Argonaut Affirmed, Off Watch

Standard & Poor’s Ratings Services removed from CreditWatch and affirmed its “BB+” counterparty credit rating on Argonaut Group Inc. and its “BBB+” counterparty credit and financial strength ratings on Argonaut’s property/casualty subsidiaries. Argonaut’s substantially improved capital position since the beginning of the year and the expectation of further improvement in the second half of 2003 influenced the ratings action. S&P also said that the outlook on all these companies is negative.

S&P analyst John Iten said he expects Argonaut’s underwriting results to improve in the second half of the year and into 2004, thanks to the hardened market. The outlook remains negative, however, because of the possibility of additional reserve strengthening.

Argonaut’s acquisition of the Colony Insurance Group, which writes surplus lines business, in mid-2001 has greatly reduced Argonaut’s historical dependence on workers’ compensation. Surplus lines premiums constituted 41 percent of total gross written premium in 2002 and 49 percent in the first quarter of 2003. Argonaut expanded its surplus lines presence in April 2002 with the acquisition of the renewal rights of Fulcrum Insurance Co. from SCOR Group. Argonaut’s expansion into surplus lines appears to have been well timed, and most of the company’s future growth and earnings are expected to come from these operations.

Workers’ compensation is a decreasing portion of Argonaut’s book of business. The company is implementing a restructuring plan to focus on upper-middle-market, loss-sensitive accounts and, effective March 31, 2003, it exited the wrap-up and small commercial businesses.

Argonaut posted a $21 million pretax loss for 2002 versus a $3 million profit in 2001. Last year’s results were hurt by reserve strengthening for asbestos of $59.8 million and a $70 million write-down of its deferred tax asset. Pretax income for the first half of 2003 was $67.0 million, up from $20.1 million in the prior-year period. Net income rose to $53.3 million from $13.6 million in the same period a year earlier, including net realized gains of $44.1 million and $9.1 million in the respective years. Earnings in the first half of 2003 included a reserve strengthening charge for lines of business the company is exiting, restructuring charges, and an increase in allowance for doubtful reinsurance recoverables.