Voce Capital Details On How To Improve Argo Group’s Return On Equity

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Voce Capital Management’s founder, J. Daniel Plants, is already a renowned scrivener, his activist letters earning him a Bloomberg profile almost three years ago.

As of Monday, however, Plants may have found a subject equal to his talents. The 18-page opening salvo in what looks likely to be a proxy contest at Bermuda-based reinsurance company Argo Group International deserves an entry of its own should Jeff Gramm write a sequel to his collection of Dear Chairman letters (even if it is addressed to shareholders).

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The allegations, for time-pressed readers, center mainly on the compensation of Argo Group's CEO Mark Watson and spending on items like office space, advertising, air travel, and even philanthropy, which Voce deems problematic. In Plants’ words, “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.”

Argo Group's board, for its part, says the letter “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.” It also argues that Watson and the board are aligned with shareholders, as demonstrated by their 4.9% ownership of the company.

Yet the lack of serious rebuttal may, at the very least, allow Voce’s claims to stick in readers’ minds over the next two months as Voce presses its claim for four board seats. The fact that Watson’s personal website has been down for maintenance since Monday, and the lukewarm justification given to the New York Post, does little to help.

There is more to come, a Voce spokesman told me, including the names of its four nominees and details on how to improve Argo Group's return on equity. As the activist’s letter argues, “The only pathway for Argo to create sustainable, long-term shareholder value is through a dramatic improvement in its return on equity.” Voce’s case is that this is impossible without slashing overheads but it must do more than just expose egregious compensation. Despite a short-lived spike, the stock was down 0.5% for the week at yesterday’s close.

Watson, a 19-year veteran of Argo Group, will face a determined challenge. Voce has launched four proxy contests in five years, defined by Activist Insight Online as a demand for board representation where the target has rejected the nominees, and only one of those settled. And while Argo's 14-person board is on the large side based on an analysis of peer companies cited in its proxy that are profiled on Activist Insight Governance, the addition of four new directors this year has brought the average tenure down to a middling tenure in an industry where longevity and experience are prized.

Last week’s column dealt with Bristol-Myers Squibb outing Starboard Value. The tactical nuances are worth revisiting again as GCP Applied Technologies used the tactic against the same activist on Wednesday, suggesting almost a concerted effort to flush out Starboard this proxy season. For Bristol-Myers, any benefit could be short-lived. Although Starboard did go public with its opposition to the Celgene acquisition this week holding just 0.3% of the stock, its argument was bolstered by the decision of Wellington Management to publicly oppose the deal. An 8% holder with no real history of activism, Wellington is a dangerous opponent of the deal even if it only currently holds voting power over one-fifth of the stock it beneficially owns. It will be interesting to see whether its new-found voice impresses proxy advisers or other investors. Certainly, it sent Celgene holders running for the hills with the stock closing down 8.7% Thursday.

Quote of the week comes from a top-15 shareholder of Barclays, signaling that damage may have been done to Ed Bramson’s efforts to win a seat on the board. Barclays’ defense against Sherborne Investors is beginning, by accident or design, to have developed some momentum; after the company reported improved earnings in its investment bank and announced that it would consider repurchasing shares, yesterday saw a Financial Times account of how Sherborne used a $1.4 billion loan from Bank of America and an equity collar, limiting its downside, to build its stake.

"If you are going to be that disruptive, we would want to see a pretty high conviction from him," the top-15 shareholder said. "The collar doesn't help his case."

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