SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1994 Commission File No. 0-14950
ARGONAUT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4057601
(State or other jurisdiction of (IRS employer identification number)
incorporation of organization)
1800 Avenue of the Stars, Suite 1175, Los Angeles, California 90067-6045
(Address of principal executive offices) (Zip Code)
310.553.0561
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ X ]
As of February 28, 1995, registrant had 24,930,388 shares of Common Stock
outstanding, and the aggregate market value of the voting stock held by
nonaffiliates (based on the closing price on February 28, 1995 of such stock on
the National Association of Securities Dealers, Inc. Automated Quotation System)
was approximately $767 million.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II: Excerpts from Annual Report to Shareholders for the Year Ended
December 31, 1994
Part III: Excerpts from Proxy Statement for the 1995 Annual Meeting of
Shareholders
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Argonaut Group, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 1994
TABLE OF CONTENTS
Page
PART I
Item 1. Business 2
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners
and Management 12
Item 13. Certain Relationships and Related Transactions 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 12
Page 1
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PART I
Item 1. BUSINESS
INTRODUCTION
Argonaut Group, Inc. ("Argonaut Group") is a holding company whose subsidiaries
are primarily engaged in the selling, underwriting, and servicing of workers
compensation and other lines of property-casualty insurance. Workers
compensation accounted for 86% of premiums in 1994. See "Item 6. Selected
Financial Data" for certain financial information regarding industry segments in
which the Company operates. Argonaut Group was incorporated in Delaware and was
a wholly-owned subsidiary of Teledyne, Inc. ("Teledyne") until 1986, when
Teledyne distributed to its shareholders all of the outstanding shares of common
stock of Argonaut Group. Argonaut Group's executive offices are located at 1800
Avenue of the Stars, Suite 1175, Los Angeles, California 90067, telephone
310.553.0561. The term "the Company" refers to Argonaut Group and all its
subsidiaries.
Argonaut Insurance Company ("Argonaut Insurance"), Argonaut Group's larger
insurance subsidiary, was established in California in 1948. Workers
compensation is the primary line of insurance written by Argonaut Insurance and
its subsidiaries: Argonaut-Midwest Insurance Company, Argonaut-Northwest
Insurance Company, Argonaut-Southwest Insurance Company, and Georgia Insurance
Company. Argonaut Insurance and these subsidiaries also write complementary
lines of commercial insurance for their clients, primarily consisting of general
and automobile liability.
Great Central Insurance Company ("Great Central") is Argonaut Group's other
principal insurance subsidiary. Established in Illinois in 1948, Great Central
specializes in providing commercial multiple peril insurance for certain classes
of insureds. Argonaut Insurance is Great Central's immediate parent.
AGI Properties, Inc. ("AGI Properties"), a non-insurance company, owns and
leases certain real properties. AGI Properties was incorporated in California
in 1970. Argonaut Insurance is AGI Properties' immediate parent.
PRODUCTS
The Company has two primary product lines: workers compensation insurance and
other property-casualty insurance. Incorporated herein by reference is the
information appearing as "Note 9 - Business Segments" in the Notes to the
Consolidated Financial Statements of the Annual Report. See Exhibit Index.
WORKERS COMPENSATION
Workers compensation insurance is a statutory system which provides for
compensation of a policyholder's employees and their dependents for injuries
(other than self-inflicted wounds) arising out of or suffered in the course of
the employee's
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employment, even though the injuries may have resulted from the negligence or
wrongful conduct of the employee himself or any other person. Workers
compensation insurance is sold primarily by Argonaut Insurance. Premiums for
this line of business were $240.2 million, $280.0 million, and $289.6 million,
in 1994, 1993, and 1992, respectively.
OTHER PROPERTY-CASUALTY INSURANCE
This product includes general and automobile liability, commercial multiple-
peril, and various other insurance coverages.
Argonaut Insurance offers general and automobile liability and other insurance
to commercial clients in conjunction with workers compensation insurance.
Liability insurance compensates third parties for damages resulting from the
actions of the insured.
Commercial multiple-peril insurance, Great Central's primary product, is a
composite product designed for the small-to-medium sized business which needs
basic insurance coverage and simple insurance administration. Commercial
multiple-peril policies generally cover property, plant, inventory, general
liability, and associated coverages. Premiums for these product lines were
$39.5 million, $35.4 million, and $38.8 million, in 1994, 1993, and 1992,
respectively.
CEDED REINSURANCE
The Company's policy regarding reinsurance is based upon the capitalization of
the subsidiaries. The goal is to limit the exposure to surplus from losses
resulting from catastrophes and large or unusually hazardous risks.
As is the case with direct premiums written, premium revenue on reinsurance
contracts is recognized ratably over the period to which the premium relates.
Argonaut Insurance's limit of retention on its primary reinsurance treaty is $2
million. Great Central's limit of retention on its primary reinsurance treaty
is $300,000.
Incorporated herein by reference is the information appearing as "Note 3 -
Reinsurance" in the Notes to the Consolidated Financial Statements of the Annual
Report. See Exhibit Index.
COMPETITION
The property-casualty insurance industry is characterized by a large number of
competing companies and modest market shares by industry participants.
According to A.M. Best, a leading insurance industry rating and analysis firm,
there are about 2,300 property-casualty insurance companies operating in the
United States, with the 200 largest companies writing about 80% of the
industry's premiums.
The Company's principal competitors cannot be easily classified. The Company's
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principal lines of business are written by numerous insurance companies.
Competition for any one account may come from a very large national firm or a
smaller regional company selling either directly or through agents and brokers.
For the Company's principal line of business, workers compensation, additional
competition comes from state workers compensation funds.
REGULATION
On November 8, 1988, California voters passed an initiative known as Proposition
103. The Proposition, in part, provides for a roll-back of rates for certain
lines of business (excluding workers compensation) to 20% below rate levels of
November 8, 1987. The new California Insurance Commissioner has requested that
the Company meet with the Insurance Department to resolve what liability, if
any, it has under Proposition 103. While we have agreed to do so, management
believes that the Company is in compliance with such roll-back requirements, and
that any potential contingent liability would be immaterial. Therefore, there
is no provision in the accompanying financial statements for any liability or
loss related to Proposition 103.
Beginning in 1994, the Company's insurance subsidiaries are subject to the Risk-
Based Capital (RBC) for Insurers Model Act. The RBC calculation takes into
account: (1) asset risk, (2) credit risk, (3) underwriting risk, and (4) all
other relevant risks. The RBC for Insurers Model Act provides for four levels
of regulatory authority: (1) Company Action Level Event, (2) Regulatory Action
Level Event, (3) Authorized Control Level Event, and (4) Mandatory Control Level
Event. These four levels of authority provide for ever increasing regulatory
remedies for companies that fail to comply with the RBC for Insurers Model Act.
As of December 31, 1994, preliminary calculations show that the Company's
insurance subsidiaries RBC coverage far exceeds the minimum required.
The Company's insurance subsidiaries are members of the statutorily created
insolvency guarantee associations in all states where they are authorized to
transact business. These associations were formed for the purpose of paying
claims of insolvent companies. The Company is assessed its pro rata share of
such claims based upon its premium writings, subject to a maximum annual
assessment per line of insurance. Such costs can generally be recovered through
surcharges on future premiums. The Company does not believe that assessments on
current insolvencies will have a material effect on its financial condition or
results of operations.
The Company has no policyholder dividend restrictions.
Under the provisions of the California Insurance Code, there is a maximum amount
of shareholder dividends which can be paid without prior approval of the
Insurance Commissioner. Under these provisions, as of December 31, 1994,
Argonaut Insurance could pay to Argonaut Group a maximum dividend of $57.6
million without the Insurance Commissioner's approval.
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MARKETING
Argonaut Insurance and Great Central Insurance operate in substantially
different markets.
Argonaut Insurance is licensed to write insurance in 50 states and the District
of Columbia. Its products are distributed primarily through agents and brokers.
Argonaut Insurance's target markets are companies whose workers compensation
needs will result in annual premiums of between $250,000 and $5 million and
classes of insurance which require specialized knowledge to (a) underwrite
prudently and (b) control losses through cooperative efforts to enhance the
safety of the workplace. These classes include (a) contractors, (b)
wholesalers, retailers, light manufacturers and service firms, and (c) clients
who use self-insurance plans to meet some or all of their insurance needs.
Argonaut Insurance's primary line of business, workers compensation insurance,
accounts for 91% of its premiums (81% of total consolidated premiums). These
policies are written on a retrospectively rated basis. Argonaut Insurance's
risk regarding inadequate price levels is mitigated to a certain extent as the
insured will have to pay additional premiums (or will be refunded premiums)
based upon their actual loss experience.
Great Central is authorized to operate in 33 states and considers itself to be a
specialty company with a defined target market. Great Central's dominant
product is commercial multiple-peril. Great Central's policies are marketed
through agents.
Neither Argonaut Insurance nor Great Central market any of their policies
through managing general agents.
RUN OFF LINES
Incorporated herein by reference is the information appearing as "Note 12 - Run
Off Lines" in the Notes to the Consolidated Financial Statements of the Annual
Report. See Exhibit Index.
Loss ratios for the run off line of business are not meaningful as there are no
premiums associated with this line of business.
INVESTMENTS
The Company's investment portfolio continues to emphasize high quality fixed
income investments. As a percentage of the total investment portfolio, U.S.
Treasury securities continue to comprise the majority of the Company's holdings.
Obligations of states and political subdivisions have decreased from 1993 as a
result of maturities and sales. The proceeds from these maturities and sales
were re-invested in high quality non-redemptive preferred stocks. Corporate
securities continue to decrease as a result of maturities.
