SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Period Ended June 30, 1994
Commission file number 0-14950
Argonaut Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4057601
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1800 Avenue of the Stars, Suite 1175, Los Angeles, California
(Address of principal executive offices)
90067-6045
(Zip Code)
310.553.0561
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
As of July 29,1994 there were outstanding 25,684,671 shares of
common stock, par value $.10 per share, of the registrant.
Page 1 of 10 Pages
Exhibit Index on Page 10
ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page
-----
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993..............4
Consolidated Statements of Income
Three and Six Months Ended
June 30, 1994 and 1993.......................5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1994
and 1993......................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Second Quarter Ended June 30, 1994
and 1993......................................7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.................8
Signatures................................................9
Exhibit Index............................................10
Page 2
PART I. FINANCIAL INFORMATION
Item 1.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of June 30, 1994, 1994, and the
related consolidated statements of income for the three-month and
six-month periods ended June 30, 1994 and 1993 and the statements of
cash flows for the six-month periods ended June 30, 1994 and 1993
are unaudited, and, in the opinion of management, include all
adjustments which are necessary for a fair presentation of such
statements. Such adjustments consist of only normal recurring
items. Interim results are not necessarily indicative of results
for other interim periods or for a full year.
In May 1993, the Financial Accounting Standards Board ("FASB")
issued a new standard for accounting for certain investments in
debt and equity securities, Financial Accounting Standard No. 115
("FAS 115"). The Company adopted FAS 115 as of January 1, 1994
and classified its entire fixed maturity portfolio as "Available
for Sale". The adoption of FAS 115 resulted in a cumulative
increase of $27.3 million, net of tax, in shareholders' equity, as
of January 1, 1994. The adoption of FAS 115 had no income statement
effect.
For a description of accounting policies, see notes to financial
statements in the Annual Report or the Form 10-K. Certain prior
year amounts have been reclassified to conform with the current
year's presentation.
Note 2 - Accounting and Reporting for Reinsurance Contracts
The Company has no concentrations of credit risk associated with
reinsurance receivables and prepaid reinsurance premiums.
Page 3
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
June 30, 1994 December 31, 1993
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities,
available for sale, at market $1,456.9 $ -
(cost: $1,438.5)
Fixed maturities, at amortized cost - 1,441.3
(market: $1,534.5)
Equity securities, at market 113.1 108.7
(cost: 1994-$36.8; 1993-$29.0)
Short-term investments 0.4 14.4
Securities in transit 5.5 -
-------- --------
1,575.9 1,564.4
Cash and cash equivalents 15.8 41.4
Accrued investment income 32.4 33.6
Receivables:
Reinsurance 220.5 224.3
Agents' balances 82.0 92.5
Accrued retrospective premiums 85.8 83.2
Cost in excess of net assets purchased 48.0 49.4
Unearned premiums on ceded reinsurance 4.1 3.2
Deferred Federal income taxes receivable 60.8 78.3
Other assets 13.4 12.4
------- --------
$2,138.7 $2,182.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expense $1,215.0 $1,284.1
Unearned premiums 78.8 77.8
Accrued policyholder dividends 5.4 12.1
Income taxes payable (5.6) 5.6
Other liabilities 79.9 73.5
-------- --------
1,373.5 1,453.1
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 25,681,914 and
25,674,010 shares issued and
outstanding at 6/30/94 and
12/31/93, respectively 2.6 2.6
Additional paid-in capital 103.4 103.3
Retained earnings 591.3 566.3
Net unrealized appreciation
on securities 67.9 57.4
-------- --------
765.2 729.6
-------- --------
$2,138.7 $2,182.7
======== ========
</TABLE>
Page 4
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(unaudited)
For the Quarter For the Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $70.1 $74.7 $137.3 $160.9
Net investment income 27.7 27.9 55.1 56.0
Gains on sales of investments 0.8 0.8 2.3 1.2
------ ------ ------ ------
Total Revenue 98.6 103.4 194.7 218.1
------ ------ ------ ------
Expenses:
Losses and loss adjustment expenses 47.5 52.0 99.5 117.7
Underwriting, acquisition,
and insurance expenses 18.9 21.9 36.8 40.6
Amortization of cost in excess of
net assets purchased 0.7 0.7 1.4 1.4
Policyholder dividends 1.5 1.7 3.1 3.5
------ ------ ------ ------
Total Expenses 68.6 86.9 140.8 163.2
------ ------ ------ ------
Income before income taxes 30.0 27.1 53.9 54.9
Provision for income taxes 8.5 7.2 15.0 14.9
------ ------ ------ ------
Net Income $21.5 $19.9 $38.9 $40.0
====== ====== ====== ======
Income Per Common Share: $0.84 $0.78 $1.51 $1.56
====== ====== ====== ======
Weighted Average Common Shares 25,680,566 25,619,802 25,678,442 25,613,138
========== ========== ========== ==========
</TABLE>
Page 5
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
unaudited)
For the Six Months
Ended June 30,
1994 1993
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $38.9 $40.0
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 1.9 4.7
Decrease (increase) in accrued
investment income 1.2 (0.5)
Decrease (increase) in reinsurance
receivables 3.8 15.3
Decrease (increase) in agents' balances 10.5 33.5
