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Argonaut to gain Bermuda foothold through planned merger with PXRE

Argonaut to gain Bermuda foothold through planned merger with PXRE

HAMILTON, Bermuda—Argonaut Group Inc. last week announced plans to merge with embattled reinsurer PXRE Group Inc., giving the U.S. specialty insurer an operation in Bermuda.

Following completion of the deal, the combined entity will do business as Argo Group International Holdings Ltd. Argo will become the Bermuda holding company for Argonaut Group's U.S. operations; a new Bermuda reinsurer, Peleus Reinsurance Ltd.; and PXRE's existing insurance subsidiaries.

Argonaut Group President and Chief Executive Officer Mark E. Watson III will serve as president and CEO of the new company, which will be based in Hamilton, Bermuda. Barbara C. Bufkin will leave her post as Argonaut's senior vp-corporate business development to become Peleus Re's president.

PXRE President and CEO Jeffrey Radke will resign at the close of the transaction--expected in the third quarter--but will serve as a consultant for a period of time, said an Argonaut spokeswoman.

Under terms of the deal, which is subject to regulatory and shareholder approvals, each Argonaut share will be exchanged for 6.5 PXRE shares of common stock. Argonaut shareholders will also receive a one-time preclosing special cash dividend totaling about $60 million.

At the deal's conclusion, Argonaut shareholders will own about 73% of the company and PXRE shareholders, 27%. The combined company will have $1.66 billion in capital.

San Antonio-based Argonaut Group, a specialty insurer, reported $106 million in net income for 2006--a 31.7% increase--and $847 million in net premiums written, up 10.1%.

PXRE, whose primary focus has been property cat reinsurance and retrocessional coverage, reported profits of $28.5 million for 2006, including a $19.7million net loss for the fourth quarter. This compares with a $697.6 million net loss in 2005, when the reinsurer was hammered by hurricane losses.

PXRE, which is not writing new business, asked major rating agencies to withdraw their ratings last year after it faced downgrades following its 2005 loss.

Argonaut now operates in three areas, Mr. Watson said during a joint investor conference call to discuss the merger: excess and surplus lines--which accounts for about two-thirds of its business--a retailer-distributed admitted product segment, and a managing general agency that writes public entity business.

The transaction will boost the reinsurance portion of Argonaut's business mix to about 15% from the current 8%, he noted.

Peleus' focus will be on reinsuring medium and small commercial insurers on a pro rata and risk-excess basis; casualty reinsurance, initially a quota share of Argonaut's U.S. business; and property cat risk on a "controlled basis," according to the companies.

The deal "provides a very robust platform for us to grow, from both in Bermuda and outside of Bermuda, particularly the U.S." said Mr. Watson. "This gives us more flexibility on the underwriting side and the capital side," he said.

John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., an advisory firm that specializes in the insurance industry, said the deal is "on balance neutral" for current policyholders, although "there could be a benefit for new policyholders in the future as a result of the two companies being better positioned to offer their specialty insurance products."

Following the announcement, rating agency Standard & Poor's Corp. in New York revised its outlook on Argonaut Group to negative from stable, citing the property catastrophe reinsurance exposure it will assume from Peleus Re. It affirmed Argonaut's A- financial strength rating.

Oldwick, N.J.-based A.M. Best Co. Inc. kept Argonaut's A financial strength rating unchanged and assigned Peleus an A- rating.