Argonaut Group Releases Q4 2003 and Full-Year Results

San Antonio-based Argonaut Group, Inc. announced financial results for the three months and full year ended Dec. 31, 2003.
Highlights for the 2003 fourth quarter and full year include the following:

Argonaut Group’s continuing business segments during the fourth quarter produced a combined ratio of 96.7 percent, marking the second consecutive quarter that the continuing business segments have reported an underwriting profit;

Earned premiums for the fourth quarter and full year were up 28.4 percent and 48.7 percent, respectively, over the same periods in 2002;

Total revenue was $160.6 million during the fourth quarter of 2003, compared to $137.8 million for the same period in 2002;

Cash flow generated from operations during the fourth quarter and full year totaled $54.9 million and $184.7 million, respectively;

and Book value increased 16 percent to $17.65 per share at Dec. 31, 2003 from $15.17 per share at Dec. 31, 2002 on a fully diluted basis.

The company’s continuing business segments produced a GAAP combined ratio of 96.7 percent for the 2003 fourth quarter versus 110.2 percent for the same three-month period in 2002. All units of Argonaut Group demonstrated improvement in their combined ratios for the fourth quarter and full year versus 2002. For the year, the continuing business segments produced a GAAP combined ratio of 101.9 percent compared to 108.7 percent for the year ended December 31, 2002.

During the fourth quarter, Argonaut Group completed a follow-on public equity offering of 5.4 million shares of common stock, including exercise of the underwriters’ over-allotment option, yielding total net proceeds of $79.9 million after deducting the underwriting discounts and commissions and offering expenses. The Company will use the majority of these proceeds to support the capital levels and growth of its insurance subsidiaries.

Argonaut Group President and Chief Executive Officer Mark E. Watson III said, “We are very pleased with Argonaut Group’s progress and overall performance during 2003. Our continuing improvement can be attributed to our team’s dedication to business fundamentals, underwriting discipline and superior customer service. All of this positions our Company to continue focusing on the business we are underwriting today.”

Financial results

For the fourth quarter, Argonaut Group reported net income after tax of $31.0 million or $1.10 per diluted common share, compared to a net loss of $105.3 million or $4.88 per diluted common share during the same period in 2002. The current quarter includes $20.9 million of net income as a result of a reduction in the deferred tax asset valuation allowance. The prior year period included reserve strengthening of $52.8 million related to asbestos in the run-off lines segment combined with the establishment of a valuation allowance of $71.9 million related to the deferred tax asset.

Fourth quarter operating income, another meaningful measure of Argonaut’s performance, was $13.4 million, compared to an operating loss of $58.7 million for the same period in 2002. The Company’s continuing segments in the aggregate produced operating income of $17.8 million while the run-off segment incurred an operating loss of $2.5 million. Operating income includes corporate and other expenses, which during the fourth quarter totaled $1.9 million. The net of the segments’ operating income (loss) and corporate and other expenses produced operating income of $13.4 million for the quarter. Operating income (loss) differs from net income (loss) under accounting principles generally accepted in the United States (GAAP) in that operating income excludes a tax benefit of $16.2 million and net realized investment gains of $1.4 million for the quarter. Operating income (loss) does not replace net income (loss) as the GAAP measure of company results of operations.

Total revenue for the quarter was $160.6 million, compared to $137.8 million for the same period in 2002, or a 16.5 percent increase. Earned premium was $145.7 million compared to $113.5 million for the comparable quarter in 2002, or a 28.4 percent increase. Total revenue includes realized gains on the sales of investments, which were $1.4 million and $11.4 million, respectively, for the fourth quarters of 2003 and 2002.

The income tax benefit for the quarter was $16.2 million, which includes the $20.9 million reduction in the deferred tax asset valuation allowance. The company expects that it will ultimately realize the deferred tax asset in the future and regularly evaluates the deferred tax asset valuation allowance.