Increase in accrued retrospective premiums (2.6) (18.8)
Decrease (increase) in ceded reinsurance
unearned premiums (0.9) 0.6
Decrease in deferred Federal income taxes 13.7 7.4
Decrease in reserves for losses and
loss adjustment expense (69.1) (63.2)
Increase (decrease) in unearned premiums 1.0 (4.0)
Increase (decrease) in accrued
policyholder dividends (6.7) 0.1
Increase (decrease) in income taxes payable (11.2) 0.7
Other, net 4.9 16.2
------ ------
(14.6) 32.0
------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 10.6 12.1
Sales of equity securities 0.1 -
Maturities and mandatory calls
of fixed maturity investments 66.8 41.4
Purchases of fixed maturity investments (75.4) (74.1)
Purchases of equity securities (6.5) -
Decrease (increase) in short-term investments 14.0 (7.7)
Other, net (6.8) 4.6
------ ------
2.8 (23.7)
------ ------
Cash flows from financing activities:
Payment of cash dividend (13.9) (11.8)
Exercise of stock options 0.1 0.5
------ ------
(13.8) (11.3)
------ ------
Decrease in cash and cash equivalents (25.6) (3.0)
Cash and cash equivalents, beginning of period 41.4 20.4
------ ------
Cash and cash equivalents, end of period $15.8 $17.4
====== ======
</TABLE>
Page 6
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
The Company's operating income after tax was $21.0 million for the quarter
ended June 30, 1994, compared with $19.3 million for the same period last
year. For the six months ended June 30, 1994, consolidated operating income
after tax was $37.4 million, compared with $39.1 million for the same period
last year. Operating income excludes gains on the sale of investments. The
combined ratio increased to 101% for the current quarter versus 99% for the
similar period in 1993. For the six months ended June 30, 1994, the combined
ratio increased to 102% from 101% for the same period in 1993.
While direct premiums written are consistent with the prior year ($137.5
million for the six months ended June 30, 1994, versus $139.5 million for the
same period in 1993), earned premium declined from $160.9 million for the six
months ended June 30, 1993, to $137.3 million for the same period of the
current year. For the quarter ended June 30, 1994, earned premium declined to
$70.1 million from $74.7 million for the same period last year. These
declines are due to the following factors:
1. Assumed reinsurance premiums from mandated assigned-risk-type pools are
down compared with 1993;
2. Increases to additional premiums receivable under retrospectively rated
policies are down compared with 1993, based on anticipated improved loss
experience; and
3. Premiums ceded to reinsurers are up compared with 1993 from the purchase
of facultative reinsurance for liability exposure on large wrap-up
programs and lower retention levels at the Great Central subsidiary.
Loss and loss adjustment expenses decreased to $47.5 million for the second
quarter of 1994 from $52.0 million for the same period in 1993. For the six
months ended June 30, 1994, loss and loss adjustment expenses decreased to
$99.5 million from $117.7 million for the same period in 1993. The Company's
loss ratio was relatively consistent with 69% for the current quarter and 74%
for the six months ended June 30, 1994, compared with 71% for the second
quarter of 1993 and 75% for the six months ended June 30, 1993.
Net investment income decreased slightly to $27.7 million for the second
quarter of 1994 from $27.9 million for the second quarter 1993. For the six
months ended Juned 30, 1994, net investment income was $55.1 million compared
with $56.0 million for the same period in 1993.
Underwriting expenses totalled $18.9 million for the second quarter of
1994, compared with $21.9 million for the similar period in 1993. For the six
months ended June 30, 1994, underwriting expenses were $36.8 million compared
with $40.6 million for the same period in 1993.
Page 7
Policyholder dividend expense was $1.5 million in the second quarter of 1994
versus $1.7 million for the second quarter of 1993. For the six months ended
June 30, 1994, policyholder dividend expense was $3.1 million compared with
$3.5 million for the same period in 1993.
Gains on sales of investments were $0.8 million for the current quarter,
the same as for the second quarter in 1993. For the six months ended June
30, 1994, gains on sales of investments were $2.3 million compared with $1.2
million for the same period in 1993. We cannot anticipate when or if similar
gains may occur in the future.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company have been met by funds
provided from premiums and investment income as well as
maturities of invested assets. The primary use of funds was to
pay claims, policy benefits, operating expenses, and commissions
and to purchase new investments.
Management believes that the Company maintains sufficient
liquidity to pay claims and expenses. Management also believes
that the Company possesses adequate capital resources to cover
unforeseen events such as reinsurer insolvencies, inadequate
premium rates, or reserve deficiencies.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index
(b) During the quarter covered by this
report, the Registrant did not file any reports
on Form 8-K.
Page 8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Argonaut Group, Inc.
(Registrant)
/s/ Charles E. Rinsch
- ----------------------
Charles E. Rinsch
President (principal executive
officer)
/s/ James B Halliday
- ---------------------
James B Halliday
Vice President and Treasurer
(principal financial and
accounting officer)
August 12, 1994
Page 9
EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
- -------- ----------------
No exhibits were required to be filed by Item 601 of Regulation S-K.
Page 10
