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, 1995
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 31, 1995 there were outstanding 24,176,045 shares of
common stock, par value $.10 per share, of the registrant.
<PAGE>
ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1995 and December 31, 1994..............4
Consolidated Statements of Income
Three and Six Months Ended
June 30, 1995 and 1994......................5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1995
and 1994......................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Second Quarter Ended June 30, 1995
and 1994.........................................7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.................8
Signatures................................................9
Exhibit Index............................................10
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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 June 30, 1995, and the
related consolidated statements of income for the three-month and
six-month periods ended June 30, 1995 and 1994 and the statements
of cash flows for the six-month periods ended June 30, 1995 and
1994 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.
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.
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
June 30, 1995 December 31, 1994
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities,
available for sale, at market $1,247.7 $1,270.7
(cost: 1995-$1220.2; 1994-$1,289.5)
Equity securities,
available for sale, at market 245.9 183.9
(cost: 1995-$140.3; 1994-$101.5)
Short-term investments 6.3 35.2
Securities in transit 0.8 (5.0)
-------- --------
1,500.7 1,484.8
Cash and cash equivalents 5.5 29.2
Accrued investment income 27.6 29.6
Receivables:
Reinsurance 223.3 235.4
Agents' balances 61.2 75.1
Accrued retrospective premiums 109.4 110.0
Cost in excess of net assets purchased 45.3 46.4
Unearned premiums on ceded reinsurance 5.9 3.4
Deferred Federal income taxes receivable 37.1 66.0
Other assets 12.2 13.5
------- --------
$2,028.2 $2,093.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expenses $1,138.2 $1,196.3
Unearned premiums 40.9 73.5
Accrued policyholder dividends (3.0) 0.3
Income taxes payable (receivable) (0.9) (2.1)
Other liabilities 73.7 80.0
-------- --------
1,248.9 1,348.0
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 24,175,736 and
24,928,246 shares issued and
outstanding at 6/30/95 and
12/31/94, respectively 2.5 2.5
Additional paid-in capital 97.7 100.6
Retained earnings 589.7 595.5
Net unrealized appreciation
on securities 89.4 47.0
-------- --------
779.3 745.6
-------- --------
$2,028.2 $2,093.6
======== ========
</TABLE>
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<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,
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $54.7 $70.1 $109.9 $137.3
Net investment income 26.0 27.7 51.9 55.1
Gains on sales of investments 0.5 0.8 .4 2.3
------ ------ ------ ------
Total Revenue 81.2 98.6 162.2 194.7
------ ------ ------ ------
Expenses:
Losses and loss adjustment expenses 41.3 47.5 89.8 99.5
Underwriting, acquisition,
and insurance expenses 15.5 18.9 31.4 36.8
Amortization of cost in excess of
net assets purchased 0.7 0.7 1.4 1.4
Policyholder dividends 4.3 1.5 3.4 3.1
------ ------ ------ ------
Total Expenses 61.8 68.6 126.0 140.8
------ ------ ------ ------
Income before income taxes 19.4 30.0 36.2 53.9
Provision for income taxes 3.7 8.5 6.7 15.0
------ ------ ------ ------
Net Income $15.7 $21.5 $29.5 $38.9
====== ====== ====== ======
Income Per Common Share: $0.65 $0.84 $1.21 $1.51
====== ====== ====== ======
Weighted Average Common Shares 24,195,093 25,680,566 24,429,032 25,678,442
========== ========== ========== ==========
</TABLE>
Page 5
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
unaudited)
For the Six Months
Ended June 30,
1995 1994
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $29.5 $38.9
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 5.8 1.9
Decrease (increase) in accrued
investment income 2.0 1.2
Decrease (increase) in reinsurance
receivables 12.1 3.8
Decrease in agents' balances 13.9 10.5
Increase in accrued retrospective premiums .6 (2.6)
Decrease (increase) in unearned premiums
on ceded reinsurance (2.5) (0.9)
Decrease in deferred Federal income taxes 1.8 13.7
Decrease in reserves for losses and
loss adjustment expense (58.1) (69.1)
Increase (decrease) in unearned premiums (32.6) 1.0
Increase (decrease) in accrued
policyholder dividends (3.3) (6.7)
Increase in income taxes payable
(receivable) 1.2 (1.2)
Other, net (5.5) 4.9
------ ------
(35.1) (14.6)
------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 57.0 10.6
Sales of equity securities 8.3 0.1
Maturities and mandatory calls
of fixed maturity investments 2.0 66.8
Purchases of fixed maturity investments 28.9 (75.4)
Purchases of equity securities 0.0 (6.5)
Decrease (increase) in short-term investments(40.8) 14.0
Other, net (6.0) (6.8)
------ ------
49.4 2.8
------ ------
Cash flows from financing activities:
Repurchase of common stock (23.0) 0.0
Payment of cash dividend (15.2) (13.9)
Exercise of stock options 0.2 0.1
------ ------
(38.0) (13.8)
------ ------
Decrease in cash and cash equivalents (23.7) (25.6)
Cash and cash equivalents, beginning of period 29.2 41.4
------ ------
Cash and cash equivalents, end of period $5.5 $15.8
====== ======
</TABLE>
Page 6
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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 $15.4 million for the quarter
ended June 30, 1995, compared with $21.0 million for the same period last
year. For the six months ended June 30, 1995, consolidated operating income
after tax was $29.2 million, compared with $37.4 million for the same period
last year. Operating income excludes gains on the sale of investments. The
combined ratio increased to 124% for the current quarter versus 101% for the
similar period in 1994. For the six months ended June 30, 1995, the combined
ratio increased to 121% from 102% for the same period in 1994.
