In a report by A.M. Best on the E&S market distributed at the conference, Argonaut ranked as the 13th-largest E&S group, with $520 million in direct written E&S (nonadmitted) premiums for 2005.

With Argonaut's E&S premiums jumping 23.7 percent over 2004, its growth rate was surpassed only by two competitors–11th-place Axis (with a premium jump of 64.8 percent) and fourth-ranked ACE INA (jumping 28.9 percent).

Back in 1999, Argonaut–then a California workers' compensation specialist–didn't even make Best's list of top 25 E&S carriers, before sliding onto the list two years later in the 25th-spot with nearly $110 million from its first specialty lines acquisition–Richmond, Va.-based Colony Insurance Company.

“Colony was a bootstrap company from the early 1990s,” recalled Dale Pilkington, president of Colony Group. “We started out with two products,” he said, identifying those as small package contract business and industrial casualty business.

Through a combination of product development and acquisition, “we went from two products to 10 existing divisions in 2006, and from $28 million to over $500 million in premiums.”

“If I take the same period of time and look forward, I can't predict what Colony will look like, but it will evolve and change,” Mr. Pilkington said, going on to explain how Colony works with 200 wholesale broker partners to understand their business plans and build products to meet their needs.

With niches outside of the E&S market as well–in divisions called Select Markets (in which Argonaut offers specialty admitted products and services for selected industries through three carriers) and Public Entities (providing insurance and risk management services to small and midsized municipalities and public school districts)–Argonaut posted over $1 billion in gross written premiums overall, and a combined ratio of 98.7 in 2005 (a far cry from the 130 posted just three years ago).

“Eighty-five percent of the business we write today is new to the company over a five-year period,” Mr. Watson told shareholders in May. “We are market leaders underwriting grocery stores, dry cleaners, coal mines in Pennsylvania, and we have recognized expertise in many of the other specialty niches that we serve,” he said, highlighting the diversity of the group and three of its admitted specialty products.

“We are quickly on our way to becoming one of the top 10 E&S writers,” he added.

E&S accounted for 59 percent of gross written premiums in 2005, according to information in Argonaut's annual statement, while Select Markets contributed 24 percent, and Public Entity business, 6 percent. (The remaining 11 percent came from an exited division, which Argonaut sold in late 2005.)

With a wide range of diversified specialty products in its three divisions, Barbara Bufkin, senior vice president of business development for the group, contributes to Argonaut's growth story by leading initiatives aimed at educating employees “throughout the enterprise” about the group's products and services.

“We made a concerted effort to do this through quarterly communication lunches and by putting together an information template that describes the products and services we offer. Literally every employee in the group received a document that we worked on to make it easy to read–a handy desk guide to be able to talk about what it is that we did across the business,” she said.

Ms. Bufkin and Mr. Pilkington also described business development teams made up of individuals who don't underwrite business, but instead devote full attention to identifying new product initiatives.

Apprised of the E&S ranking in the A.M. Best report, Mr. Watson said he attributed a lot of Argonaut's growth to the integration of acquisitions, some to hiring new talent, and much of it to a simple formula–”keeping our heads down and executing” on the vision that dates back to 1999.

A biography in Argonaut's marketing materials points out that Mr. Watson is an “avid climber and sailor,” and while the climber admitted that he expected Argonaut to move up a few more spots on the Best ranking, a sailor's motto–staying the course–seems more consistent with the vision he articulated during the interview.

A sailboat logo is front-and-center on all of the group's market materials and external reports. Front-and-center on its navigational maps is a focus on underwriting, according to Mr. Watson, who said Argonaut did not have a “culture of underwriting” when he joined the board.

“When I showed up and asked about the target return-on-equity, the employees didn't know what I was talking about,” he said, adding that when he asked what the target combined ratio was, the response was 120.

“Where I came from, there were only two blanks on reports” used by his prior company, Titan Holdings–a specialty insurer founded and headed by his father–to record combined ratios. “You didn't get to go above 99,” he said, charting the course for Argonaut to follow as well.

That course would mean an entirely new direction in terms of product focus for the West Coast workers' comp writer, since 120 was the industry average combined ratio for comp. But while Mr. Watson's compass was pointed toward specialty niches, the move wasn't a total transformation, he agreed.

“A lot of the expertise that we had institutionally at Argonaut, we still use today. Even then our business model was very client focused,” he said, noting that clients back then were insureds, and the model focused on helping them keep losses from ever occurring through safety and loss control programs.

While the clients on the biggest segment of Argonaut's business today are wholesale brokers, client-focused initiatives are still a cornerstone of the enterprise.

“We ask, 'What can we do to help you grow your business better.' That happens every time we get together,” he said, noting that such discussions were taking place at NAPSLO. Sometimes improvements take the form of service–”how quickly are we able to turn around quotes or issue policies,” he said, noting that it also means developing new products. Wholesalers are “always looking for something to add to their portfolios to help their clients and agents.”

In the days when Argonaut was a West Coast comp writer, “all our competitors were really big companies with a very different model that was much more price driven,” he said. So even though Argonaut provided a lot of service, it couldn't compete. “The buyer only cared about price,” he said.

“Ours was a transformation away from large competitive accounts that are labor intensive to smaller, less price-sensitive ones that are less labor intensive in terms of servicing policyholders and more focused on how good we are at underwriting,” he explained.

“The strategy was to get out of businesses where we couldn't have a market leadership position and get into those businesses where we could–namely E&S and small niches,” he said, not only explaining the transformation, but an eventual exit from large-account risk management business in 2005, driven by a recognition that Argonaut was not a market leader in the segment.

