Argonaut Group Notes 4thQ, 2002 Results

San Antonio-based Argonaut Group, Inc. announced financial results for the three months and year ended Dec. 31, 2002.
Items of note for the fourth quarter and full year include:

*The Company’s Excess & Surplus (E&S) segment reported an 88 percent increase in net earned premium and 105 percent increase in underwriting income for the fourth quarter of 2002 compared to the same period in 2001. For the quarter, the segment represented 55 percent of Argonaut Group’s total net written premium. The GAAP combined ratios for the segment were 93.1 percent and 94.7 percent for the quarter and the year, respectively.

Three of Argonaut Group’s four business units reported combined ratios under 100 percent for the quarter. The GAAP combined ratio for core operations exclusive of Run-Off lines improved during the year to 108.7 percent compared to 130.4 percent for 2001.
The company strengthened asbestos reserves by $52.8 million in the fourth quarter. The company established a partial valuation allowance of $71.9 million against its deferred tax asset.

During the fourth quarter of 2002, Argonaut reported a net loss of $105.3 million or $4.88 per diluted common share on 21.6 million shares, compared to a net loss of $0.6 million or $0.03 per diluted share, for the same three-month period in 2001. The 2002 net loss was due to a $52.8 million strengthening of the asbestos reserves for run-off lines in Argonaut Insurance Company and the establishment of a partial valuation allowance of $71.9 million against Argonaut Group’s deferred tax asset.

Total revenue, which includes earned premiums, investment income and net gains on sales of investments, was $137.8 million during the fourth quarter of 2002, compared to $119.1 million for the same period in 2001.

For the year ended Dec. 31, 2002, the company reported a net loss of $87.0 million or $4.04 per diluted common share, compared to net income of $2.9 million or $0.13 per diluted share, during the same period in 2001. During 2002, total revenue was $457.9 million, versus revenue of $292.6 million during 2001.

In the first half of 2003, Argonaut Insurance Company will reorganize its operations to concentrate on casualty and risk management solutions for upper-middle market accounts, which have been the historical core of its business. With the elimination of non-strategic businesses, Argonaut Insurance Company will reduce its workforce by 15 percent over the next two quarters and will incur a reorganization charge of approximately $3 million in the first quarter of 2003. The reorganization will also have the effect of reducing operating expenses in the latter half of 2003 and in future years. In its refocused configuration, Argonaut Insurance Company is expected to produce less than 20 percent of the Group’s gross written premium on a prospective basis.

*Excess & Surplus Lines (E&S) – Colony Insurance Group, which was acquired by Argonaut Group during the third quarter of 2001, specializes in underwriting Excess and Surplus Lines of insurance. For the fourth quarter, net earned premiums for E&S lines were $52.8 million, generating underwriting income of $3.6 million and a combined ratio of 93.1 percent. This is compared to net earned premiums of $28.1 million and underwriting income of $1.8 million for the same period in 2001. For the year ended Dec. 31, 2002, Colony reported net earned premiums of $152.3 million generating underwriting income of $8.1 million. For 2002, the combined ratio was 94.7 percent compared to 94.0 percent in 2001. The combined ratio includes expenses associated with the acquisition of renewal rights and certain other assets of a SCOR subsidiary, Fulcrum Insurance Company.

*Specialty Commercial Lines – Rockwood Casualty Insurance Company and Argonaut Great Central Insurance Company comprise Argonaut Group’s Specialty Commercial Lines. During the fourth quarter, these companies contributed net earned premiums of $27.6 million and underwriting income of $0.3 million, compared to net earned premiums of $24.9 million and underwriting income of $2.8 million during the same period in 2001. For the fourth quarter, Argonaut’s Specialty Commercial Lines reported a 99.0 percent combined ratio. For the year ended Dec. 31, 2002, these companies reported net earned premiums of $105.4 million and underwriting income of $0.3 million, compared to net earned premiums of $54.5 million and a loss of $1.7 million for the same period a year ago. For 2002, the combined ratio was 99.7 percent, down from 103 percent in 2001.

*Specialty Workers’ Compensation (Risk Management) – Net earned premiums were $28.3 million for the three months ended Dec. 31, 2002, resulting in a net underwriting loss of $15.0 million, compared to net earned premiums of $46.9 million and a net underwriting loss of $15.3 million for the same period in 2001. For the fourth quarter, the combined ratio in this segment was 153.0 percent, versus 132.6 percent a year earlier. For the year ended Dec. 31, 2002, Argonaut Insurance reported net earned premiums of $109.2 million and an underwriting loss of $37.4 million compared to net earned premiums of $126.5 million and a loss of $57.1 million for the same period a year ago. For 2002, the combined ratio was 134.2 percent, down from 145.1 percent in 2001.

The company reported that the business written by the Specialty Workers’ Compensation unit during the past two years is improving and reflects the company’s focus on underwriting discipline and risk management services.

The unit was negatively impacted in the fourth quarter and year by adverse development in one large construction account written in 2000. Argonaut Insurance Company will withdraw from certain product lines within Specialty Workers’ Compensation in a strategic effort to focus on those lines of business and market sectors that the company believes offer the greatest potential for profitable growth. To more accurately reflect the business going forward the company will begin referring to the “Specialty Workers’ Compensation” business segment as “Risk Management” during the first quarter of 2003.

*Public Entity – Trident Insurance Services underwrites Argonaut Group’s Public Entity segment. Trident’s net earned premiums for the fourth quarter were $4.8 million, versus $1.6 million for the same quarter in 2001. For the fourth quarter of 2002, Trident generated underwriting income of $0.2 million versus an underwriting loss of $0.1 million for the same period a year earlier. Trident’s combined ratio during the fourth quarter was 96.2 percent, down from 106.2 percent during the same period a year earlier. For the year ended Dec. 31, 2002, Trident reported net earned premiums of $11.5 million and an underwriting loss of $0.3 million compared to net earned premiums of $4.1 million and a loss of $0.1 million for the same period a year ago. For 2002, the combined ratio was 102.3 percent versus 101.0 percent in 2001.

*Run-Off – For the fourth quarter of 2002, the company’s Run-Off Operations incurred a pre-tax operating loss of $60.1 million. For the full year these operations incurred a pre-tax operating loss of $67.9 million. The loss for the year includes $59.8 million in reserve strengthening and a $7.2 million increase in allowance for doubtful accounts related to reinsurance balances recoverable in this segment.