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The Company's investment policy is to invest only in investment-grade
securities. We do not invest in high-yield or so called "junk bonds". We have
no derivatives, speculative real estate, or mortgage obligations.
Incorporated herein by reference is the information appearing as "Note 2 -
Investments" and "Note 7 - Net Investment Income" in the Notes to the
Consolidated Financial Statements of the Annual Report. See Exhibit Index.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Incorporated herein by reference is the information appearing as "Note 4 -
Reserves for Losses and Loss Adjustment Expenses" in the Notes to the
Consolidated Financial Statements of the Annual Report. See Exhibit Index.
Reserves for environmental claims were $23.4 million and $32.8 million at
December 31, 1994 and 1993, respectively.
The following tables indicate the manner in which reserves for losses and loss
adjustment expenses at the end of a particular year change as time passes. The
first table presented is net of the effects of reinsurance. The second table
presented includes only amounts related to direct insurance. Reserves for
losses and loss adjustment expenses and cumulative paid amounts on direct
insurance are not available prior to 1989; therefore, the second table reflects
only the past 6 years development.
The first line shows the reserves as originally reported at the end of the
stated year. The second section shows the cumulative amounts paid as of the end
of successive years related to those reserves. The third section shows the
original recorded reserves as of the end of successive years adjusted to reflect
facts and circumstances later discovered. The last line, cumulative deficiency
or redundancy, compares the adjusted reserves to the reserves as originally
established and shows that the reserves as originally recorded were either
inadequate or excessive to cover the estimated cost of claims as of December 31,
1994.
Conditions and trends that have affected the development of these reserves in
the past will not necessarily recur in the future. It would not be appropriate
to use this cumulative history in the projection of future performance.
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<TABLE>
Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and LAE (a) $1,290.5 $1,311.9 $1,303.6 $1,309.6 $1,337.0 $1,348.5 $1,287.8 $1,201.9 $1,107.6 $ 1,011.4
Cumulative Amount
Paid as of: (b)
One year later 241.6 240.3 227.0 220.7 260.0 313.1 307.3 276.9 259.9
Two years later 431.9 413.1 382.3 384.4 464.9 537.5 525.8 489.2
Three years later 569.3 529.8 505.8 519.1 603.2 698.5 697.6
Four years later 660.1 626.3 605.0 613.0 704.4 835.7
Five years later 737.9 700.9 678.6 680.8 801.7
Six years later 798.0 765.2 734.8 752.2
Seven years later 859.3 811.2 793.1
Eight years later 905.8 859.7
Nine years later 948.6
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves Reestimated
as of:
One year later 1,346.9 1,338.0 1,316.0 1,289.1 1,317.2 1,358.3 1,285.2 1,197.1 1,086.8
Two years later 1,404.7 1,354.7 1,287.9 1,262.5 1,284.7 1,356.9 1,311.9 1,202.0
Three years later 1,412.1 1,317.9 1,277.1 1,195.5 1,261.3 1,381.9 1,315.9
Four years later 1,379.2 1,319.3 1,209.4 1,175.9 1,282.9 1,374.1
Five years later 1,379.0 1,250.6 1,196.8 1,176.4 1,257.5
Six years later 1,307.6 1,249.2 1,191.2 1,153.0
Seven years later 1,318.1 1,232.7 1,163.7
Eight years later 1,301.7 1,206.0
Nine years later 1,274.9
Cumulative (Deficiency)
Redundancy: $15.6 $105.9 $139.9 $156.6 $79.5 ($25.6) ($28.1) ($0.1) $20.8
(a) Reserves for Losses and LAE, net of reserves for reinsurance
(b) Cumulative amount paid, net of reinsurance payments
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</TABLE>
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<TABLE>
Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and LAE (a) NA NA NA NA $1,587.4 $1,561.8 $1,494.4 $1,390.9 $1,284.1 $1,196.3
Cumulative Amount
Paid as of: (b)
One year later NA NA NA NA 509.2 384.7 355.7 325.6 288.3
Two years later NA NA NA NA 770.5 656.2 621.6 564.4
Three years later NA NA NA NA 954.4 862.6 818.2
Four years later NA NA NA NA 1,097.1 1,023.5
Five years later NA NA NA NA 1,216.7
Six years later NA NA NA NA
Seven years later NA NA NA
Eight years later NA NA
Nine years later NA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves Reestimated
as of:
One year later NA NA NA NA 1,770.2 1,619.3 1,512.6 1,414.2 1,291.7
Two years later NA NA NA NA 1,764.0 1,645.8 1,570.2 1,448.8
Three years later NA NA NA NA 1,772.2 1,702.3 1,603.7
Four years later NA NA NA NA 1,829.1 1,719.7
Five years later NA NA NA NA 1,820.3
Six years later NA NA NA NA
Seven years later NA NA NA
Eight years later NA NA
Nine years later NA
Cumulative (Deficiency)
Redundancy: NA NA NA NA ($232.9) ($157.9) ($109.3) ($57.9) ($7.6)
(a) Reserves for Losses and LAE, excluding effects of reinsurance
(b) Cumulative amount paid, excluding effects of reinsurance
NA: Not available
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</TABLE>
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CAPITAL ADEQUACY
Several measures of capital adequacy are common in the property-casualty
industry. The two most often used are (a) premium-to-surplus (which measures
pressures on capital from inadequate pricing) and, (b) reserves-to-surplus
(which measures pressure on capital from inadequate loss and loss adjustment
expense reserves).
The following table shows the consolidated premium-to-surplus and reserves-to-
surplus ratios of the Company's insurance subsidiaries (on a statutory basis).
Year Ended December 31,
------------------------------
1994 1993 1992
----- ----- -----
Ratio of:
Premium-to-surplus 0.4 0.5 0.5
==== ==== ====
Reserves-to-surplus 1.6 1.9 2.3
==== ==== ====
The Company believes that its 1994 capital ratios are satisfactory.
RATINGS
The Company's insurance subsidiaries are rated annually by A.M. Best. A.M. Best
is generally considered to be the leading insurance rating agency, and its
ratings are used by insurance buyers, agents and brokers, and other insurance
companies as an indicator of financial strength and security, and are not
intended to reflect the quality of the rated company for investment purposes.
Argonaut Insurance and its pooled subsidiaries were awarded an "A+" (Superior)
rating in 1994 and 1993. An "A+" rating is the second highest rating A.M. Best
awards. Great Central is rated separately and was awarded an "A-" (Excellent)
rating in both 1994 and 1993. "A-" is the fourth highest of A.M. Best's
ratings.
During 1994, Standard & Poor's assigned its "AA+" rating to the claims-paying
ability of Argonaut Insurance and its pooled subsidiaries.
EMPLOYEES
At December 31, 1994, the Company employed 631 full-time employees. Of this
total, Argonaut Insurance employed 523 people (389 professional managerial and
134 clerical/operational). Great Central employed 94 people (56 professional
managerial and 38 clerical/operational). Argonaut Group employed 14 people (11
professional managerial and 3 clerical/operational). The Company is not a
party to any collective bargaining agreements.
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Item 2. PROPERTIES
Argonaut Insurance's headquarters are located in a facility which consists of an
office building on approximately two acres of land in Menlo Park, California.
Great Central's headquarters are located in a facility in Peoria, Illinois.
Argonaut Insurance and Great Central own the buildings in which their
headquarters are located. In addition, the Company has entered into short term
leases in conjunction with its operations at various locations throughout the
country. The Company believes that its properties are adequate for its present
needs.
Item 3 LEGAL PROCEEDINGS
The insurance subsidiaries of Argonaut Insurance are parties to various legal
proceedings which are considered routine and incidental to their business and
are not material to the Company's financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Argonaut Group's security holders during
the last quarter of its fiscal year ended December 31, 1994.
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market and is
included in the NASDAQ National Market System. The closing price on February
28, 1995 was $30.750 per share. The information on high and low common stock
prices set forth under the caption "Common Stock Market Prices" in the Annual
Report to Shareholders of Argonaut Group for the fiscal year ended December 31,
1994, is incorporated herein by reference. See Exhibit Index.
HOLDERS OF COMMON STOCK
The number of holders of record of the Company's Common Stock as of February 28,
1995 was 10,291.
DIVIDENDS
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources" in the Annual Report to Shareholders of Argonaut Group for
the fiscal year ended December 31, 1994 and in "Note 6 - Shareholders' Equity"
in the Notes to the Consolidated Financial Statements of the Annual Report, is
incorporated herein by reference. See Exhibit Index.
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Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data" in the
Annual Report to Shareholders of Argonaut Group for the fiscal year ended
December 31, 1994, is incorporated herein by reference. See Exhibit Index.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Annual Report
to Shareholders of Argonaut Group for the fiscal year ended December 31, 1994,
is incorporated herein by reference. See Exhibit Index.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants and consolidated financial
statements and related notes of Argonaut Group, Inc. and subsidiaries listed on
the index to financial statements set forth in Item 14(a)1 of this Form 10-K
Report are incorporated herein by reference to the Annual Report to Shareholders
of Argonaut Group for the fiscal year ended December 31, 1994.
The Company does not identify each asset with any one line of business and any
such allocation would be arbitrary.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information appearing under the captions
"Election of Directors", "Executive Officers", and "Security Ownership of
Principal Shareholders and Management" in the registrant's Proxy Statement to be
filed with the Securities and Exchange Commission relating to the registrant's
Annual Meeting of Shareholders to be held on April 25, 1995.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the captions
"Compensation of Executive Officers", "Indemnity Agreements", "Pension Plan",
and "Compensation of Directors" in the registrant's Proxy Statement to be filed
with the Securities and Exchange Commission relating to the registrant's Annual
Meeting of Shareholders to be held on April 25, 1995.