Press reports about Argonaut from the late 1990s suggest that the story of the company's transformation can be completely described by a competitive California market, which prompted an ailing workers' comp writer to refocus.

What those reports leave out are details about an aging board of directors coming together with a young, multitalented professional whose broad experience in the insurance industry had nothing to do with California comp.

“The story begins about halfway through my career evolution so far,” Mr. Watson said, noting that just a little while before coming to Argonaut, he was with his dad's company, Titan, which had two specialties–nonstandard auto and public entity.

Titan was sold to USF&G, which was then acquired by The St. Paul, he recalled. Deciding against a move to Minnesota, he left a year later to form Aquila Capital Partners, a private equity firm focused on what was then a booming technology industry.

Still, “I wanted to try to keep my hands in the business because I literally had grown up in it,” he said, referring to the fact that both his father and grandfather were in the business and that his first years as a professional–working as a lawyer in New York City–were involved in reinsurance. “I didn't want to let all that go to waste” and agreed to join the board of Argonaut Group in 1999, he noted.

The board members then were all “captains of industry,” including executives from Teledyne (Argonaut started life as a wholly-owned subsidiary of Teledyne), but they realized that younger blood was needed to secure the future.

Mr. Watson and Michael Gray–president of Gray Insurance Company, a Louisiana insurer focused on the oil and gas industries–joined the board at a time when it was focusing on the company's strategic direction. “Given my background in small-account type business–and no comp–we floated the idea that maybe that was a more sustainable business platform,” he said. The board agreed and convinced him to run the company.

Asked about milestones in the history of Argonaut, Mr. Watson spoke about acquisitions such as Colony. He also spent time talking about the cleanup before acquisitions–a clean sweep of claims files and change in underwriting philosophy.

“During my first week, it became clear to the management team that there was a problem the board didn't know anything about,” he said, referring to a gaping loss reserve hole. “I became CEO in January 2000, just after we had posted our fourth-quarter 1999 results, and over the course of that year we went back and reviewed every single open file. Argonaut closed a number of offices and put up over $150 million in reserves, he said, characterizing that as “a fairly extraordinary number” at the time.

“We were really the first ones to acknowledge that we'd made a mistake in the late 1990s,” he said.

“There is nothing better than learning through trial by fire,” he said, philosophically, recounting a battle with auditors (who wanted to issue an opinion qualified by a description of a changed “conservative” reserving philosophy), and questions from rating agencies and competitors who were also skeptical of Argonaut's motives in putting up a big number.

Going into 2001, the start-up of a public entity operation, Trident (headed by Michael Arledge, a former Titan colleague) and the acquisition of Colony gave Argonaut leaders “a spiritual lift,” but Argonaut was back “in survival mode” in 2002, Mr. Watson said.

Although a hard market and minimal damage from 9/11 should have advanced Argonaut on the road to recovery, the collapse of Enron, he said, had repercussions for many companies including Argonaut that had Arthur Andersen as their auditors.

In the post-Enron environment, new auditors, he added, “were very nervous about companies that were financially challenged.” That meant “we had to sort through our legacy issues,” leading to another huge charge–this time for asbestos.

“A number of people wanted to write us off, and the irony was that our company was in much better shape operationally,” he said–adding, however, that Argonaut did come up short on capital.

Refueled by an investment from another specialty company–Houston-based HCC Holdings–Argonaut re-emerged in 2003 with its 2002 balance sheet issues behind it, he said, characterizing those as the most challenging obstacles the management team ever faced.

According to Mr. Watson, integrating more than half-a-dozen acquisitions in recent years has been much less challenging.

Colony and its sister company, Rockwood, a coal-mine comp specialist–the first acquisitions–essentially served as the platform for the new specialty model. “What we found in Colony was the culture I was looking for–underwriting profitability, collegiality, operational excellence and people that really got the market,” he said.

Mr. Watson said that every acquisition since has been integrated into either Colony or Select Markets, and has met three goals. “We've focused on how the business will further our strategic objectives, whether it will be a cultural fit, and how will it affect our market presence.”

Argonaut hasn't picked up additional systems in the process. “Technically, we just hired a whole lot of people and brought in a lot of business at once,” he said. “So we've stretched our IT infrastructure a little,” but eliminated process integration issues.

Integration, he added, isn't just business process or IT, but culture. “When I talk about culture, I'm talking about people,” he continued. “If we don't feel the people will fit with our culture, there's no reason to buy the business.”

Mr. Watson also said that new hires go through an interview process that is very long and rigorous. “At the end of the day, we know who we're getting and they know what they're walking into.”

“Our biggest asset isn't in our investment portfolio; it's in our people,” he said.

Looking ahead, Mr. Watson said that while there will always be opportunities to add to Argonaut's E&S operations and its other two business segments, the platform will likely remain unchanged. “We call our segments E&S, Select Markets and Public Entity, but they could just as easily be called Wholesaler Nonadmitted, Retail Admitted and Agency.” (Trident, the public entity arm, is an MGA.) “When you break out the operations, I don't know that there is a fourth leg to the stool,” he said.

The company will cautiously look to expand within existing segments, he said–noting, for example, that Colony is experimenting with taking on exposure in the energy sector via a quota-share deal with a business partner.

“We'll continue to focus our resources on those parts of the economy that are growing fastest,” he added, noting that technology and professional services are other areas of economic growth.