For the year ended Dec. 31, 2003, the company reported net income of $109.0 million or $4.40 per diluted common share, compared to a net loss of $87.0 million or $4.04 per diluted common share for the prior year. During 2003, total revenue was $730.0 million compared to $457.9 million for the year ended Dec. 31, 2002, or a 59.4 percent increase. Earned premium was $562.8 million compared to $378.4 million during 2002, or a 48.7 percent increase. Total revenue includes realized gains on sales of investments which were $113.6 million and $26.6 million, respectively, for the years ended 2003 and 2002.

Comprehensive income was $34.4 million for the fourth quarter of 2003 compared to a loss of $103.1 million for the same period of 2002. For the year ended Dec. 31, 2003, comprehensive income was $89.2 million compared to a net loss of $107.8 million in 2002. The improvement in both periods of 2003 was primarily due to higher net income. Net income for the year ended 2003 includes realized gains arising from sales of real estate assets of $57.7 million.

Segment results:u>

Specialty Excess & Surplus Lines (E&S) – For the fourth quarter of 2003, gross written premiums for the E&S segment were $99.9 million, generating operating income of $10.5 million, compared to gross written premiums of $84.2 million and operating income of $6.5 million for the same period in 2002. The GAAP combined ratio for the fourth quarter of 2003 was 91.6 percent versus 93.1 percent for the same period in 2002. For the year ended Dec. 31, 2003, gross written premiums for the E&S segment were $384.5 million, generating operating income of $41.1 million and a GAAP combined ratio of 91.1 percent. This compares favorably to the year ended December 31, 2002 with gross written premiums of $257.9 million, generating operating income of $18.5 million and a GAAP combined ratio of 94.7 percent.

Risk Management – For the fourth quarter of 2003, gross written premiums for the Risk Management segment were $46.1 million, generating operating income of $2.2 million, compared to gross written premiums of $40.2 million and an operating loss of $7.7 million for the same period in 2002. The GAAP combined ratio for the fourth quarter of 2003 was 116.1 percent versus 153.0 percent for the same period in 2002. For the year ended Dec. 31, 2003, gross written premiums for the Risk Management segment were $197.4 million, generating an operating loss of $11.7 million and a GAAP combined ratio of 131.8 percent. For the year ended Dec. 31, 2002, gross written premiums were $201.9 million, generating an operating loss of $6.0 million and a GAAP combined ratio of 134.2 percent. The decrease in operating income was primarily the result of reduced investment income.

Specialty Commercial Lines – For the fourth quarter of 2003, gross written premiums for the Specialty Commercial segment were $34.1 million, generating operating income of $4.3 million, compared to gross written premiums of $33.4 million and operating income of $3.0 million for the same period in 2002. The GAAP combined ratio for the fourth quarter of 2003 was 94.2 percent versus 99.0 percent for the same period in 2002. For the year ended Dec. 31, 2003, gross written premiums for the Specialty Commercial segment were $143.9 million, generating operating income of $10.2 million and a GAAP combined ratio of 99.5 percent. For the year ended Dec. 31, 2002, gross written premiums were $128.5 million, generating operating income of $10.5 million and a GAAP combined ratio of 99.7 percent.

Public Entity – For the fourth quarter of 2003, gross written premiums for the Public Entity segment were $14.6 million, generating operating income of $0.8 million, compared to gross written premiums of $15.0 million and operating income of $0.3 million for the same period in 2002. The GAAP combined ratio for the fourth quarter of 2003 was 95.5 percent versus 96.2 percent for the same period in 2002. For the year ended Dec. 31, 2003, gross written premiums for the Public Entity segment were $62.5 million, generating operating income of $2.5 million and a GAAP combined ratio of 94.9 percent. This compares favorably to the year ended Dec. 31, 2002 with gross written premiums of $33.8 million, generating operating income of $0.3 million, and a GAAP combined ratio of 102.3 percent.

Run-Off Lines – For the fourth quarter of 2003, the Run-Off segment incurred an operating loss of $2.5 million compared to an operating loss of $60.1 million for the same period in 2002. For the year ended Dec. 31, 2003, this segment incurred an operating loss of $12.7 million compared to an operating loss of $67.9 million for the same period in 2002. The 2003 fourth quarter and yearly operating losses were primarily a result of decreases to reinsurance balances recoverable.