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 September 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 October 21,1994 there were outstanding 25,388,994 shares
of common stock, par value $.10 per share, of the registrant.
Page 1 of 10 Pages
Exhibit Index on Page 10
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page
-----
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993..............4
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 1994 and 1993..........................5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1994 and 1993.........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Third Quarter Ended September 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
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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 September 30, 1994, and the
related consolidated statements of income for the three-month
and nine-month periods ended September 30, 1994 and 1993 and the
statements of cash flows for the nine-month periods ended
September 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 necessar-
ily 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
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
September 30, 1994 December 31, 1993
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities, available for
sale, at market (cost: $1,382.4) $1,391.4 $ -
Fixed maturities, at amortized cost - 1,441.3
(market: $1,534.5)
Equity securities, at market 155.3 108.7
(cost: 1994-$69.8; 1993-$29.0)
Short-term investments 2.3 14.4
-------- --------
1,549.0 1,564.4
Cash and cash equivalents 11.6 41.4
Accrued investment income 34.3 33.6
Receivables:
Reinsurance 220.5 224.3
Agents' balances 86.3 92.5
Accrued retrospective premiums 100.1 83.2
Cost in excess of net assets purchased 47.4 49.4
Unearned premiums on ceded reinsurance 3.3 3.2
Deferred Federal income taxes receivable 58.0 78.3
Other assets 12.7 12.4
-------- --------
$2,123.2 $2,182.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expense $1,189.2 $1,284.1
Unearned premiums 77.7 77.8
Accrued policyholder dividends 2.5 12.1
Income taxes payable 0.4 5.6
Other liabilities 82.1 73.5
-------- --------
1,351.9 1,453.1
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 25,467,994 and
25,674,010 shares issued and
outstanding at 9/30/94 and
12/31/93, respectively 2.5 2.6
Additional paid-in capital 102.7 103.3
Retained earnings 598.9 566.3
Net unreal. apprec. on securities 67.2 57.4
-------- --------
771.3 729.6
-------- --------
$2,123.2 $2,182.7
======== ========
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(unaudited)
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $70.4 $71.6 $207.7 $232.5
Net investment income 28.2 27.7 83.3 83.7
Gains on sales of investments 0.4 1.6 2.7 2.8
------ ------ ------ ------
Total Revenue 99.0 100.9 293.7 319.0
------ ------ ------ ------
Expenses:
Losses and loss adjustment expenses 49.5 52.1 149.0 169.8
Underwriting, acquisition,
and insurance expenses 18.1 18.7 54.9 59.3
Amortization of cost in excess of
net assets purchased 0.7 0.7 2.1 2.1
Policyholder dividends 1.7 2.1 4.8 5.6
------ ------ ------ ------
Total Expenses 70.0 73.6 210.8 236.8
------ ------ ------ ------
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: $0.81 $0.87 $2.33 $2.44
====== ====== ====== ======
Weighted Average Common Shares 25,609,335 25,644,842 25,655,154 25,623,822
========== ========== ========== ==========
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Nine Months
Ended September 30,
1994 1993
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $59.7 $62.4
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 4.0 6.1
Increase in accrued investment income (0.7) (1.6)
Decrease in reinsurance receivables 3.8 7.6
Decrease in agents' balances 6.2 23.9
Increase in accrued retrospective premiums (16.9) (18.8)
Decrease (increase) in ceded reinsurance
unearned premiums (0.1) 0.2
Decrease in deferred Federal income taxes 15.3 4.4
Decrease in reserves for losses and
loss adjustment expense (94.9) (88.4)
Decrease in unearned premiums (0.1) (8.6)
Increase (decrease) in accrued
policyholder dividends (9.6) 1.8
Increase (decrease) in income taxes payable (5.2) 1.0
Other, net 6.3 20.1
------ ------
(32.2) 10.1
------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 12.4 53.0
Maturities and mandatory calls
of fixed maturity investments 119.4 29.6
Purchases of fixed maturity investments (73.0) (97.8)
Purchases of equity securities (41.1) -
Decrease (increase) in short-term investments 12.1 0.3
Other, net 0.4 10.2
------ ------
30.2 (4.7)
------ ------
Cash flows from financing activities:
Repurchase of common stock (6.8) -
Payment of cash dividend (21.3) (18.2)
Exercise of stock options 0.3 0.8
------ ------
(27.8) (17.4)
------ ------
Decrease in cash and cash equivalents (29.8) (12.0)
Cash and cash equivalents, beginning of period 41.4 20.4
------ ------
Cash and cash equivalents, end of period $11.6 $8.4
====== ======
</TABLE>
Page 6
<PAGE>
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 $20.6 million for the quarter
ended September 30, 1994, compared with $21.5 million for the same period last
year. For the nine months ended September 30, 1994, consolidated operating
income after tax was $58.0 million, compared with $60.6 million for the same
period last year. Operating income excludes gains on the sale of investments.