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the caption
"Security Ownership of Principal Shareholders and Management" in the
registrant's Proxy Statement to be filed with the Securities and Exchange
Commission relating to the registrant's Annual Meeting of Shareholders to be
held on April 25, 1995.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the caption
"Compensation and Stock Option Committee Interlocks and Insider Participation"
in the registrant's Proxy Statement to be filed with the Securities and Exchange
Commission relating to the registrant's Annual Meeting of Shareholders to be
held on April 25, 1995.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, and REPORTS ON FORM 8-K
(a)1. Financial Statements
Selected Financial Data
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Income
For the Years Ended December 31, 1994, 1993, and 1992
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1994, 1993, and 1992
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
Common Stock Market Prices (Unaudited)
Management's Discussion and Analysis of Results of Operations and
Financial Condition
(a)2. Financial Statement Schedules
Report of Independent Public Accountants on Schedules
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Schedule I - Condensed Financial Information of Registrant
December 31, 1994 and 1993
Schedule V - Supplementary Insurance Information
December 31, 1994, 1993, and 1992
All other schedules and notes specified under Regulation S-X are omitted because
they are either not applicable, not required, or the information called for
therein appears in response to the items of Form 10-K or in the financial
statements or notes thereto.
(a)3. Exhibits
The following exhibits are numbered in accordance with Item 601 of Regulation S-
K and, except as noted, are filed herewith.
2. Information Statement of Registrant (incorporated by reference to the
Exhibit 2 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission on
September 4, 1986).
3.1 Certificate of Incorporation of Registrant (incorporated by reference to
the Exhibit 3.1 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission on
September 4, 1986).
3.2 Bylaws of the Registrant (incorporated by reference to the Exhibit 3.2 to
the Registrant's Form 10 Registration Statement dated September 3, 1986,
filed with the Securities and Exchange Commission on September 4, 1986).
10.1 Argonaut Group, Inc. 1986 Stock Option Plan (incorporated by reference to
the Exhibit 10.1 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission on
September 4, 1986).
10.2 Argonaut Group, Inc. Retirement Plan (incorporated by reference to the
Exhibit 10.2 to the Registrant's Form 10 Registration Statement dated
September 3, 1986, filed with the Securities and Exchange Commission on
September 4, 1986).
10.3 Tax Agreement by and among Registrant and its subsidiaries and Teledyne,
Inc. (incorporated by reference to the Exhibit 10.3 to the Registrant's
Form 10 Registration Statement dated September 3, 1986, filed with the
Securities and Exchange Commission on September 4, 1986).
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10.4 1986 Stock Option Plan, as amended (incorporated by reference to the
Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on February 13, 1987).
10.5 401(k) Retirement Savings Plan (incorporated by reference to the Exhibit
10.4 to the Registrant's Form 10-K filed with the Securities and Exchange
Commission on February 28, 1989).
10.6 Employee Stock Investment Plan (incorporated by reference to the Exhibit
4.3 to the Registrant's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on October 10, 1989).
13. The following materials are excerpted from the Annual Report to
Shareholders of Argonaut Group, Inc. for the fiscal year ended December 31,
1994:
a) Selected Financial Data
b) Financial Statements
c) Common Stock Market Prices
d) Management's Discussion and Analysis of
Results of Operations and Financial Condition
21. Subsidiaries of Registrant (incorporated by reference to the Exhibit 21 to
the Registrant's Form 10 Registration Statement dated September 3, 1986,
filed with the Securities and Exchange Commission on September 4, 1986).
23. Consent of Independent Public Accountants
27. Financial Data Schedule for December 31, 1994 Form 10-K
28P. Combined Statutory Schedule P of Argonaut Insurance Company
and Great Central Insurance Company
(b) Reports on Form 8-K
There were no Reports filed on Form 8-K for the quarter ended December 31, 1994.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Charles E. Rinsch
--------------------------
Charles E. Rinsch
President
Date: March 17, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Charles E. Rinsch President, Chief Executive March 17, 1995
- ---------------------- Officer, and Director
Charles E. Rinsch
/s/ James B Halliday Vice President, Secretary, March 17, 1995
- ---------------------- and Treasurer (principal
James B Halliday financial and accounting
officer)
/s/ George A. Roberts Director March 17, 1995
- ----------------------
George A. Roberts
/s/ Henry E. Singleton Director March 17, 1995
- ----------------------
Henry E. Singleton
Page 15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholders of Argonaut Group, Inc.
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Argonaut Group, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated January 5, 1995. Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedules listed in Part IV, Item 14(a)(2) are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in our audit of
the basic consolidated financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California
January 5, 1995
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
BALANCE SHEET December 31,
1994 1993
------ ------
Assets
Short-term investments $ - $ 9.8
Cash & cash equivalents 0.6 4.7
Investment in subsidiary 609.0 556.0
Cost in excess of net assets purchased 46.6 49.4
Deferred Federal income taxes receivable 87.6 105.6
Due from/to subsidiaries (10.5) 3.7
Other assets 10.5 2.5
------ ------
$743.8 $731.7
====== ======
Liabilities & Shareholders' Equity
Income taxes payable (receivable) $ (1.8) $ (3.2)
Other liabilities - 5.3
Shareholders' equity 745.6 729.6
------ ------
$743.8 $731.7
====== ======
STATEMENT OF OPERATIONS For The Year Ended December 31,
1994 1993 1992
------ ------ ------
Revenues $ 3.2 $ 3.1 $ 3.2
Expenses:
Amortization of cost in excess
of net assets 2.8 2.8 2.8
Other expenses 4.1 7.7 3.2
------ ------ ------
Loss before tax and undistributed earnings (3.7) (7.4) (2.8)
Provision for income taxes 14.8 (0.8) 5.7
------ ------ ------
Net loss before equity in earnings
of subsidiary (18.5) (6.6) (8.5)
Equity in earnings of subsidiary 95.2 95.7 94.8
------ ------ ------
Income before cumulative effect of change
in accounting for income taxes 76.7 89.1 86.3
Cumulative effect of change in accounting
for income taxes - - 61.8
------ ------ ------
Net Income $ 76.7 $ 89.1 $148.1
====== ====== ======
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
STATEMENT OF CASH FLOWS For The Year Ended December 31,
1994 1993 1992
------ ------ ------
Cash flows from operating activities:
Net income $ 76.7 $ 89.1 $148.1
Adjustments to reconcile net income to
net cash provided by operations:
Cumulative effect of change in
accounting for income taxes - - (61.8)
Amortization 2.8 2.8 2.8
Earnings in subsidiary (95.2) (95.7) (94.8)
Dividend from subsidiary 31.6 31.5 31.5
Decrease in deferred Federal
income taxes receivable 18.0 7.7 5.7
Decrease (increase) in due from/
to subsidiaries 14.2 (2.5) (0.2)
Decrease in income taxes payable 1.4 (8.1) (0.8)
Other, net (13.1) 6.9 (0.2)
------ ------ ------
36.4 31.7 30.3
------ ------ ------
Cash flows from investing activities:
Decrease (increase) in short-term
investments 9.8 (9.8) -
------ ------ ------
9.8 (9.8) -
------ ------ ------
Cash flows from financing activities:
Repurchase of common stock (21.9) - (24.5)
Payment of cash dividend (28.7) (24.6) (20.8)
Exercise of stock options 0.3 1.1 0.5
------ ------ ------
(50.3) (23.5) (44.8)
------ ------ ------
Increase (decrease) in cash &
cash equivalents (4.1) (1.6) (14.5)
Cash & cash equivalents, beginning of period 4.7 6.3 20.8
------ ------ ------
Cash & cash equivalents, end of period $ 0.6 $ 4.7 $ 6.3
====== ====== ======
<PAGE>
<TABLE>
ARGONAUT GROUP, INC.
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 1994, 1993, and 1992
($ in millions)
<CAPTION>
Net Amortization
Future Other Premium Invest. Loss (Defer'l) Other Premiums
DPAC Benefits UPR Pay. Revenue Income & LAE DPAC Insur Exp Written
Segment (a) (b) (c) (d) (e) (f)(1) (g) (h) (i)(2) (j)
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Workers Comp 2.6 822.9 54.3 - 240.2 61.4 167.9 (2.3) 62.4 213.1
All Other 1.0 373.4 19.2 - 39.5 27.8 39.3 0.5 11.7 35.8
Unallocable - - - - 21.5 - - - - -
--- ------- ---- --- ----- ----- ----- ----- ---- -----
3.6 1,196.3 73.5 - 279.7 110.7 207.2 (1.8) 74.1 248.9
=== ======= ==== === ===== ===== ===== ===== ==== =====
Year Ended December 31, 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Workers Comp 0.3 856.1 57.9 - 280.0 64.6 212.4 - 68.4 247.8
All Other 1.5 428.0 19.9 - 35.4 32.3 16.8 0.1 13.2 36.5
Unallocable - - - - - 21.2 - - - -
--- ------- ---- --- ----- ----- ----- ----- ---- -----
1.8 1,284.1 77.8 - 315.4 118.1 229.2 0.1 81.6 284.3
=== ======= ==== === ===== ===== ===== ===== ==== =====
Year Ended December 31, 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Workers Comp 0.3 894.7 56.5 - 289.6 61.7 259.6 (0.1) 55.9 276.6
All Other 1.6 496.2 22.1 - 38.8 32.9 15.7 - 16.1 46.0
Unallocable - - - - - 28.6 - - - -
--- ------- ---- --- ----- ----- ------ ----- ---- -----
1.9 1,390.9 78.6 - 328.4 123.2 275.3 (0.1) 72.0 322.6
=== ======= ==== === ===== ===== ===== ===== ==== =====
(a) Deferred Policy Acquisition Costs
(b) Future Policy Benefits, Claims, and Claim Adjustment Expenses
(c) Unearned Premiums
(d) Other Policy Claims and Benefits Payable
(e) Premium Revenue
(f) Net Investment Income
(g) Benefits, Claims, and Claim Adjustment Expenses
(h) Amortization of Deferred Policy Acquisition Costs
(i) Other Insurance Expenses
(j) Premiums Written
(1) Net investment income allocated based upon each segment's share of
investable funds
(2) Other insurance expenses allocated based on specific identification, where
possible, and related activities.
