The last thing Mark Watson did during a recent interview was tohand over transcripts of two prior interviews he had done withanother publication since becoming CEO of Argonaut–one this yearand one in 2003. “The amazing thing about the two [transcripts] isthe consistency of the responses,” he pointed out.

There was little need to highlight the overlap, as references to“small and niche” focuses, diversified underwriting platforms, anundistracted business strategy bent on “just executing,” withprofessionals having specialized expertise in a variety of nichemarkets are obvious parallels between the two.

“The strategy we're executing today is the same strategy that we[the board] agreed [to] back in the fall of 1999,” Mr. Watson toldNU in an on-site interview in Chicago last month during theNational Association of Professional Surplus Lines Offices annualconference.

Still, there's a lot that's different about San Antonio-basedArgonaut Group since Mr. Watson joined the board in 1999. The mostvisible difference to attendees of the NAPSLO conference is thesize of the group's excess and surplus lines book.

In a report by A.M. Best on the E&S market distributed atthe conference, Argonaut ranked as the 13th-largest E&S group,with $520 million in direct written E&S (nonadmitted) premiumsfor 2005.

With Argonaut's E&S premiums jumping 23.7 percent over 2004,its growth rate was surpassed only by two competitors–11th-placeAxis (with a premium jump of 64.8 percent) and fourth-ranked ACEINA (jumping 28.9 percent).

Back in 1999, Argonaut–then a California workers' compensationspecialist–didn't even make Best's list of top 25 E&S carriers,before sliding onto the list two years later in the 25th-spot withnearly $110 million from its first specialty linesacquisition–Richmond, Va.-based Colony Insurance Company.

“Colony was a bootstrap company from the early 1990s,” recalledDale Pilkington, president of Colony Group. “We started out withtwo products,” he said, identifying those as small package contractbusiness and industrial casualty business.

Through a combination of product development and acquisition,“we went from two products to 10 existing divisions in 2006, andfrom $28 million to over $500 million in premiums.”

“If I take the same period of time and look forward, I can'tpredict what Colony will look like, but it will evolve and change,”Mr. Pilkington said, going on to explain how Colony works with 200wholesale broker partners to understand their business plans andbuild products to meet their needs.

With niches outside of the E&S market as well–in divisionscalled Select Markets (in which Argonaut offers specialty admittedproducts and services for selected industries through threecarriers) and Public Entities (providing insurance and riskmanagement services to small and midsized municipalities and publicschool districts)–Argonaut posted over $1 billion in gross writtenpremiums overall, and a combined ratio of 98.7 in 2005 (a far cryfrom the 130 posted just three years ago).

“Eighty-five percent of the business we write today is new tothe company over a five-year period,” Mr. Watson told shareholdersin May. “We are market leaders underwriting grocery stores, drycleaners, coal mines in Pennsylvania, and we have recognizedexpertise in many of the other specialty niches that we serve,” hesaid, highlighting the diversity of the group and three of itsadmitted specialty products.

“We are quickly on our way to becoming one of the top 10 E&Swriters,” he added.

E&S accounted for 59 percent of gross written premiums in2005, according to information in Argonaut's annual statement,while Select Markets contributed 24 percent, and Public Entitybusiness, 6 percent. (The remaining 11 percent came from an exiteddivision, which Argonaut sold in late 2005.)

With a wide range of diversified specialty products in its threedivisions, Barbara Bufkin, senior vice president of businessdevelopment for the group, contributes to Argonaut's growth storyby leading initiatives aimed at educating employees “throughout theenterprise” about the group's products and services.

“We made a concerted effort to do this through quarterlycommunication lunches and by putting together an informationtemplate that describes the products and services we offer.Literally every employee in the group received a document that weworked on to make it easy to read–a handy desk guide to be able totalk about what it is that we did across the business,” shesaid.

Ms. Bufkin and Mr. Pilkington also described businessdevelopment teams made up of individuals who don't underwritebusiness, but instead devote full attention to identifying newproduct initiatives.

Apprised of the E&S ranking in the A.M. Best report, Mr.Watson said he attributed a lot of Argonaut's growth to theintegration of acquisitions, some to hiring new talent, and much ofit to a simple formula–”keeping our heads down and executing” onthe vision that dates back to 1999.

