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, 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 October 31, 1995 there were outstanding 24,138,936 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
September 30, 1995 and December 31, 1994..............4
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 1995 and 1994..........................5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995
and 1994.............................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Third Quarter Ended September 30, 1995
and 1994.............................................7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K....................9
Signatures..................................................10
Exhibit Index...............................................11
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, 1995, and the
related consolidated statements of income for the three-month and
nine-month periods ended September 30, 1995 and 1994 and the state-
ments of cash flows for the nine-month periods ended September 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.
Page 3
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
September 30, 1995 December 31, 1994
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities,
available for sale, at market $1,173.9 $1,270.7
(cost: 1995-$,148.6; 1994-$1,289.5)
Equity securities,
available for sale, at market 301.6 183.9
(cost: 1995-$186.4; 1994-$101.5)
Short-term investments 13.8 35.2
Securities in transit (0.3) (5.0)
-------- --------
1,489.0 1,484.8
Cash and cash equivalents 9.1 29.2
Accrued investment income 28.0 29.6
Receivables:
Reinsurance 201.3 235.4
Agents' balances 68.1 75.1
Accrued retrospective premiums 113.8 110.0
Cost in excess of net assets purchased 44.6 46.4
Unearned premiums on ceded reinsurance 4.8 3.4
Deferred Federal income taxes receivable 30.5 66.0
Other assets 12.6 13.5
------- --------
$2,001.8 $2,093.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expenses $1,094.9 $1,196.3
Unearned premiums 49.4 73.5
Accrued policyholder dividends (6.8) 0.3
Income taxes receivable (2.6) (2.1)
Other liabilities 82.5 80.0
-------- --------
1,217.4 1,348.0
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 24,157,880 and
24,928,246 shares issued and
outstanding at 9/30/95 and
12/31/94, respectively 2.5 2.5
Additional paid-in capital 97.7 100.6
Retained earnings 591.4 595.5
Net unrealized appreciation
on securities 92.8 47.0
-------- --------
784.4 745.6
-------- --------
$2,001.8 $2,093.6
======== ========
</TABLE>
Page 4
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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 Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $52.0 $70.4 $161.9 $207.7
Net investment income 24.6 28.2 76.5 83.3
Gains on sales of investments 0.7 0.4 1.1 2.7
------ ------ ------ ------
Total Revenue 77.3 99.0 239.5 293.7
------ ------ ------ ------
Expenses:
Losses and loss adjustment expenses 44.0 49.5 133.8 149.0
Underwriting, acquisition,
and insurance expenses 18.1 18.1 49.5 54.9
Amortization of cost in excess of
net assets purchased 0.7 0.7 2.1 2.1
Policyholder dividends 3.3 1.7 6.7 4.8
------ ------ ------ ------
Total Expenses 66.1 70.0 192.1 210.8
------ ------ ------ ------
Income before income taxes 11.2 29.0 47.4 82.9
Provision for income taxes 0.9 8.2 7.6 23.2
------ ------ ------ ------
Net Income $10.3 $20.8 $39.8 $59.7
====== ====== ====== ======
Income Per Common Share: $0.43 $0.81 $1.64 $2.33
====== ====== ====== ======
Weighted Average Common Shares 24,170,156 25,609,335 24,341,792 25,655,154
========== ========== ========== ==========
</TABLE>
Page 5
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
unaudited)
For the Nine Months
Ended September 30,
1995 1994
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $39.8 $59.7
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 8.8 4.0
Decrease (increase) in accrued
investment income 1.6 (0.7)
Decrease in reinsurance receivables 34.1 3.8
Decrease in agents' balances 7.0 6.2
Increase in accrued retrospective premiums (3.8) (16.9)
Increase in ceded reinsurance unearned
premiums (1.4) (0.1)
Decrease in deferred federal income taxes 4.4 15.3
Decrease in reserves for losses and
loss adjustment expenses (101.4) (94.9)
Decrease in unearned premiums (24.1) (0.1)
Decrease in accrued policyholder
dividends (7.1) (9.6)
Increase in income taxes payable (0.5) (5.2)
Other, net 1.0 6.3
------ ------
(41.6) (32.2)
------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 59.5 12.4
Sales of equity securities 2.0 0.0
Maturities and mandatory calls
of fixed maturity investments 78.0 119.4
Purchases of fixed maturity investments (1.0) (73.0)
Purchases of equity securities (86.9) (41.1)
Decrease in short-term investments 21.3 12.1
Other, net (4.8) 0.4
------ ------
68.1 30.2
------ ------
Cash flows from financing activities:
Repurchase of common stock (23.6) (6.8)
Payment of cash dividend (23.2) (21.3)
Exercise of stock options 0.2 0.3
------ ------
(46.6) (27.8)
------ ------
Decrease in cash and cash equivalents (20.1) (29.8)
Cash and cash equivalents, beginning of period 29.2 41.4
------ ------
Cash and cash equivalents, end of period $9.1 $11.6
====== ======
</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 $9.8 million for the quarter
ended September 30, 1995, compared with $20.6 million for the same period last
year. For the nine months ended September 30, 1995, consolidated operating
income after tax was $39.1 million, compared with $58.0 million for the nine
month period last year. Operating income excludes gains on the sale of invest-
ments.
