Argo Group has had a busy decade. The recent Bermuda convert has seen its premiums explode from $100m in 1998 to just shy of an estimated $2bn this year. Mairi Mallon reports.

Argo Group has been through a sea change. Not only has it evolved its business model, it has also redomiciled from the United States to Bermuda through a reverse merger with PXRE, changed its name from Argonaut to Argo, opened a reinsurance division and most recently fought off competition to snap up Lloyd’s of London’s Heritage Underwriters.

The deal to buy Heritage for £136m in cash was sealed last month, but the company’s chief executive Mark Watson told Global Reinsurance his company is still open to more mergers and acquisitions, despite difficult market conditions. “We are always in acquisition mode,” says Watson. “We are always looking for talented people and teams to join our organisation. Sometimes it is a big deal, sometimes it is a small deal that we never talk about. Usually it is a small deal.”

Argo’s management is keen for the world to know that it is not just another recently started up Bermuda reinsurer, but has a decades-old business and mainly writes insurance. “Argonaut was started back in the late 1940s in the Bay Area of California and over the next 20 or 30 years it branched out and became a national underwriter mainly focused on the construction industry,” says Watson. In fact, in the late 1960s, Argonaut was one of the innovators of a product called “wrap-up” which is now popular in the construction industry (Argo has now exited wrap-ups because it says the market has become too competitive).

Radical makeover

While Argo still insures some parts of the construction industry, the company’s profile has changed radically since the 1960s. The biggest changes have happened in the last decade. Back in 1998, during the most painful part of the last soft market, the company’s board decided it wanted to change the way the company wrote business to give it stability – no matter what kind of cycle the market was going through.

“The plan was to become a specialty underwriter, including having an excess and surplus lines component,” explains Watson. “Part of that was driven by the general market conditions at the time, which you may recall, we were at the bottom of a soft market of the last market cycle. The thought was that we needed to have more control over pricing and terms and conditions than some of the businesses we were writing.”

The company also assumed there might not be another robust marketplace. As a result it decided to focus on being in lines of business that can generate an underwriting profit in a soft market, and not in just a hard market. Watson was asked to come up with a plan. The board liked what he presented and he was made chief executive officer.

“We thought of it more as an evolution than a revolution,” says Watson of the plans. “And if you look at the steps that we have taken over the last eight years or so, they have been fairly methodical, fairly purposeful, but only a few of them have been relatively significant. Most of them have just been incremental changes over time. In any one year period it does not look that significant but it does in the aggregate.” He adds that the proof was the fact that 95% of the premium volume Argo has today is from start-ups or acquisitions – just 5% of the premium similar to what they were writing eight years ago. “I think that is the biggest tell-tale.”

Acquisition trail

As part of Argonaut’s strategic plan to add excess and surplus lines to its book of business, it bought Colony in 2001, and has kept on adding small and large companies to build up its retail specialty business. (In 2002 Argonaut completed the acquisition of the renewal rights to another excess and surplus lines company, Fulcrum Insurance Company, then in 2005, Argonaut bought the renewal rights acquisition of the Interstate Insurance Group’s Transportation and Multi-line business segments).

“Pretty quickly after we put the plan in place, we acquired Colony, and that was a big change,” says Watson. “We started Trident, our public entity operation, in 2000 and it has acquired two of its competitors since then. The combination of those acquisitions, plus some organic growth, have put us in number two position in terms of market leadership for small to medium-sized public entities. Our main competitors today are Markel and Berkley.”

When Argo acquired Colony in 2001 it had completed its first year, writing $100m worth of premium. Colony now writes over $600m in premium and Argo’s total excess and surplus lines in the US are now over $700m. Out of the original plan the company has grown beyond recognition through a large volume of M&As as well as organic growth and now the US segment of the company is mainly a specialty underwriter with a large excess and surplus lines programme.

“Over the last eight or nine years, the business plan we put in place in 1999 has not changed,” says Watson. “We have tweaked it a bit as the market conditions have changed and as globalisation has really taken hold in our industry – but it is basically the same plan.