</TABLE>
EXHIBIT 13
Argonaut Group, Inc. and Subsidiaries
Selected Financial Data
For the Years Ended December 31,
(in millions) 1994 1993 1992 1991 1990
STATEMENT OF OPERATIONS DATA:
Premiums:
Workers compensation $ 240.2 $ 280.0 $ 289.6 $ 312.7 $ 361.0
Other insurance 39.5 35.4 38.8 54.8 97.7
-------- -------- -------- -------- --------
279.7 315.4 328.4 367.5 458.7
Net investment income 110.7 118.1 123.2 135.1 149.1
Gains on sales of investments 3.8 5.4 18.0 14.7 3.2
-------- -------- -------- -------- --------
Total Revenue $ 394.2 $ 438.9 $ 469.6 $ 517.3 $ 611.0
======== ======== ======== ======== ========
Underwriting gain (loss) before income taxes:
Workers compensation $ 3.9 $ (10.7) $ (32.4) $ (41.1) $ (19.2)
Other continuing lines (24.4) (19.8) (15.2) (24.3) (22.8)
Run off lines 12.0 24.9 22.0 23.1 11.7
-------- -------- -------- -------- --------
$ (8.5) $ (5.6) $ (25.6) $ (42.3) $ (30.3)
======== ======== ======== ======== ========
Income Before Income Taxes $ 106.0 $ 117.9 $ 115.6 $ 107.5 $ 122.0
Provision for income taxes 29.3 28.8 29.3 23.1 32.3
-------- -------- -------- -------- --------
Income Before
Cumulative Effect
of Accounting Change 76.7 89.1 86.3 84.4 89.7
Cumulative effect of
change in accounting
for income taxes -- -- 61.8 -- --
-------- -------- -------- -------- --------
Net Income $ 76.7 $ 89.1 $ 148.1 $ 84.4 $ 89.7
======== ======== ======== ======== ========
Income Per Common Share:
Income Before
Cumulative Effect
of Accounting Change $ 3.00 $ 3.48 $ 3.32 $ 3.16 $ 3.25
Cumulative effect of
change in accounting
for income taxes -- -- 2.38 -- --
-------- -------- -------- -------- --------
Net Income Per Common Share $ 3.00 $ 3.48 $ 5.70 $ 3.16 $ 3.25
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Portfolio investments $1,484.8 $1,564.4 $1,566.0 $1,599.0 $1,638.2
======== ======== ======== ======== ========
Total assets $2,093.6 $2,182.7 $2,178.1 $2,200.5 $2,228.7
======== ======== ======== ======== ========
Reserves for losses and loss
adjustment expenses $1,196.3 $1,284.1 $1,390.9 $1,494.4 $1,561.8
======== ======== ======== ======== ========
Shareholders' equity $ 745.6 $ 729.6 $ 653.6 $ 554.7 $ 488.1
======== ======== ======== ======== ========
Cash dividends declared per
common share $ 1.12 $ 0.96 $ 0.80 $ 0.64 $ 0.53
======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
13-1
<PAGE>
EXHIBIT 13
Report of Independent Public Accountants
To the Shareholders of Argonaut Group, Inc.
We have audited the accompanying consolidated balance sheets of Argonaut Group,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Argonaut Group,
Inc. and subsidiaries as of December 31, 1994 and 1993, and their results of
operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As explained in the accompanying notes to the consolidated financial statements,
the Company has adopted new accounting standards promulgated by the Financial
Accounting Standards Board, changing its method of accounting, effective January
1, 1994 for certain investments in debt and equity securities, effective January
1, 1993, for reinsurance, and effective January 1, 1992, for income taxes.
ARTHUR ANDERSEN LLP
San Francisco, California
January 5, 1995
13-2
<PAGE>
EXHIBIT 13
Argonaut Group, Inc. and Subsidiaries
Consolidated Balance Sheets
In millions except per share amounts
December 31, December 31,
1994 1993
ASSETS
Investments:
Fixed maturities, available for sale,
at fair value (cost: $1,289.5) $1,270.7 $ -
Fixed maturities, at amortized cost - 1,441.3
(fair value: $1,534.5)
Equity securities, available for sale,
at fair value
(cost: 1994 - $101.5; 1993 - $29.0) 183.9 108.7
Short-term investments, available for sale,
at fair value 35.2 14.4
Securities in transit (5.0) -
-------- --------
1,484.8 1,564.4
Cash and cash equivalents 29.2 41.4
Accrued investment income 29.6 33.6
Receivables:
Reinsurance 235.4 224.3
Agents' balances 75.1 92.5
Accrued retrospective premiums 110.0 83.2
Cost in excess of net assets purchased 46.6 49.4
Unearned premiums on ceded reinsurance 3.4 3.2
Deferred Federal income taxes receivable 66.0 78.3
Other assets 13.5 12.4
-------- --------
$2,093.6 $2,182.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses
and loss adjustment expenses $1,196.3 $1,284.1
Unearned premiums 73.5 77.8
Accrued policyholder dividends 0.3 12.1
Current income taxes payable (receivable) (2.1) 5.6
Other liabilities 80.0 73.5
-------- --------
1,348.0 1,453.1
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 24,928,246 and 25,674,010 shares
issued and outstanding at December 31, 1994
and December 31, 1993, respectively 2.5 2.6
Additional paid-in capital 100.6 103.3
Retained earnings 595.5 566.3
Net unrealized appreciation on securities 47.0 57.4
-------- --------
745.6 729.6
-------- --------
$2,093.6 $2,182.7
======== ========
The accompanying notes are an integral part of these financial statements.
13-3
<PAGE>
EXHIBIT 13
Argonaut Group, Inc. and Subsidiaries
Consolidated Statements of Income
In millions except per share amounts
For the Years Ended December 31,
1994 1993 1992
Premiums and other revenue:
Premiums, net $279.7 $315.4 $328.4
Net investment income 110.7 118.1 123.2
Gains on sales of investments 3.8 5.4 18.0
------ ------ ------
Total Revenue 394.2 438.9 469.6
------ ------ ------
Expenses:
Losses and loss adjustment
expenses 207.2 229.2 275.3
Underwriting, acquisition,
and insurance expenses 72.3 81.7 71.9
Amortization of cost in excess
of net assets purchased 2.8 2.8 2.8
Policyholder dividends 5.9 7.3 4.0
------ ------ ------
Total Expenses 288.2 321.0 354.0
------ ------ ------
Income before income taxes 106.0 117.9 115.6
Provision for income taxes 29.3 28.8 29.3
------ ------ ------
Income before cumulative
effect of accounting
change 76.7 89.1 86.3
Cumulative effect of change
in accounting for income
taxes -- -- 61.8
------ ------ ------
Net Income $ 76.7 $ 89.1 $148.1
====== ====== ======
Income Per Common Share:
Income before cumulative
effect of accounting
change $ 3.00 $ 3.48 $ 3.32
Cumulative effect of change
in accounting for income
taxes -- -- 2.38
------ ------ ------
Net Income $ 3.00 $ 3.48 $ 5.70
====== ====== ======
Proforma amounts assuming the
new standard for accounting
for income taxes is applied
retroactively:
Net Income $ 76.7 $ 89.1 $ 86.3
Net Income Per Common Share $ 3.00 $ 3.48 $ 3.32
The accompanying notes are an integral parts of these statements.
13-4
<PAGE>
EXHIBIT 13
Argonaut Group, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
In millions except per share amounts
Common Additional Retained Net Shareholders'
Stock Paid-In Earnings Unreal. Equity
Capital Apprec.
on Secur.
Balance, December 31, 1991 $2.6 $105.5 $395.2 $51.4 $554.7
Net income 148.1 148.1
Change in net unrealized
appreciation on equity
securities (4.4) (4.4)
Retirement of Argonaut Group,
Inc. common stock (3.8) (20.7) (24.5)
Cash dividends
($0.80 per share) (20.8) (20.8)
Stock options exercised 0.5 0.5
---- ------ ------ ----- ------
Balance, December 31, 1992 2.6 102.2 501.8 47.0 653.6
Net income 89.1 89.1
Change in net unrealized
appreciation on equity
securities 10.4 10.4
Cash dividends
($0.96 per share) (24.6) (24.6)
Stock options exercised 1.1 1.1
---- ------ ------ ----- ------
Balance, December 31, 1993 2.6 103.3 566.3 57.4 729.6
Cumulative effect of change in
accounting for fixed maturities 60.6 60.6
Net income 76.7 76.7
Change in net unrealized
appreciation on securities (71.0) (71.0)
Retirement of Argonaut Group,
Inc. common stock (0.1) (3.0) (18.8) (21.9)
Cash dividends
($1.12 per share) (28.7) (28.7)
Stock options exercised 0.3 0.3
---- ------ ------ ----- ------
Balance, December 31, 1994 $2.5 $100.6 $595.5 $47.0 $745.6
==== ====== ====== ===== ======
The accompanying notes are an integral part of these statements.
