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 March 31, 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 April 22,1994 there were outstanding 25,679,140 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
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Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 1994 and December 31, 1993.............4
Consolidated Statements of Income
Three Months Ended March 31, 1994
and 1993......................................5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1994
and 1993......................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
First Quarter Ended March 31, 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 March 31, 1994, and the
related consolidated statements of income for the three-month
periods ended March 31, 1994 and 1993 and the statements of cash
flows for the three-month periods ended March 31, 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.
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)
March 31, 1994 December 31, 1993
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities,
available for sale, at market $1,473.6 $ -
(cost: $1,431.6)
Fixed maturities, at amortized cost - 1,441.3
(market: $1,534.5)
Equity securities, at market 107.5 108.7
(cost: 1994-$29.0; 1993-$29.0)
Short-term investments 21.2 14.4
Securities in transit (6.0) -
-------- --------
1,596.3 1,564.4
Cash and cash equivalents 43.8 41.4
Accrued investment income 34.7 33.6
Receivables:
Reinsurance 229.8 224.3
Agents' balances 79.3 92.5
Accrued retrospective premiums 94.9 83.2
Cost in excess of net assets purchased 48.7 49.4
Unearned premiums on ceded reinsurance 4.8 3.2
Deferred Federal income taxes receivable 58.6 78.3
Other assets 12.9 12.4
------- --------
$2,203.8 $2,182.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expense $1,248.4 $1,284.1
Unearned premiums 90.0 77.8
Accrued policyholder dividends 8.6 12.1
Income taxes payable 6.3 5.6
Other liabilities 83.1 73.5
-------- --------
1,436.4 1,453.1
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 25,678,960 and
25,674,010 shares issued and
outstanding at 3/31/94 and
12/31/93, respectively 2.6 2.6
Additional paid-in capital 103.4 103.3
Retained earnings 577.3 566.3
Net unrealized appreciation
on securities 84.1 57.4
-------- --------
767.4 729.6
-------- --------
$2,203.8 $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 Ended March 31,
1994 1993
------ ------
<S> <C> <C>
Premiums and other revenue:
Premiums, net $67.2 $86.2
Net investment income 27.4 28.1
Gains on sales of investments 1.5 0.4
------ ------
Total Revenue 96.1 114.7
------ ------
Expenses:
Losses and loss adjustment expenses 52.0 65.7
Underwriting, acquisition,
and insurance expenses 17.9 18.7
Amortization of cost in excess of
net assets purchased 0.7 0.7
Policyholder dividends 1.6 1.8
------ ------
Total Expenses 72.2 86.9
------ ------
Income before income taxes 23.9 27.8
Provision for income taxes 6.5 7.7
------ ------
Net Income $17.4 $20.1
====== ======
Income Per Common Share: $0.68 $0.79
====== ======
Weighted Average Common Shares 25,676,295 25,606,400
========== ==========
</TABLE>
Page 5
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
unaudited)
For the Three Months
Ended March 31,
1994 1993
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $17.4 $20.1
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 1.2 2.3
Increase in accrued investment income (1.1) (2.4)
Decrease (increase) in reinsurance
receivables (5.5) 7.0
Decrease in agents' balances 13.2 31.2
Increase in accrued retrospective premiums (11.7) (5.6)
Decrease (increase) in ceded reinsurance
unearned premiums (1.6) 0.7
Decrease in deferred Federal income taxes 5.6 1.3
Decrease in reserves for losses and
loss adjustment expense (35.7) (26.8)
Increase (decrease) in unearned premiums 12.2 (7.7)
Increase (decrease) in accrued
policyholder dividends (3.5) 0.5
Increase in income taxes payable 0.7 6.2
Other, net 8.9 (3.9)
------ ------
0.1 22.9
------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 6.1 3.8
Maturities and mandatory calls
of fixed maturity investments 41.9 23.1
Purchases of fixed maturity investments (38.0) (34.5)
Increase in short-term investments (6.8) (7.2)
Other, net 5.4 (2.1)
------ ------
8.6 (16.9)
------ ------
Cash flows from financing activities:
Payment of cash dividend (6.4) (5.4)
Exercise of stock options 0.1 0.3
------ ------
(6.3) (5.1)
------ ------
Increase in cash and cash equivalents 2.4 0.9
Cash and cash equivalents, beginning of period 41.4 20.4
------ ------
Cash and cash equivalents, end of period $43.8 $21.3
====== ======
</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 $16.4 million for
the quarter ended March 31, 1994, compared with $19.8 million for
the same period last year. Operating income excludes gains on
the sale of investments. The combined ratio increased to 107%
for the current quarter versus 102% for the similar period in
1993.
While direct premiums written are consistent with the prior year
($68.3 million versus $67.7 million in 1993), earned premium
declined from $86.2 million in the first quarter of 1993, to
$67.2 million for the first quarter of the current year. This
decline is due to the following factors:
1. Assumed reinsurance premiums from mandated assigned-risk-type
pools are down $4 million compared with the first quarter of
1993;
2. Increases to additional premiums receivable under
retrospectively rated policies are down $8 million compared
with 1993, based on anticipated improved loss experience; and
3. Premiums ceded to reinsurers are up $3.5 million 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 Insurance subsidiary.
Net income before tax for the current quarter includes a charge
of $3.5 million to strengthen loss reserves related to general
liability policies written in prior years, compared with $1.5
million of similar reserve strengthening for general liability in
the first quarter of 1993. 1994 results also include $3 million
(pre-tax) of favorable loss development from lines of business
which are being run off and are no longer being written. The
first quarter of 1993 included $5 million of favorable loss
development for the runoff lines. The amount of future
additional favorable or unfavorable development in these runoff
lines, if any, cannot be anticipated.
Loss and loss adjustment expenses decreased to $52.0 million for
the first quarter of 1994 from $65.7 million for the same period
in 1993. The Company's loss ratio was relatively consistent with
79% for the current quarter compared with 78% for the first
quarter of 1993.
Net investment income decreased slightly to $27.4 million for the
first quarter of 1994 from $28.1 million for the first quarter in
1993.
Underwriting expenses totalled $17.9 million for the first
quarter of 1994, compared with $18.7 million for the similar
period in 1993.
Policyholder dividend expense was $1.6 million in the first
quarter of 1994 versus $1.8 million for the first quarter of
1993.
Page 7
Gains on sales of investments were $1.5 million for the current
quarter, compared with $0.4 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)
May 13, 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