Consolidated net income was $10.3 million ($0.43 per common share) on total
revenue of $77.3 million for the third quarter of 1995, compared with $20.8
million ($0.81 per common share) on total revenue of $99.0 million for the same
quarter last year. For the nine months ended September 30, 1995, consolidated
net income was $39.8 million ($1.64 per common share) on total revenue of
$239.5 million, compared with net income of $59.7 million ($2.33 per common
share) on total revenue of $293.7 million for the same period of 1994.
Total revenue includes gains on sales of investments of $700,000 for the cur-
rent quarter, compared with a gain of $400,000 for the same period in 1994.
For the nine months ended September 30, 1995, gains on sales of investments
$1.1 million, compared with $2.7 million for the same period last year. We
cannot anticipate when or if similar gains may occur in the future.
Consistent with the prior two quarters, premiums are down significantly from
1994. Net written premiums were $135.3 million for the first nine months of
1995, compared with $190.4 million last year. Earned premiums were $161.9 mil-
lion for the current nine months, compared with $207.7 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 willing to write fewer
accounts in California rather than participate in the current severe price
competition.
2. Loss experience on recent policy years for Workers Compensation continues
to develop more favorably than anticipated, increasing the amount of
premium returned to policyholders 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. The impact of large deductible programs on inforce
premiums is approximately $90 million at September 30, 1995, compared with
a $60 million impact at the same point in 1994.
Page 7
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Net income before tax for the current quarter includes a charge of $10.0 mil-
lion for adverse development of losses related primarily to residential const-
ruction defects insured under general liability policies written at Argonaut
Insurance Company prior to 1991. Similar adverse development of general
liability in the third quarter of 1994 was $4.0 million. The Company's claim
and actuarial staffs have completed a thorough evaluation of the residential
construction claims, and believe that, based on current information, reserves
are now adequate to cover any significant future development. Argonaut has not
provided general liability coverage for residential contractors since 1991.
The third quarter of 1994 also included $4.0 million of favorable loss develop-
ment 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 third quarter of 1995.
Loss and loss adjustment expenses decreased to $44.0 million for the third
quarter of 1995 from $49.5 million for the same period in 1994. For the nine
months ended September 30, 1995, loss and loss adjustment expenses decreased to
$133.8 million from $149.0 million for the same period in 1994. The Company's
loss ratio increased to 90% for the current quarter, compared with 72% for the
third quarter of 1994. For the nine months ended September 30, 1995, the loss
ratio increased to 86%, compared with 73% for the first nine months of 1994.
As discussed above the increased loss ratio results primarily from the decline
in premium, strengthening of general liability loss reserves, and no favorable
development in 1995 for the run-off lines.
Net investment income decreased to $24.6 million for the third quarter of 1995
from $28.2 million for the third quarter in 1994. For the nine months ended
September 30, 1995, net investment income was $76.5 million compared with $83.3
million for the same period in 1994.
Underwriting expenses totaled $18.1 million for both the third quarters of
1995 and 1994. For the nine months ended September 30, 1995, underwriting
were $49.5 million compared with $54.9 million for the same period in 1994.
Decreased underwriting expenses year-to-date primarily reflect lower commissions
and premium taxes resulting from less premium.
Policyholder dividend expense was $3.3 million in the third quarter of 1995
versus $1.7 million for the third quarter of 1994. For the nine months ended
September 30, 1995, policyholder dividend expense was $6.7 million compared
with $4.8 million for the same period in 1994.
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.
Page 8
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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 9
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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)
8-Nov-95
Page 10
<PAGE>
EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
- -------- ----------------
27 Financial Data Schedule for September 30, 1995 Form 10-Q.
Page 11
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<S> <C>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 1,173,900
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 301,600
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<TOTAL-INVEST> 1,489,000
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<TOTAL-ASSETS> 2,001,800
<POLICY-LOSSES> 1,094,900
<UNEARNED-PREMIUMS> 49,400
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0
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161,900
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