure that a proper risk management framework is in place to protect against these types of issues.”
AM Best said the ratings are likely to remain under review pending follow up discussions with management and the conclusion of the SEC inquiry and its findings.

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