A biography in Argonaut's marketing materials points out thatMr. Watson is an “avid climber and sailor,” and while the climberadmitted that he expected Argonaut to move up a few more spots onthe Best ranking, a sailor's motto–staying the course–seems moreconsistent with the vision he articulated during the interview.

A sailboat logo is front-and-center on all of the group's marketmaterials and external reports. Front-and-center on itsnavigational maps is a focus on underwriting, according to Mr.Watson, who said Argonaut did not have a “culture of underwriting”when he joined the board.

“When I showed up and asked about the target return-on-equity,the employees didn't know what I was talking about,” he said,adding that when he asked what the target combined ratio was, theresponse was 120.

“Where I came from, there were only two blanks on reports” usedby his prior company, Titan Holdings–a specialty insurer foundedand headed by his father–to record combined ratios. “You didn't getto go above 99,” he said, charting the course for Argonaut tofollow as well.

That course would mean an entirely new direction in terms ofproduct focus for the West Coast workers' comp writer, since 120was the industry average combined ratio for comp. But while Mr.Watson's compass was pointed toward specialty niches, the movewasn't a total transformation, he agreed.

“A lot of the expertise that we had institutionally at Argonaut,we still use today. Even then our business model was very clientfocused,” he said, noting that clients back then were insureds, andthe model focused on helping them keep losses from ever occurringthrough safety and loss control programs.

While the clients on the biggest segment of Argonaut's businesstoday are wholesale brokers, client-focused initiatives are still acornerstone of the enterprise.

“We ask, 'What can we do to help you grow your business better.'That happens every time we get together,” he said, noting that suchdiscussions were taking place at NAPSLO. Sometimes improvementstake the form of service–”how quickly are we able to turn aroundquotes or issue policies,” he said, noting that it also meansdeveloping new products. Wholesalers are “always looking forsomething to add to their portfolios to help their clients andagents.”

In the days when Argonaut was a West Coast comp writer, “all ourcompetitors were really big companies with a very different modelthat was much more price driven,” he said. So even though Argonautprovided a lot of service, it couldn't compete. “The buyer onlycared about price,” he said.

“Ours was a transformation away from large competitive accountsthat are labor intensive to smaller, less price-sensitive ones thatare less labor intensive in terms of servicing policyholders andmore focused on how good we are at underwriting,” he explained.

“The strategy was to get out of businesses where we couldn'thave a market leadership position and get into those businesseswhere we could–namely E&S and small niches,” he said, not onlyexplaining the transformation, but an eventual exit fromlarge-account risk management business in 2005, driven by arecognition that Argonaut was not a market leader in thesegment.

Press reports about Argonaut from the late 1990s suggest thatthe story of the company's transformation can be completelydescribed by a competitive California market, which prompted anailing workers' comp writer to refocus.

What those reports leave out are details about an aging board ofdirectors coming together with a young, multitalented professionalwhose broad experience in the insurance industry had nothing to dowith California comp.

“The story begins about halfway through my career evolution sofar,” Mr. Watson said, noting that just a little while beforecoming to Argonaut, he was with his dad's company, Titan, which hadtwo specialties–nonstandard auto and public entity.

Titan was sold to USF&G, which was then acquired by The St.Paul, he recalled. Deciding against a move to Minnesota, he left ayear later to form Aquila Capital Partners, a private equity firmfocused on what was then a booming technology industry.

Still, “I wanted to try to keep my hands in the business becauseI literally had grown up in it,” he said, referring to the factthat both his father and grandfather were in the business and thathis first years as a professional–working as a lawyer in New YorkCity–were involved in reinsurance. “I didn't want to let all thatgo to waste” and agreed to join the board of Argonaut Group in1999, he noted.

The board members then were all “captains of industry,”including executives from Teledyne (Argonaut started life as awholly-owned subsidiary of Teledyne), but they realized thatyounger blood was needed to secure the future.

