Argonaut Merges With PXRE Group

Specialty insurer Argonaut Group Inc. will merge with the storm-impacted PXRE Group Ltd. to form Argo Group. The deal is expected to close by the end of third-quarter 2007, the companies said.

Under terms of the agreement, Argo Group will become the Bermuda holding company for PXRE's existing insurance subsidiaries, Argonaut Group's U.S. operations and a newly formed Bermuda reinsurer named Peleus Reinsurance Ltd.

Jeffrey Radke, president and chief executive officer of PXRE, said the merger was the culmination of the “evaluation of numerous alternatives.” Mr. Radke will resign from PXRE at the close of the merger but remain a consultant to PXRE, it was explained during an analyst's conference call.

After being hit with more than $800 million in losses from the 2005 hurricane season, Bermuda-based PXRE saw its ratings downgraded and began to explore strategic alternatives, including run-off.

Peleus will be headed by Barbara C. Bufkin, who is currently senior vice president, corporate business development for Argonaut. Her appointment is subject to Bermuda regulatory approval.

Argo Group will trade on the NASDAQ stock exchange under Argonaut's existing ticker symbol AGII.

Argonaut, based in San Antonio, Texas, is a writer of specialty insurance products in the property-casualty market. PXRE provides reinsurance products and services worldwide. The new headquarters will be in Bermuda.

Mark E. Watson III, president and chief executive officer of Argonaut, will become the president and CEO of Argo Group, subject to Bermuda regulatory approval.

The board of directors will consist of the nine directors from Argonaut and four from PXRE. A chairman will be elected later.

“Argonaut Group's merger with PXRE is a natural progression in our long-term strategy as a growing specialty underwriter,” said Mr. Watson in a statement.

He added, “With combined assets exceeding $5 billion and shareholder's equity of approximately $1.3 billion, plus operations based in Bermuda, the United States and Europe, we believe Argo Group will be well positioned to develop and grow a sustainable and profitable global business platform.”

The deal, which Mr. Watson called a reverse merger, will involve an exchange of Argonaut shares into Argo and expected dividend payment of approximately $60 million. At the end of the deal 27 percent of PXRE stock holders will own Argo and the remaining 73 percent will be owned by Argonaut shareholders.

During the call, Mr. Watson said that while the new company will write more catastrophe than Argonaut has in the past, it would not get into writing retrocession “where [PXRE] got into trouble.” Reinsurance is expected to constitute 15 percent of the overall business.

The new company, Peleus, will begin writing new business within a couple of months, if all goes as planned, said Mr. Watson and Mr. Radke.

PXRE reported its end-of-year and fourth-quarter returns saying net income in the quarter rose 96 percent, or $427 million, from a loss of $446 million to a loss of $20 million. Earnings per share stood at negative 29 cents compared with negative $8.45 a share in 2005. Revenues declined in the fourth quarter by 99 percent, or $155 million, from $157 million to less than $2 million.

This result was on a 114 percent drop in net premium, or $149 million, from $131 million to negative $18 million.

For the year, net income increased 104 percent, or $726 million, going from a loss of $698 million to a gain of $29 million. Earnings per share improved from negative $21.65 to 37 cents a share. Revenues dropped 67 percent, or $282 million, from $420 million to $138 million. Net premium written for the year dropped 87 percent, from $353 million to $54 million.

PXRE's combined ratio for the year stood at 88.4 compared with 282.4 in 2005.

A.M. Best issued a statement saying that Argonaut's financial strength rating of “A (Excellent)” would remain unchanged with the merger. The outlook is stable. The new reinsurer, Peleus Re, received a financial strength rating of “A-minus (Excellent)” from Best.

Standard & Poor's revised Argonaut's outlook from stable to negative. S&P gives the company a financial strength rating of “A-minus.”