Argonaut’s Earned Premiums Up, Combined Ratio Down for Q1 2004

San Antonio-based Argonaut Group Inc. announced financial results for the three months ended March 31, 2004, reporting that earned premium rose and its combined ratio decreased from the same quarter in 2003. Net income was down for the quarter compared to the previous year.

The company said earned premiums were a record $153.8 million, up 23.9 percent over the same three-month period in 2003. Argonaut Group’s GAAP combined ratio was 97.9 percent versus108.5 percent for the same three-month period in 2003.

During the first quarter of 2004, Argonaut reported net income after tax of $18.3 million or $0.60 per diluted common share on 30.7 million shares, compared to 2003 first quarter net income after tax of $33.6 million or $1.55 per diluted share on 21.6 million shares. The first quarter of 2003 included a $34.2 million gain net of tax or $1.58 per share from sales of select real estate holdings.

Book value on a fully diluted basis increased 4.6 percent to $18.46 per share at March 31, 2004 versus $17.65 per share at Dec. 31, 2003.

Commenting on the company’s financial results, Argonaut Group President and Chief Executive Officer Mark E. Watson III stated, “Each of our four business segments during the first quarter delivered improved operating results from a year ago as we continued our focus on underwriting profitability. The integration of our renewal rights acquisitions is proceeding as expected as we continue to add distribution channels to our core business and build market positions.”

First quarter 2004 operating income, which the company believes is another meaningful measure of Argonaut Group’s performance, was $15.8 million versus operating income of $0.7 million for the same period in 2003. Operating income includes corporate, interest and other expenses, which during the first quarter of 2004 totaled $4.0 million versus $1.8 million for the first quarter of 2003.

Operating income differs from net income under accounting principles generally accepted in the United States (GAAP) in that operating income excludes income tax expense and net realized investment gains. Operating income is a non-GAAP financial measure. Operating income for the quarter ended March 31, 2004 excludes net realized investment gains of $2.5 million and income tax expense of $0. Operating income for the quarter ended March 31, 2003 excludes net realized investment gains of $56.0 million and income tax expense of $23.1 million.

Total revenue for the quarter was $171.0 million versus $193.6 million for the same period a year ago. Earned premium in the first three months of 2004 rose 23.9 percent to $153.8 million compared to $124.1 million during the 2003 first quarter. Total revenue includes realized gains on sales of investments, which were $2.5 million and $56.0 million for the first quarters of 2004 and 2003, respectively.

For the three months ended March 31, 2004, the company recorded no tax expense as the deferred tax valuation allowance was reduced to the extent tax expense was generated. Tax expense for the three months ended March 31, 2003 was $23.1 million. At March 31, 2004, the net deferred tax asset, after considering the valuation allowance of approximately $43.1 million, was $27.1 million. The company expects it will ultimately realize the deferred tax asset in the future and regularly evaluates the deferred tax asset valuation allowance.

Comprehensive income for the first quarter of 2004 was $25.1 million compared to $28.8 million for the same three-month period in 2003. First quarter 2003 comprehensive income was higher due primarily to higher net income in that period, which included a $34.2 million after-tax gain from sales of real estate assets.

Asbestos litigation

Final orders were entered confirming the Chapter 11 Plan of Reorganization (the “Plan”) filed in U.S. Bankruptcy Court for the Northern District of California by MacArthur Company, Western MacArthur Company, and Western Asbestos Company (the “MacArthur Companies”). All pending settlements reached with insurers in litigation with the MacArthur Companies, including Argonaut Insurance Company, were confirmed, and all appeals and objections to previously issued orders have been withdrawn by agreement. Injunctions provided for in the Plan were also issued requiring all existing and future claims against the MacArthur Companies related to asbestos to be channeled solely to a trust established pursuant to Section 524(g) of the Bankruptcy Code.

Argonaut Insurance Company contributed $29.8 million into the bankruptcy trust and received a release from the MacArthur Companies as to any and all existing or future asbestos-related claims, including any claims for extra-contractual relief, arising directly or indirectly out of any alleged coverage under the nine Argonaut Insurance Company polices at issue. In addition, claimants seeking funds from the trust will be required to execute release and indemnity agreements in favor of Argonaut Insurance Company as a condition to receiving payment. Based on information currently available to the company, management’s best estimate of Argonaut Insurance Company’s asbestos and environmental reserves remains unchanged following the settlement.

Operating segments

For the first quarter of 2004, gross written premiums for the E&S segment increased 18 percent to $99.8 million, generating operating income of $11.9 million, compared to gross written premiums of $84.6 million and operating income of $7.9 million for the same period in 2003. The GAAP combined ratio for the first quarter of 2004 was 90.3 percent versus 92.6 percent for the same period in 2003.

For the first quarter of 2004, gross written premiums for the Risk Management segment were $43.1 million, generating operating income of $4.3 million, compared to gross written premiums of $43.6 million and an operating loss of $8.0 million for the same period in 2003. The GAAP combined ratio for the first quarter of 2004 was 107.8 percent versus 153.6 percent for the same period in 2003.

For the first quarter of 2004, gross written premiums for the Specialty Commercial segment increased 19 percent to $41.1 million, generating operating income of $2.7 million, compared to gross written premiums of $34.4 million and operating income of $2.3 million for the same period in 2003. The GAAP combined ratio for the first quarter of 2004 was 99.6 percent, which includes approximately $850,000 in start-up expenses associated with the Grocers renewal rights acquisition, versus 99.5 percent for the same period in 2003.

For the first quarter of 2004, gross written premiums for the Public Entity segment were $16.1 million, generating operating income of $0.9 million, compared to gross written premiums of $11.3 million and operating income of $0.3 million for the same period in 2003. The GAAP combined ratio for the first quarter of 2004 was 96.0 percent versus 98.8 percent for the same period in 2003.