13-5
<PAGE>
EXHIBIT 13
Argonaut Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31,
In millions 1994 1993 1992
Cash flows from operating activities:
Net income $ 76.7 $ 89.1 $148.1
Adjustments to reconcile net income
to net cash provided by operations:
Cumulative effect of change in
accounting for income taxes -- -- (61.8)
Amortization and depreciation 7.0 8.4 11.3
Decrease (increase) in accrued investment income 4.0 (1.1) 3.3
Decrease (increase) in reinsurance receivables (11.1) 9.9 18.5
Decrease in agents' balances 17.4 21.4 24.5
Increase in accrued retrospective premiums (26.8) (30.7) (8.1)
Decrease (increase) in unearned
premiums on ceded reinsurance (0.2) -- 0.1
Decrease in deferred Federal income taxes 18.0 7.6 5.6
Decrease in reserves for losses
and loss adjustment expenses (87.8) (106.8) (103.5)
Increase (decrease) in unearned premiums (4.3) (0.8) 1.3
Increase (decrease) in accrued
policyholder dividends (11.8) 0.5 (9.3)
Increase (decrease) in current
income taxes payable (receivable) (7.7) 0.2 (0.5)
Other, net 4.4 34.6 (9.9)
------ ------ ------
(22.2) 32.3 19.6
------ ------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 102.2 63.7 304.6
Maturities and mandatory calls of
fixed maturity investments 123.8 72.3 130.1
Purchase of fixed maturity investments (77.1) (114.5) (402.3)
Purchases of equity securities (72.9) -- (12.0)
Increase in short-term investments (20.8) (9.5) (3.7)
Other, net 5.1 0.2 0.4
------ ------ ------
60.3 12.2 17.1
------ ------ ------
Cash flows from financing activities:
Repurchase of common stock (21.9) -- (24.5)
Payment of cash dividend (28.7) (24.6) (20.8)
Exercise of stock options 0.3 1.1 0.5
------ ------ ------
(50.3) (23.5) (44.8)
------ ------ ------
Increase (decrease) in cash and cash equivalents (12.2) 21.0 (8.1)
Cash and cash equivalents, beginning of period 41.4 20.4 28.5
------ ------ ------
Cash and cash equivalents, end of period $ 29.2 $ 41.4 $ 20.4
====== ====== ======
The accompanying notes are an integral part of these statements.
13-6
<PAGE>
EXHIBIT 13
Argonaut Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The consolidated financial statements of Argonaut Group, Inc. and subsidiaries
("the Company") have been prepared on the basis of generally accepted accounting
principles, which differ from statutory insurance accounting practices. The
financial statements include the accounts and operations of Argonaut Group, Inc.
and its subsidiaries. Certain prior year amounts have been reclassified to
conform with the current year's presentation. All material intercompany
accounts and transactions have been eliminated
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and certain repurchase agreements with original maturities of three months
or less.
INVESTMENTS
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 investment
portfolio as "Available For Sale". FAS 115 requires that securities classified
as "Available for Sale" be carried at fair value with unrealized gains/losses,
net of tax, recorded in shareholders' equity. The adoption of FAS 115 resulted
in a cumulative increase of $60.6 million, net of tax, in shareholders' equity,
as of January 1, 1994. The adoption of FAS 115 had no income statement effect.
Investments in fixed maturities at December 31, 1994 include bonds, notes, and
redeemable preferred stocks, valued at fair value and are classified as
"Available For Sale". Investments in fixed maturities at December 31, 1993 were
valued at amortized cost. Equity securities include common and nonredeemable
preferred stocks, valued at fair value. Unrealized appreciation or depreciation
on fixed maturity investments available for sale and equity securities is
included, net of applicable deferred income taxes, in shareholders' equity.
Fair values for fixed maturity investments and equity securities are based on
quoted market prices or dealer quotes. Short-term investments include
investments maturing within three months of purchase, valued at cost, which
approximates fair value. Gains and losses on sales of investments are computed
on the specific identification method and are reflected in total revenue.
RECEIVABLES
Agents' balances are presented net of a reserve for uncollectible accounts of
$1.7 million, $1.9 million, and $2.6 million at December 31, 1994, 1993, and
1992, respectively.
Accrued retrospective premiums are estimates based upon expected ultimate
losses.
COST IN EXCESS OF NET ASSETS PURCHASED
Cost in excess of net assets purchased of $46.6 million at December 31, 1994 and
$49.4 million at December 31, 1993, related to the purchase price in excess of
net assets associated with Teledyne, Inc.'s acquisition of Argonaut Insurance
Company in 1969 is net of accumulated amortization of $23.0 million and $20.2
million, respectively. Cost in excess of net assets purchased is being
amortized on a straight-line basis over a 25 year period beginning October 1,
1986.
RECOGNITION OF PREMIUM REVENUE & RELATED EXPENSES
Premium revenue is recognized ratably over the period to which the premium
relates. Policy acquisition costs, included in other assets, consisting
primarily of commissions and premium taxes, are deferred and amortized over the
periods benefitted.
PER SHARE DATA
Per share data have been computed based on the weighted average number of shares
outstanding, which were: 25,541,039, 25,634,451, and 25,968,254 shares for the
years ending December 31, 1994, 1993, and 1992, respectively. The potential
dilution of common stock equivalents, such as stock options, is not material;
therefore, they are not included in the calculation of per share data.
13-7
<PAGE>
EXHIBIT 13
Note 2: Investments
Gains on sales of investments for the years ended December 31, were as follows.
In millions 1994 1993 1992
Fixed maturities $ 3.8 $ 5.3 $18.0
Equity securities -- 0.1 --
----- ----- -----
$ 3.8 $ 5.4 $18.0
===== ===== =====
The change in net unrealized appreciation of investments in equity securities
and fixed maturities, available for sale for the years ended December 31, was as
follows.
In millions 1994 1993 1992
Fixed maturities $(18.8) $ -- $ --
Equity securities 2.7 17.0 (6.6)
Tax effect 5.7 (6.6) 2.2
------ ------ ------
$(10.4) $ 10.4 $ (4.4)
====== ====== =======
The amortized cost and fair values of fixed maturity investments as of December
31, were as follows.
In millions 1994
----------------------------------------------
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
----------------------------------------------
U.S. Treasury securities $ 897.6 $2.8 $(17.0) $ 883.4
Obligations of states and
political subdivisions 339.4 2.6 (6.1) 335.9
Corporate securities 25.0 -- (0.5) 24.5
Redemptive preferred stock 27.5 0.2 (0.8) 26.9
-------- ---- ------ --------
$1,289.5 $5.6 $(24.4) $1,270.7
======== ==== ====== ========
In millions 1993
----------------------------------------------
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
----------------------------------------------
U.S. Treasury securities $ 879.4 $70.4 $ -- $ 949.8
Obligations of states and
political subdivisions 480.5 20.6 (0.8) 500.3
Corporate securities 49.3 1.3 (0.1) 50.5
Redemptive preferred stock 32.1 1.8 -- 33.9
-------- ----- ------ --------
$1,441.3 $94.1 $ (0.9) $1,534.5
======== ===== ====== ========
The amortized cost and fair value of fixed maturity investments as of December
31, 1994, by contractual maturity, are shown below.
In millions Amortized Fair
Cost Value
Due in one year or less $ 24.9 $ 25.2
Due after one year to five years 1,184.1 1,167.8
Due after five years to ten years 67.6 65.1
Due after ten years 12.9 12.6
-------- --------
$1,289.5 $1,270.7
======== ========
The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations without call or
prepayment penalties.
Proceeds from sales of fixed maturity investments were $102.2 million, $61.2
million, and $314.0 million in 1994, 1993, and 1992, respectively. Gross gains
of $4.1 million, $5.6 million, and $21.4 million and gross losses of $0.3
million, $0.3 million, and $3.4 million were realized on those sales in 1994,
1993, and 1992, respectively.
Unrealized appreciation of fixed maturity investments decreased $112.0 million
in 1994, increased $21.8 million in 1993, and decreased $16.1 million in 1992.
At December 31, 1994, all unrealized appreciation and depreciation on fixed
maturity investments is included, net of tax, in shareholders' equity. FAS 115
did not permit the restatement of prior period amounts.
The fair value and amortized cost of bonds on deposit with various insurance
regulatory agencies was $429.7 million and $437.2 million, respectively, at
December 31, 1994. Additionally, U.S. Treasury Notes with an amortized cost of
$7.9 million and fair value of $7.8 million were pledged as collateral for
surety bonds which were issued to various states in lieu of depositing bonds.
At December 31, 1994 and 1993, there were no investments in any one investee
exceeding 10% of shareholders' equity.
13-8
<PAGE>
EXHIBIT 13
Note 3: Reinsurance
The Company reinsures certain risks with other insurance companies. Such
arrangements serve to limit the Company's maximum loss on catastrophes and large
or unusually hazardous risks. The Company is liable for reinsurance ceded in
the event its reinsurers do not meet their obligations. The Company's reserves
for nonrecoverable reinsurance were $7.5 million and $17.1 million as of
December 31, 1994 and 1993, respectively. Under certain of the reinsurance
agreements, funds are held to secure performance of reinsurers in meeting their
obligations. The amount of such funds was $39.6 million and $39.2 million at
December 31, 1994 and 1993, respectively.