Both written and earned premiums are down significantly from 1994. Net written
premiums were $82.4 million for the first half of 1995, compared with $134.5
million last year. Earned premiums were $109.9 million for the current six
months, compared with $137.3 million for the same period in 1994. This decline
is primarily due to the following factors:
1. In California, Workers Compensation premiums were subjected to rate
decreases of 29% during 1994, and have experienced further price declines
in 1995 under open rating. Also, Argonaut is writing fewer accounts in
California since severe price competition has resulted in many policies
being written at prices we feel are inadequate.
2. Loss experience on recent policy years for Workers Compensation continues
to develop more favorably than anticipated, increasing the amount of
premium returned to poliyholders under retrospectively rated policies.
3. An increasing number of Workers Compensation policies are being written
with large deductible provisions, reducing premium, but also reducing
exposure to losses.
Net income before tax for the current quarter includes a charge of $6.0 million
for adverse development of losses from general liability policies written in
prior years, compared with $3.0 million of similar development for general
liability in the second quarter of 1994. The second quarter of 1994 included
$4 million of favorable loss development from lines of business which are being
run off, and are no longer being written. There was no similar favorable loss
development for the runoff lines in the second quarter of 1995. The amount of
future additional favorable or unfavorable develpment in these runoff lines, if
any, cannot be anticipated.
Loss and loss adjustment expenses decreased to $41.3 million for the second
quarter of 1995 from $47.5 million for the same period in 1994. For the six
months ended June 30, 1995, loss and loss adjustment expenses decreased to
$89.8 million from $99.5 million for the same period in 1994. The Company's
loss ratio increased to 82% for the current quarter compared with 69% for the
second quarter of 1994. For the six months ended June 30, 1995, the loss ratio
Page 7
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increased to 84% compare with 74% for the first six months of 1994. The
increased loss ratio results primarily from the decline in premium and
strengthening of general liability loss reserves, both discussed above.
Net investment income decreased slightly to $26 million for the second
quarter of 1995 from $27.7 million for the second quarter 1994. For the six
months ended Juned 30, 1995, net investment income was $51.9 million compared
with $55.1 million for the same period in 1994.
Underwriting expenses totaled $15.5 million for the second quarter of
1995, compared with $18.9 million for the similar period in 1994. For the six
months ended June 30, 1995, underwriting expenses were $31.4 million compared
with $36.8 million for the same period in 1994. Decreased underwriting expenses
both for the quarter and year-to-date primarily reflect lower commissions and
premium taxes resulting from less premium.
Policyholder dividend expense was $4.3 million in the second quarter of 1995
versus $1.5 million for the second quarter of 1994. For the six months ended
June 30, 1995, policyholder dividend expense was $3.4 million compared with
$3.1 million for the same period in 1994.
Gains on sales of investments were $500,000 for the current quarter, compared
with a gain of $800,000 for the same period in last year. For the six months
ended June 30, 1995, gains on sales of investments were $400,000, compared with
$2.3 million for the same period last year. 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
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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 7, 1995
Page 9
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EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
-------- ----------------
27 Financial Data Schedule for June 30, 1995 Form 10-Q.
Page 10
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 1,247,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 245,900
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,500,700
<CASH> 5,500
<RECOVER-REINSURE> 223,300
<DEFERRED-ACQUISITION> 2,800
<TOTAL-ASSETS> 2,028,200
<POLICY-LOSSES> 1,138,200
<UNEARNED-PREMIUMS> 40,900
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
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<COMMON> 2,500
0
0
<OTHER-SE> 776,800
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109,900
<INVESTMENT-INCOME> 51,900
<INVESTMENT-GAINS> 2,300
<OTHER-INCOME> 0
<BENEFITS> 89,800
<UNDERWRITING-AMORTIZATION> 800
<UNDERWRITING-OTHER> 30,600
<INCOME-PRETAX> 36,200
<INCOME-TAX> 6,700
<INCOME-CONTINUING> 29,500
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 29,500
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
<RESERVE-OPEN> 1,196,300
<PROVISION-CURRENT> 89,800
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