The combined ratio increased to 105% for the current quarter versus 103% for
the similar period in 1993. For the nine months ended September 30, 1994, the
combined ratio remained the same as in the same period last year at 102%.
Earned premium declined from $232.5 million for the nine months ended
September 30, 1994, to $207.7 million for the same period of the current year.
For the quarter ended September 30, 1994, earned premium declined to $70.4
million from $71.6 million for the same period last year. These declines are
due to the following factors:
1. Policies written with high deductible limits on losses in our workers
compensation line of business are up compared to 1993;
2. Assumed reinsurance premiums from mandated assigned-risk-type pools are
down compared with 1993;
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 $49.5 million for the third
quarter of 1994 from $52.1 million for the same period in 1993. For the nine
months ended September 30, 1994, loss and loss adjustment expenses decreased
to $149.0 million from $169.8 million for the same period in 1993. The
Company's loss ratio was relatively consistent with 72% for the current
quarter and 73% for the nine months ended September 30, 1994, compared with
75% for both the third quarter of 1993 and for the nine months ended September
30, 1993.
Net investment income increased slightly to $28.2 million for the third
quarter of 1994 from $27.7 million for the third quarter 1993. For the nine
months ended September 30, 1994, net investment income was $83.3 million
compared with $83.7 million for the same period in 1993.
Underwriting expenses totalled $18.1 million for the third quarter of 1994,
compared with $18.7 million for the similar period in 1993. For the nine
months ended September 30, 1994, underwriting expenses were $54.9 million
compared with $59.3 million for the same period in 1993.
Page 7
<PAGE>
Policyholder dividend expense was $1.7 million in the third quarter of 1994
versus $2.1 million for the third quarter of 1993. For the nine months ended
September 30, 1994, policyholder dividend expense was $4.8 million compared
with $5.6 million for the same period in 1993.
Gains on sales of investments were $0.4 million for the current quarter, the
same as for the third quarter in 1993. For the nine months ended September
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
<PAGE>
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)
October 28, 1994
Page 9
<PAGE>
EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
- - -------- ----------------
27 Financial Data Schedule for 9/30/94 Form 10-Q.
Page 10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 1,391,400
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 155,300
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,549,000
<CASH> 11,600
<RECOVER-REINSURE> 220,500
<DEFERRED-ACQUISITION> 3,400
<TOTAL-ASSETS> 2,123,200
<POLICY-LOSSES> 1,189,200
<UNEARNED-PREMIUMS> 77,700
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,500
0
0
<OTHER-SE> 768,800
<TOTAL-LIABILITY-AND-EQUITY> 2,123,200
207,700
<INVESTMENT-INCOME> 83,300
<INVESTMENT-GAINS> 2,700
<OTHER-INCOME> 0
<BENEFITS> 149,000
<UNDERWRITING-AMORTIZATION> (1,500)
<UNDERWRITING-OTHER> 56,400
<INCOME-PRETAX> 82,900
<INCOME-TAX> 23,200
<INCOME-CONTINUING> 59,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,700
<EPS-PRIMARY> 2.33
<EPS-DILUTED> 2.33
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