In December 1992, the FASB issued a new standard for accounting for reinsurance
contracts, Financial Accounting Standard No. 113 ("FAS 113"). The Company
adopted FAS 113 as of January 1, 1993. The adoption of FAS 113 had no income
statement effect. FAS 113 requires estimated losses recoverable from reinsurers
and the ceded portion of unearned premiums to be reported as assets, rather than
be netted against reserves for losses and loss adjustment expenses and direct
unearned premiums, respectively.
Losses and loss adjustment expenses of $207.2 million, $229.2 million, and
$275.3 million as of December 31, 1994, 1993, and 1992, respectively, are net of
recoveries of $21.2 million, $26.0 million, and $42.6 million, respectively.
While the Company is not in the business of assuming reinsurance risks, it is
required to accept certain assigned risks and other legally mandated reinsurance
obligations.
Premiums for the years ended December 31, were as follows.
In millions 1994 1993 1992
Direct written premiums $250.8 $285.7 $272.5
Reinsurance ceded to
other companies (19.7) (17.0) 9.4
Reinsurance assumed from
other companies 17.8 15.6 40.7
------ ------ ------
Net written premiums $248.9 $284.3 $322.6
====== ====== ======
Direct earned premiums $281.9 $306.8 $276.7
Reinsurance ceded to
other companies (20.1) (17.4) 8.4
Reinsurance assumed from
other companies 17.9 26.0 43.3
------ ------ ------
Net earned premiums $279.7 $315.4 $328.4
====== ====== ======
Percentage of reinsurance
assumed to net earned premiums 6.4% 8.2% 13.2%
====== ====== ======
Note 4: Reserves for Losses and Loss Adjustment Expenses
The following table provides a reconciliation of reserves for losses and loss
adjustment expenses for the years ended December 31, 1994, 1993, and 1992.
In millions 1994 1993 1992
Reserves for losses and loss
adjustment expenses at
beginning of year $1,284.1 $1,390.9 $1,494.4
Losses and loss adjustment expenses:
Provision for losses and loss adjust-
ment expenses for claims occurring
in the current year 235.3 238.5 290.4
Increase (decrease) in estimated
losses and loss adjustment expenses
for claims occurring in prior years (6.9) 16.7 27.5
-------- -------- --------
228.4 255.2 317.9
-------- -------- --------
Losses and loss adjustment expense
payments for claims occurring during:
Current year 43.7 42.9 56.3
Prior years 272.5 319.1 365.1
-------- -------- --------
316.2 362.0 421.4
-------- -------- --------
Reserves for losses and loss adjust-
ment expenses at end of year $1,196.3 $1,284.1 $1,390.9
======== ======== ========
The reserves for losses and loss adjustment expenses represent the estimated
indemnity cost and loss adjustment expenses necessary to cover the ultimate net
cost of investigating and settling claims. Such estimates are based upon
individual case estimates for reported claims, estimates from ceding companies
for reinsurance assumed, and actuarial estimates for losses which have been
incurred but not yet reported to the insurer. Any change in probable ultimate
liabilities is reflected in current operating results.
The ultimate cost of claims, particularly liability claims, is difficult to
predict for several reasons. Claims may not be reported until many years after
a policy expires. Changes in the legal environment have created further
complications. Court decisions and federal and state legislation may
dramatically increase the liability between the time a policy is written and
associated claims are ultimately resolved. For example, liability for exposure
to toxic substances and environmental impairment, which did not appear likely or
even exist when the policies were written, has been imposed by legislators and
judicial interpretation. Tort liability has been expanded by some jurisdictions
to cover defective workmanship.
Liabilities assumed from other insurance companies under reinsurance contracts
is subject to the same factors, and further exacerbated by extended lags between
the date of occurrence and the date the Company is notified of the claim.
13-9
<PAGE>
EXHIBIT 13
Reserves for such difficult-to-estimate liabilities are established by examining
the facts of tendered claims and adjusted in the aggregate for ultimate loss
expectations based upon historical experience patterns and current socio-
economic trends. Due to these factors, among others, the process cannot provide
an exact forecast of future payments. Rather, it produces a best estimate of
liability as of a certain date. Management believes the reserves established to
be adequate. While the eventual ultimate liability may differ from the current
estimate, management does not believe that the difference will have a material
effect, either adversely or favorably, on the Company's financial position and
results of operations.
The Company discounted certain workers compensation pension-type reserves using
a maximum interest rate of 3.0 percent in 1994 and 1993. The amount of
unamortized discount was $6.9 million at December 31, 1994 and 1993.
Note 5: Income Taxes
In 1987, Argonaut Group adopted Financial Accounting Standard No. 96 ("FAS 96"),
Accounting for Income Taxes. In February 1992, the FASB issued a new standard
for accounting for income taxes, Financial Accounting Standard No. 109 ("FAS
109"), which superseded FAS 96. The Company adopted FAS 109 as of January 1,
1992. Under the provisions of FAS 109, the Company elected not to restate prior
years' financial statements. The cumulative effect of the change in accounting
for income taxes was $61.8 million.
The Company's income tax provision includes the following components.
In millions 1994 1993 1992
Current tax provision $11.6 $20.9 $23.6
Deferred tax provision related
to future tax deductions 17.7 7.9 5.7
----- ----- -----
Income tax provision $29.3 $28.8 $29.3
===== ===== =====
A reconciliation of the Company's income tax provision to the provision which
would have resulted if the tax had been computed at the statutory rate is as
follows:
In millions 1994 1993 1992
Income tax provision at statutory
tax rates $36.8 $41.1 $39.0
Tax effect of:
Tax exempt interest (8.0) (9.0) (8.9)
Dividends received deduction (2.5) (2.4) (2.4)
Other permanent adjustments, net 2.0 1.7 0.7
Change in the deferred tax
receivable due to rate change -- (3.0) --
State income tax provision 1.0 0.4 0.9
----- ----- -----
Income tax provision $29.3 $28.8 $29.3
===== ===== =====
The Federal statutory rate was 35% for 1994 and 1993 and 34% for 1992.
The Company's net deferred tax assets at December 31, 1994 and 1993 were as
follows.
In millions 1994 1993
Deferred liability on unrealized gains $(16.6) $(22.0)
Deferred tax receivable 82.6 100.3
------ ------
Deferred tax asset, net $ 66.0 $ 78.3
====== ======
Under FAS 109, a deferred tax receivable can be created if expenses are reported
for financial reporting purposes before they become deductible for tax purposes.
The deferred tax receivable for a given year is equal to the theoretical refund
which will be received when expenses which have been previously reported for
financial purposes become deductible for tax purposes.
The deferred tax receivables at December 31, 1994 and 1993 results from the
following tax-effected temporary differences.
In millions 1994 1993
Reserve discounting $ 85.4 $ 94.4
Other, net (2.8) 5.9
------ ------
Total $ 82.6 $100.3
====== ======
Under FAS 109, deferred tax provisions represent changes in the deferred tax
receivable. The Company's deferred tax provisions were $17.7 million, $7.9
million, and $5.7 million in 1994, 1993, and 1992, respectively.
In 1993, the Company recorded $4.5 million in interest expense related to an
ongoing IRS audit for the tax years beginning after September 30, 1986. Any
interest expense related to adjustments for tax years ending prior to October 1,
1986 will be reimbursed by Teledyne, Inc., in accordance with the tax sharing
agreement between the two companies and will have no impact on the financial
condition or results of operations of the Company.
The Company paid income tax of $19.0 million, $20.8 million, and $24.1 million
in 1994, 1993, and 1992, respectively.
13-10
<PAGE>
EXHIBIT 13
Note 6: Shareholders' Equity
On May 31, 1991, the Company's Certificate of Incorporation was amended to
increase the number of shares of $0.10 par value common stock authorized for
issuance from 20,000,000 to 35,000,000 shares. Prior to October 1, 1986, the
Company was a wholly-owned subsidiary of Teledyne, Inc. In accordance with a
preannounced plan, Teledyne distributed its ownership of the Company to its
shareholders on a share-for-share basis. As a result, 11,709,478 shares (pre-
split) were issued and delivered to the Company's shareholders.
The Company is also authorized to issue 5,000,000 shares of $0.10 par value
preferred stock. No preferred shares were issued or outstanding at December 31,
1994.
During 1994 and 1992, the Company reacquired and retired 761,500 and 935,400
shares of its common stock, respectively, at prevailing market prices. No
shares were reacquired during 1993.
The Company's insurance subsidiaries are regulated by the various states and
prepare their financial statements in accordance with statutory accounting
principles. The amount of statutory net income and surplus (shareholders'
equity) for the insurance subsidiaries for the years ended December 31, were as
follows.
In millions 1994 1993 1992
Net income $ 79.8 $ 97.8 $ 85.7
Surplus $633.6 $583.1 $512.2
Various state insurance laws restrict the amount that may be transferred to
Argonaut Group, Inc. from its subsidiaries in the form of dividends without
prior approval of regulatory authorities. In addition, that portion of the
Company's net equity which results from the difference between statutory
insurance practices and generally accepted accounting principles would not be
available for dividends. At December 31, 1994, $57.6 million was available for
dividends to Argonaut Group without prior regulatory approval. During 1994,
dividends of $31.6 million were paid to Argonaut Group.
Note 7: Net Investment Income
Investment income and expenses for the years ended December 31, were as follows.