Not just another Bermuda reinsurer

The PXRE reverse merger last year allowed the company to reincorporate in Bermuda, giving it the same competitive edge Bermuda companies have over their US-domiciled rivals. Tax advantages were only one part of the equation. Other advantages include adding a third segment to the business - reinsurance - expanding the platform beyond the US, being close to business partners and deploying capital more efficiently. “It gives us more financial flexibility,” explains Watson.

Under the terms of the deal PXRE is legally deemed the acquirer of Argonaut, but on a general accounting principles basis, Argonaut bought PXRE. All the PXRE business was in run-off and what Argonaut acquired was the infrastructure, which allowed it to slot in a team to start up a reinsurance operation. Having Bermuda as a home meant the company had to change its name (there was already a financial services company based in Bermuda called Argonaut). The company settled for Argo, the name of the ship the Argonauts sailed in Jason and the Argonauts, and also because Argo was already being used as shorthand for the company.

Argo’s management is keen to differentiate themselves from other Bermuda reinsurers and not to be identified as “just another Bermuda reinsurance company”. Watson says, “90% plus of our business is insurance and the majority of that is in the United States, so we have a very different business model than almost all of the companies headquartered in Bermuda. We wanted to make sure that we did not get pigeonholed.”

“The reinsurance business model that most companies have here is what we refer to as event-driven. When things happen in the newspaper, they tend to draw up losses, and our business model is very different from that,” continues Watson. “Sure, we have exposure to events when they occur, but it is a lesser part of our business profile. So that means that at the end of a day our earnings stream is less volatile than most of the reinsurance companies here.”

On 6 April this year, Argo fought off the competition to buy Heritage and made a £136m cash offer. Under the deal, shareholders in Heritage will receive £1.54 a share after an already announced 6p final dividend, which was 15% above Heritage’s closing price of 133.5 pence. This valued Heritage at 1.8 times its 2007 tangible book value – a price that Watson does not think is too high. “Heritage brings more specialisation to us. Again Heritage is insurance focused, as we are, but it is focused more on the property side. Some of the specialty property lines that we have been doing, frankly, they do better than we do, so it was a good fit.”

The firm is “synchronising watches” with Heritage now that the deal had been sealed, but it intends to keep Heritage’s essence and character. Argo will do very little to touch its underwriting and claims operations, insists Watson, as this “is what makes them unique and good. We are always looking for underwriters that are better than we are to join our team and frankly that is what we picked up with Heritage,” he continues. “We have been trading in the London market for decades, and given the kind of convergence of the London market and the US market and the Bermuda market, it was really a natural fit.”

Heritage will not be the last company to be bought by Argo, and Watson says if it fits the plan, then they will buy it. “Actually, it is a pretty specific formula. At the end of the day if it does not contribute to the bottom line, either immediately or pretty quickly, then no mater how strategic the deal is, we will not do it.

“We are looking for opportunities to acquire talented people, expand distribution, add new products to our current distribution, increase our presence in a marketplace or eliminate a competitor. It is usually three or four things out of that list. What we have also found is that if we are successful at getting the right people, increasing our market presence and/or adding product or geography or distribution, then almost always it makes more economic sense.”

Mairi Mallon is a freelance journalist.

Mark Watson, president and CEO of Argo Group

Mark E Watson III is president and CEO of Argo Group International Holdings (Argo Group). Watson joined Argo Group’s predecessor company, Argonaut Group, in 1999 and has overseen the organisation’s development as a leading specialty underwriter. Prior to joining Argonaut, Watson was one of two founding partners of Aquila Capital Partners, a Texas-based venture capital firm focused on technology and life science related companies. Before founding Aquila, Watson was an executive vice president and member of the board of directors of Titan Holding, a NYSE listed property and casualty insurance group from 1992 until its acquisition in 1997 by USF&G Corporation. From 1989 to 1991 he was an associate attorney with Kroll & Tract, a New York law firm.