Mr. Watson and Michael Gray–president of Gray Insurance Company,a Louisiana insurer focused on the oil and gas industries–joinedthe board at a time when it was focusing on the company's strategicdirection. “Given my background in small-account type business–andno comp–we floated the idea that maybe that was a more sustainablebusiness platform,” he said. The board agreed and convinced him torun the company.

Asked about milestones in the history of Argonaut, Mr. Watsonspoke about acquisitions such as Colony. He also spent time talkingabout the cleanup before acquisitions–a clean sweep of claims filesand change in underwriting philosophy.

“During my first week, it became clear to the management teamthat there was a problem the board didn't know anything about,” hesaid, referring to a gaping loss reserve hole. “I became CEO inJanuary 2000, just after we had posted our fourth-quarter 1999results, and over the course of that year we went back and reviewedevery single open file. Argonaut closed a number of offices and putup over $150 million in reserves, he said, characterizing that as“a fairly extraordinary number” at the time.

“We were really the first ones to acknowledge that we'd made amistake in the late 1990s,” he said.

“There is nothing better than learning through trial by fire,”he said, philosophically, recounting a battle with auditors (whowanted to issue an opinion qualified by a description of a changed“conservative” reserving philosophy), and questions from ratingagencies and competitors who were also skeptical of Argonaut'smotives in putting up a big number.

Going into 2001, the start-up of a public entity operation,Trident (headed by Michael Arledge, a former Titan colleague) andthe acquisition of Colony gave Argonaut leaders “a spiritual lift,”but Argonaut was back “in survival mode” in 2002, Mr. Watsonsaid.

Although a hard market and minimal damage from 9/11 should haveadvanced Argonaut on the road to recovery, the collapse of Enron,he said, had repercussions for many companies including Argonautthat had Arthur Andersen as their auditors.

In the post-Enron environment, new auditors, he added, “werevery nervous about companies that were financially challenged.”That meant “we had to sort through our legacy issues,” leading toanother huge charge–this time for asbestos.

“A number of people wanted to write us off, and the irony wasthat our company was in much better shape operationally,” hesaid–adding, however, that Argonaut did come up short oncapital.

Refueled by an investment from another specialtycompany–Houston-based HCC Holdings–Argonaut re-emerged in 2003 withits 2002 balance sheet issues behind it, he said, characterizingthose as the most challenging obstacles the management team everfaced.

According to Mr. Watson, integrating more than half-a-dozenacquisitions in recent years has been much less challenging.

Colony and its sister company, Rockwood, a coal-mine compspecialist–the first acquisitions–essentially served as theplatform for the new specialty model. “What we found in Colony wasthe culture I was looking for–underwriting profitability,collegiality, operational excellence and people that really got themarket,” he said.

Mr. Watson said that every acquisition since has been integratedinto either Colony or Select Markets, and has met three goals.“We've focused on how the business will further our strategicobjectives, whether it will be a cultural fit, and how will itaffect our market presence.”

Argonaut hasn't picked up additional systems in the process.“Technically, we just hired a whole lot of people and brought in alot of business at once,” he said. “So we've stretched our ITinfrastructure a little,” but eliminated process integrationissues.

Integration, he added, isn't just business process or IT, butculture. “When I talk about culture, I'm talking about people,” hecontinued. “If we don't feel the people will fit with our culture,there's no reason to buy the business.”

Mr. Watson also said that new hires go through an interviewprocess that is very long and rigorous. “At the end of the day, weknow who we're getting and they know what they're walkinginto.”

“Our biggest asset isn't in our investment portfolio; it's inour people,” he said.

Looking ahead, Mr. Watson said that while there will always beopportunities to add to Argonaut's E&S operations and its othertwo business segments, the platform will likely remain unchanged.“We call our segments E&S, Select Markets and Public Entity,but they could just as easily be called Wholesaler Nonadmitted,Retail Admitted and Agency.” (Trident, the public entity arm, is anMGA.) “When you break out the operations, I don't know that thereis a fourth leg to the stool,” he said.

The company will cautiously look to expand within existingsegments, he said–noting, for example, that Colony is experimentingwith taking on exposure in the energy sector via a quota-share dealwith a business partner.

“We'll continue to focus our resources on those parts of theeconomy that are growing fastest,” he added, noting that technologyand professional services are other areas of economic growth.