In millions 1994 1993 1992
Investment income:
Interest and dividends on
fixed maturities $ 99.7 $104.3 $111.5
Dividends on equity securities 9.3 12.1 9.1
Interest on short-term investments 1.2 0.7 1.1
Other 2.2 2.0 2.3
------ ------ ------
112.4 119.1 124.0
Investment expenses (1.7) (1.0) (0.8)
------ ------ ------
Net investment income $110.7 $118.1 $123.2
====== ====== ======
Note 8: Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition, and insurance expenses for the years ended December
31, were as follows.
In millions 1994 1993 1992
Commissions $20.0 $23.9 $21.2
General expenses 40.9 44.6 37.9
State assessments 6.2 6.2 8.2
Taxes, licenses, and bureau fees 7.0 6.9 4.7
----- ----- -----
74.1 81.6 72.0
Amortization (deferral) of policy
acquisition costs (1.8) 0.1 (0.1)
----- ----- -----
$72.3 $81.7 $71.9
===== ===== =====
13-11
<PAGE>
EXHIBIT 13
Note 9: Benefit Plans
PENSION
The Company participates in a defined benefit plan which covers substantially
all of its employees. The benefits are based on years of service and the
employee's compensation during the last ten years of employment. The Company's
funding policy is to contribute annually the maximum allowable by the Employee
Retirement Income Security Act of 1974, as amended. Contributions are intended
to provide not only for benefits attributed to service to date, but also for
those expected to be earned in the future.
The following table sets forth a reconciliation of the plans funded status and
amounts recognized in the Company's balance sheet as of December 31.
In millions 1994 1993
Actuarial present value of benefit obligations:
Accumulated benefit obligation, (vested benefits:
1994 - $(12.6); 1993 - $(14.0)) $(13.1) $(14.7)
====== ======
Projected benefit obligation for service
rendered to date $(16.7) $(19.6)
Plan assets at fair value, primarily Treasury bonds 18.7 15.1
------ ------
Plan assets (less than) in excess of projected
benefit obligation 2.0 (4.5)
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions (4.9) --
Unrecognized prior service cost 1.6 0.8
Unrecognized net asset (0.5) (0.6)
------ ------
Pension liability recognized in the balance sheet $ (1.8) $ (4.3)
====== ======
Net pension cost included the following:
In millions 1994 1993 1992
Service cost-benefits earned
during the period $1.8 $1.3 $1.2
Interest cost on projected
benefit obligation 1.2 1.0 0.8
Actual return on plan assets (1.0) (0.9) (0.8)
Net amortization -- (0.1) (0.1)
---- ---- ----
Net periodic pension cost $2.0 $1.3 $1.1
==== ==== ====
In determining the actuarial present value of the projected benefit obligation
as of December 31, 1994 and 1993, the weighted average discount rates were 8.00
percent and 6.00 percent, respectively. The rate of increase in future
compensation levels was 4.5 percent and the long-term rate of return on assets
was 6.0 percent in 1994 and 1993.
STOCK OPTIONS
In August 1986, the Board of Directors of Argonaut Group, Inc. adopted the 1986
Stock Option Plan covering an aggregate 1,500,000 shares of Argonaut Group, Inc.
Common Stock. Under the 1986 Stock Option Plan, options to purchase shares of
Argonaut Group, Inc. Common Stock may be granted to certain key employees. The
options may be incentive stock options or nonqualified stock options. If
incentive options are granted, the exercise price of the options will be the
fair market value of the shares on the date that the option is granted. The
exercise price of nonqualified stock options to be granted can be below the fair
market value of the shares on the date of grant. To date all options granted
have been at the fair market value of the shares on the date of grant, and as
such, no compensation expense has been recognized. The options are
nontransferable and are exercisable in installments.
A summary of the stock option activity is as follows:
Number Option
of Shares Price
Outstanding at December 31, 1992 736,150 $8.58 - 27.125
Granted 79,250 $31.00 - 31.25
Exercised (67,350) $8.58 - 23.75
Cancelled (41,650) $13.58 - 31.00
-------
Outstanding at December 31, 1993 706,400 $8.58 - 31.25
Granted 254,750 $26.25 - 29.25
Exercised (13,620) $13.58 - 27.00
Cancelled (22,740) $13.58 - 31.00
-------
Outstanding at December 31, 1994 924,790
=======
As of December 31, 1994, 313,390 shares were available for future grant and
398,420 of the stock options were exercisable.
EMPLOYEE SAVINGS PLANS
Substantially all employees of the Company are eligible to participate in
employee savings plans. Under these plans, a percentage of an employee's pay
may be contributed to various savings alternatives including, under one plan,
investment in the Company's common stock. The plans call for the Company to
match the employee's contribution under various formulae. Charges to income
related to such Company matching were $0.5 million, $0.4 million, and $0.5
million, in 1994, 1993, and 1992, respectively.
13-12
<PAGE>
EXHIBIT 13
Note 10: Business Segments
The Company and its subsidiaries are engaged principally in the business of
selling workers compensation and other insurance. The Company's insurance
subsidiaries are authorized to sell a portfolio of workers compensation,
commercial and homeowners multi-peril, automobile liability and physical damage,
medical malpractice, fire, and other lines in all states and the District of
Columbia. In accordance with insurance accounting practice, all expenses have
been allocated to the two business segments.
Information on the Company's business segments for the years ended December 31,
are as follows.
In millions 1994 1993 1992
Premiums:
Workers compensation $240.2 $280.0 $289.6
Other insurance 39.5 35.4 38.8
------ ------ ------
$279.7 $315.4 $328.4
====== ====== ======
Pre-tax underwriting income (loss):
Workers compensation $ 3.9 $(10.7) $(32.4)
Other insurance (12.4) 5.1 6.8
------ ------ ------
$ (8.5) $ (5.6) $(25.6)
Net investment income 110.7 118.1 123.2
Gains on sales of investments 3.8 5.4 18.0
------ ------ ------
Income before income taxes $106.0 $117.9 $115.6
====== ====== ======
Note 11: Commitments and Contingencies
Rental expenses for operating leases, principally for offices, were $3.5
million, $3.4 million, and $3.8 million in 1994, 1993, and 1992, respectively.
As of December 31, 1994, future minimum noncancellable operating lease
commitments are as follows.
In millions 1995 $ 3.7
1996 3.4
1997 2.8
1998 1.3
1999 0.6
Thereafter 0.5
-----
$12.3
=====
The insurance subsidiaries of the Company are parties to legal actions
incidental to their business. Based on the advice of counsel, management of the
Company believes that the resolution of these matters will not materially affect
the Company's financial condition or results of operations.
The Company's insurance subsidiaries are members of the statutorily created
insolvency guarantee associations in all states where they are authorized to
transact business. These associations were formed for the purpose of paying
claims of insolvent companies. The Company is assessed its pro rata share of
such claims based on its premium writings, subject to a maximum annual
assessment per line of insurance. Such costs can generally be recovered through
surcharges on future premiums. The Company does not believe that assessments on
current insolvencies will have a material effect on its financial condition or
results of operations.
13-13
<PAGE>
EXHIBIT 13
Note 12: Run Off Lines
Although the Company has discontinued active underwriting of hospital liability,
medical malpractice liability, and assumed casualty reinsurance, these lines are
in run off status, meaning that the Company is still obligated to pay losses
incurred on policies written in past years. Each of these lines is
characterized by long elapsed periods between the occurrence of a claim and
ultimate payment of the settled claim. The Company has a specialized and
dedicated staff to administer and settle hospital liability and medical
malpractice claims. The following tables present the Company's insurance
subsidiaries' reserves for losses and loss adjustment expenses and their
underwriting income (loss), including detailed information for the years ended
December 31.
Reserves for Losses and Loss Adjustment Expenses:
In millions 1994 1993 1992
Run off lines:
Medical liability $ 15.9 $ 34.6 $ 45.6
Hospital liability 65.4 78.9 112.7
Other* 151.5 141.7 152.5
-------- -------- --------
232.8 255.2 310.8
Continuing lines 963.5 1,028.9 1,080.1
-------- -------- --------
Total reserves $1,196.3 $1,284.1 $1,390.9
======== ======== ========
Underwriting Income (Loss):
In millions 1994 1993 1992
Run off lines:
Medical liability $ 5.0 $ 8.5 $ 12.0
Hospital liability 16.0 26.5 19.0
Other* (9.0) (10.1) (9.0)
------ ------ ------
12.0 24.9 22.0
Continuing lines (16.5) (22.9) (44.5)
------ ------ ------
Total underwriting
income (loss) $ (4.5) $ 2.0 $(22.5)
====== ====== ======
* Primarily casualty reinsurance assumed
Note 13: Permitted Statutory Accounting Practices
The Company's insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the insurance departments of the state of domicile. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
The Company's insurance subsidiaries do not apply any statutory accounting
practices, which differ from prescribed statutory accounting practices, which
individually or in the aggregate materially affect statutory surplus or risk-
based capital.
13-14
<PAGE>
EXHIBIT 13
Quarterly Financial Data (Unaudited)
The following table represents unaudited quarterly financial data for the years
ended December 31, 1994 and 1993. In the opinion of management, all adjustments
necessary to properly present fairly the results of operations for such periods
are reflected. Total revenues and net income include gains on sales of invest-
ments. The Company cannot anticipate when or if similar gains may occur in
the future. Also, since quarterly financial results rely heavily on estimates,
caution should be used in drawing specific conclusions from quarterly consol-
idated results.
