S&P Takes Off CreditWatch and Affirms Argonaut Rtgs.

August 8, 2003

Standard & Poor’s Ratings Services has removed from CreditWatch and affirmed its ‘BB+’ counterparty credit rating on Argonaut Group Inc. and its ‘BBB+’ counterparty credit and financial strength ratings on Argonaut’s property/casualty insurance subsidiaries because of Argonaut’s substantially improved capital position since the beginning of the year and the expectation of further improvement in the second half of 2003. Standard & Poor’s also said that the outlook on all these companies is negative.

“Underwriting results, which are benefiting from the improved pricing environment, are expected to improve further in the second half of 2003 and into 2004,” said Standard & Poor’s credit analyst John Iten. “The resulting surplus growth will be required to support increased business volume, particularly at the Colony Group, which is benefiting from the very favorable pricing environment in the excess and surplus lines market. However, if other factors – such as additional reserve strengthening – offset the expected benefit to surplus from improved underwriting performance, the ratings would come under downward pressure, which is why the outlook is negative.”

Argonaut’s acquisition of the Colony Insurance Group, which writes surplus lines business, in mid-2001 has reportedly greatly reduced its historical dependence on workers’ compensation.

Surplus lines premiums constituted 41 percent of total gross written premium in 2002 and 49 percent in the first quarter of 2003. Argonaut expanded its surplus lines presence in April 2002 with the acquisition of the renewal rights of Fulcrum Insurance Co. from SCOR Group. Argonaut’s expansion into surplus lines appears to have been well timed, and most of the company’s future growth and earnings are expected to come from these operations. Workers’ compensation is a decreasing portion of Argonaut’s book of business. The company is implementing a restructuring plan to focus on upper-middle-market, loss-sensitive accounts and, effective March 31, 2003, it exited the wrap-up and small commercial businesses.

Argonaut posted a $21 million pretax loss for 2002 (GAAP) versus a $3 million profit in 2001. Last year’s results were hurt by reserve strengthening for asbestos of $59.8 million and a $70 million write-down of its deferred tax asset. Pretax income for the first half of 2003 was $67.0 million, up from $20.1 million in the prior-year period.

Net income rose to $53.3 million from $13.6 million in the same period a year earlier, including net realized gains of $44.1 million and $9.1 million in the respective years. Earnings in the first half of 2003 included a reserve strengthening charge for lines of business the company is exiting, restructuring charges, and an increase in allowance for doubtful reinsurance recoverables.

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