March 15, 2007 / 2:02 AM / 10 years ago

Argonaut moves into Bermuda by acquiring PXRE

NEW YORK (Reuters) - Specialty insurer Argonaut Group Inc. (AGII.O) said on Wednesday it would acquire PXRE Group PXT.N in a mostly stock deal to expand into the Bermuda reinsurance market.

The combined company, based in Bermuda and called Argo Group International Holdings Ltd., would have a combined market value of about $1.3 billion, according to Reuters calculations.

PXRE put itself up for sale after losses of $446.5 million from 2005 hurricanes Katrina, Rita and Wilma forced the reinsurer to terminate many of its contracts. It has since stopped selling new policies.

Argonaut Chief Executive Mark Watson said the group sees the Bermuda market as central to its growth plans and will form a new Bermuda reinsurer with starting capital of $200 million.

"Having a platform in Bermuda is going to be key to our progression," Watson told Reuters in an interview.

Bermuda has long attracted reinsurers with its relatively light regulatory regime. The island is home to about 1700 insurers with total capital in excess of $100 billion.

"We have observed over the last several years a convergence of both capital and insurance talent in Bermuda," Watson said.

Earlier this week, Lloyd's of London insurer LOL.UL Kiln Plc also said it plans a move to Bermuda.

Shareholders in San Antonio-based Argonaut will wind up with about 73 percent of Argo Group's common stock and PXRE's mostly private equity and hedge fund owners with about 27 percent.

"I would be surprised if either Argonaut or PXRE traded down (tomorrow) as this creates value at Argonaut, and PXRE is already traded at a discount," said Kenneth Billingsley, an analyst with BB&T Capital Markets.

VALUE OF DEAL

With PXRE, Argonaut acquires a remaining portfolio of policies, but Watson said the value in the deal was obtaining immediate access to specialist staff and infrastructure in Bermuda.

The combined Argo Group, with Watson as CEO and president, will become the Bermuda-based holding company for PXRE, the U.S. operations of Argonaut Group, which wrote $1.2 billion in 2006 gross policies, and the new reinsurer, named Peleus Reinsurance Ltd.

Credit rating firm Standard & Poor's, in a statement after Argonaut's announcement, revised its outlook on Argonaut to negative from stable.

S&P said it viewed access to the Bermuda reinsurance market and growth opportunities favorably but cited risk factors including class action lawsuits filed against PXRE after its losses.

In the deal. Argonaut valued PXRE at a discount to book value to "take into account the overhang from the lawsuits", Watson said. "We are pretty comfortable with that exposure."

Watson said a $50 million directors' and officers' insurance policy taken out by PXRE will remain in effect.

A $60 million dividend will be paid to Argonaut shareholders from cash on hand to offset possible tax liabilities from the transaction, the company said.

PXRE's primary business was to provide backup coverage to other property and casualty insurers, a particularly risky side of the business. Watson said Argo's new reinsurance venture, Peleus, will not sell this type of reinsurance.

Reinsurance currently accounts for about 8 percent of Argonaut's total net written premiums, and Peleus Re is likely to double that percentage, Watson said.

"We will be a specialty insurer with some reinsurance; we are not changing the profile of the (Argonaut) company."

The Bermuda operation will initially employ up to 30, the majority of whom already work for PXRE. PXRE CEO Jeffrey Radke will resign once the merger closes, Watson said.

PXRE on Wednesday reported a fourth-quarter loss of $19.7 million.

The deal, subject to shareholder and regulatory approval, is expected to close by the end of the third quarter.

Additional reporting by Ed Leefeldt and Deena Beasley

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