In millions except per share amounts
Three Months Ended
March 31 June 30 September 30 December 31
1994
Total revenues $ 96.1 $ 98.6 $ 99.0 $100.5
Underwriting income (loss) (5.0) 1.5 0.4 (5.4)
Net income 17.4 21.5 20.8 17.0
Net income per share* 0.68 0.84 0.81 0.68
1993
Total revenues $114.7 $103.4 $100.9 $119.9
Underwriting income (loss) (0.7) (1.6) (2.0) (1.3)
Net income 20.1 19.9 22.4 26.7
Net income per share* 0.79 0.78 0.87 1.04
* Net income per share is computed independently for each quarter and the
full year based on the respective average number of common shares outstanding;
therefore, the sum of the quarterly net income per share data may not equal the
net income per share for the year.
Common Stock Market Prices (Unaudited)
The following table shows the high, low, and closing prices during each quarter
in the past two years.
Quarter Ended
March 31 June 30 September 30 December 31
1994
High 31 3/4 30 31 30
Low 29 26 1/4 27 1/4 27 3/4
Close 29 1/4 27 3/4 29 3/4 28 1/4
1993
High 35 1/4 35 35 1/2 33 3/4
Low 28 1/4 29 3/4 30 3/4 29 1/2
Close 34 1/4 31 1/2 33 1/4 30 1/2
13-15
<PAGE>
EXHIBIT 13
Argonaut Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Results of Operations and Financial
Condition
RESULTS OF OPERATIONS
Earned premium income was $279.7 million, $315.4 million, and $328.4 million in
1994, 1993, and 1992, respectively. The decline in 1994 was primarily
attributable to a decrease in premium volume in our workers compensation line of
business. This decline in premium volume resulted primarily from rate
reductions in statutory minimum rates on California business, and an increase in
policies written with high deductible limits on losses, and thus, lower
premiums. Unprofitable mandated premiums assumed through the National Workers
Compensation Reinsurance Pool continued the decrease seen in 1993; a result of
workers compensation reform in some states, as well as a reduction in premiums
written in states with very unfavorable experience in these pools. The decrease
in 1993 earned premium was due to a decrease in premium volume resulting
primarily from a reduction in the unprofitable mandated premiums assumed for the
same reasons as discussed above. Earned premiums in our other continuing lines
of business have remained relatively stable over the past three years, with
$39.5 million in 1994, $35.4 million in 1993, and $38.8 million in 1992. These
lines of business continue to be less attractive given the severe price
competition and the potential for large claims.
Net investment income was $110.7 million, $118.1 million, and $123.2 million in
1994, 1993, and 1992, respectively. The decreases in 1994 and 1993 are
partially the result of continued lower interest rates and the restructuring of
the investments as outlined below.
Pre-tax gains on sales of investments were $3.8 million for 1994, $5.4 million
for 1993, and $18.0 million for 1992. 1992 gains resulted primarily from
transactions in U.S. Treasuries and municipal bonds to lengthen the average
maturity of the portfolio. These gains were partially offset by a write-down of
$3.1 million representing the permanent impairment of certain municipal bonds.
During 1994, these bonds were sold, resulting in a realized gain. We cannot
anticipate when or if similar gains or losses may occur in the future.
Losses and loss adjustment expenses were $207.2 million in 1994, $229.2 million
in 1993, and $275.3 million in 1992. The Company's loss ratio, including our
run off lines of business, was 76% in 1994, 73% in 1993, and 84% in 1992. The
loss ratio in our workers compensation line of business was 72% in 1994, 78% in
1993, and 91% in 1992. The loss ratios in workers compensation in 1994 and 1993
have decreased over that in 1992 primarily as a result of lower losses
attributable to the increase in policies written with high deductible limits on
losses. The loss ratio in our other continuing lines of business was 130%,
117%, and 105% in 1994, 1993, and 1992, respectively. The increased loss ratios
in our other continuing lines of business in 1994 and 1993 were primarily the
result of inadequate price levels and higher than anticipated loss development
related to business written prior to 1991. Also, 1994's ratio is affected by
additional reserves from adverse development in prior years. The amount of
future favorable or unfavorable development in any of our lines of business, if
any, cannot be anticipated.
Underwriting expenses totalled $72.3 million in 1994, $81.7 million in 1993, and
$71.9 million in 1992. Underwriting expenses are comprised of three components:
commissions and premium taxes, state fees and assessments, and general expenses.
The decrease in 1994 was due to a combination of lower commissions and premium
taxes and $4.5 million in interest expense recognized in 1993 related to an
ongoing IRS audit for tax years beginning after September 30, 1986, not
recurring in 1994. The decrease in commissions and premium taxes was primarily
due to a decrease in premium volume. The increase in 1993 was due to higher
commissions and premium taxes, the $4.5 million interest expense discussed
above, and ongoing development and implementation of new data processing
systems.
Policyholder dividend expense was $5.9 million in 1994, $7.3 million in 1993,
and $4.0 million in 1992. These changes reflect the loss experience of
participating policyholders, the basis for dividend payments.
Income from operations after tax was $74.2 million in 1994, $85.6 million in
1993, and $74.4 million in 1992. The decrease in 1994 was primarily due to
decreased favorable development in our run off lines of business coupled with
reserve strengthening in our other continuing lines of business. The
improvement in 1993 was primarily due to improved underwriting results in our
workers compensation line of business.
13-16
<PAGE>
EXHIBIT 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries require significant degree of liquidity and
adequate capital to meet ongoing obligations to policyholders and claimants and
to cover ordinary operating expenses. During the three years ended December 31,
1994, the Company generated sufficient capital from operating and investment
income to meet all of its obligations. The Company maintains adequate levels of
liquidity and surplus capacity to manage the risks inherent with any differences
between the duration of its liabilities and invested assets. Management
believes that the Company continues to maintain sufficient liquidity to pay
claims and expenses, as well as to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
Under the provisions of the California Insurance Code, there is a maximum amount
of dividends which can be paid without prior approval of the Insurance
Commissioner. Under these provisions, as of December 31, 1994, Argonaut
Insurance could pay to Argonaut Group, Inc. a maximum dividend of $57.6 million
without the Insurance Commissioner's approval. During 1994, Argonaut Insurance
paid the Company a dividend of $31.6 million.
On April 26, 1994, the Company's Board of Directors increased the quarterly
dividend from $0.25 per common share to $0.29 per common share. During 1994,
total cash dividends paid by the Company to its shareholders were $1.12 per
share.
On July 27, 1989, the Argonaut Group Board of Directors authorized the
repurchase of up to six million shares of its outstanding common stock. It is
presently expected that dividends received from the Company's subsidiaries will
be the primary source of funds for the stock repurchase program and to meet any
other capital requirements the Company may develop.
ACCOUNTING CHANGES
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 portfolio as "Available for
Sale". The adoption of FAS 115 resulted in a cumulative increase of $60.6
million, net of tax, in shareholders' equity, as of January 1, 1994. The
adoption of FAS 115 had no income statement effect. As of December 31, 1994,
the fair value of the securities affected by the adoption of FAS 115 had
declined resulting in unrealized appreciation and depreciation on fixed
maturities, available for sale, net of tax, of $18.8 million being reflected in
shareholders' equity.
In 1987, Argonaut Group adopted Financial Accounting Standard No. 96 ("FAS 96"),
Accounting for Income Taxes. In February 1992, the FASB issued Financial
Accounting Standard No. 109 ("FAS 109"), which supersedes FAS 96. The Company
adopted FAS 109 as of January 1, and accordingly, year-to-date income for 1992
reflects a one-time increase of $61.8 million ($2.38 per common share). This
adjustment records the impact of expenses which were deducted for book purposes
in prior years, but could not be recognized in the tax provision under FAS 96.
LEGISLATION
Historically, over 30% of Argonaut's premiums have been generated in California.
As part of workers compensation reform legislation, California became an "open
rating" state on January 1, 1995. This means that, as is already the case in
many other states, workers compensation policies are no longer priced on the
basis of uniform rates and rating plans adhered to by all insurance companies.
Instead, each company has filed its own rate schedules and rating plans.
13-17
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K and into the Company's previously filed Registration
Statement File No. 33-12034 and 33-31547, of our report dated January 5, 1995,
included in Argonaut Group, Inc.'s 1994 Annual Report to Shareholders. It
should be noted that we have not audited any consolidated financial statements
of the Company subsequent to December 31, 1994 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
San Francisco, California
February 28, 1995
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 1,270,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 183,900
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,484,800
<CASH> 29,200
<RECOVER-REINSURE> 235,400
<DEFERRED-ACQUISITION> 3,600
<TOTAL-ASSETS> 2,093,600
<POLICY-LOSSES> 1,196,300
<UNEARNED-PREMIUMS> 73,500
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,500
0
0
<OTHER-SE> 743,100
<TOTAL-LIABILITY-AND-EQUITY> 2,093,600
279,700
<INVESTMENT-INCOME> 110,700
<INVESTMENT-GAINS> 3,800
<OTHER-INCOME> 0
<BENEFITS> 207,200
<UNDERWRITING-AMORTIZATION> (1,800)
<UNDERWRITING-OTHER> 74,100
<INCOME-PRETAX> 106,000
<INCOME-TAX> 29,300
<INCOME-CONTINUING> 76,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,700
<EPS-PRIMARY> 3.00
<EPS-DILUTED> 3.00
<RESERVE-OPEN> 1,284,100
<PROVISION-CURRENT> 235,300
<PROVISION-PRIOR> (6,900)
<PAYMENTS-CURRENT> 43,700
<PAYMENTS-PRIOR> 272,500
<RESERVE-CLOSE> 1,196,300
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
