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, 1996
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 28, 1996 there were outstanding 23,869,839 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, 1996 and December 31, 1995.............................4
Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1996 and 1995...................................... 5
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1996 and 1995.......................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Third Quarter Ended September 30, 1996 and 1995.........................7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K..............................10
Signatures.............................................................11
Exhibit Index..........................................................12
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, 1996, and the related
consolidated statements of income for the nine-month periods ended
September 30, 1996 and 1995 and the statements of cash flows for the
nine-month periods ended September 30, 1996 and 1995 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, 1996 December 31, 1995
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities,
available for sale, at market $ 962.5 $1,063.8
(cost: 1996-$953.4; 1995-$1,032.9)
Equity securities,
available for sale, at market 435.7 393.4
(cost: 1996-$293.4; 1995-$252.3)
Short-term investments 10.7 34.9
Securities in transit .8 (2.9)
-------- --------
1,409.7 1,489.2
Cash and cash equivalents 8.2 23.3
Accrued investment income 24.7 23.9
Receivables:
Reinsurance 236.6 198.6
Agents' balances 80.0 74.0
Accrued retrospective premiums 115.4 127.3
Cost in excess of net assets purchased 41.8 43.9
Unearned premiums on ceded reinsurance 1.3 2.6
Deferred Federal income taxes receivable 56.0 15.7
Other assets 13.8 13.8
------- --------
$1,987.5 $2,012.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expenses $1,228.4 $1,060.9
Unearned premiums 67.4 64.0
Accrued policyholder dividends 1.3 (4.9)
Other liabilities 36.2 81.5
-------- --------
1,333.3 1,201.5
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 23,865,554 and
24,103,703 shares issued and
outstanding at 9/30/96 and
12/31/95, respectively 2.4 2.4
Additional paid-in capital 97.2 97.7
Retained earnings 456.2 598.9
Net unrealized appreciation
on securities 98.4 111.8
-------- --------
654.2 810.8
-------- --------
$1,987.5 $2,012.3
======== ========
</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,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $32.4 $52.0 $120.9 $161.9
Net investment income 23.1 24.6 65.8 76.5
Gains on sales of investments 0.0 0.7 21.3 1.1
------ ------ ------ ------
Total Revenue 55.5 77.3 208.0 239.5
------ ------ ------ ------
Expenses:
Losses and loss adjustment expenses 252.5 44.0 321.4 133.8
Underwriting, acquisition,
and insurance expenses 18.2 18.1 49.7 49.5
Amortization of cost in excess of
net assets purchased 0.7 0.7 2.1 2.1
Policyholder dividends 0.4 3.3 8.4 6.7
------ ------ ------ ------
Total Expenses 271.8 66.1 381.6 192.1
------ ------ ------ ------
Income before income taxes (216.3) 11.2 (173.6) 47.4
Provision for income taxes (77.0) 0.9 (64.0) 7.6
------ ------ ------ ------
Net Income ($139.3) $10.3 ($109.6) $39.8
====== ====== ====== ======
Income Per Common Share: ($5.82) $0.43 ($4.56) $1.64
====== ====== ====== ======
Weighted Average Common Shares 23,928,390 24,170,156 24,037,012 24,341,792
========== ========== ========== ==========
</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,
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income ($109.6) $39.8
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 8.5 8.8
Decrease (increase) in accrued investment income (0.8) 1.6
Decrease (increase) in reinsurance receivables (38.0) 34.1
Decrease (increase) in agents' balances (6.0) 7.0
Decrease (increase) in accrued retrospective premiums 11.9 (3.8)
Decrease (increase) in unearned premiums
on ceded reinsurance 1.3 (1.4)
Decrease (increase) in deferred Federal income tax
receivables (33.0) 4.4
Increase (decrease) in reserves for losses and
loss adjustment expense 167.5 (101.4)
Increase (decrease) in unearned premiums 3.4 (24.1)
Increase (decrease) in accrued
policyholder dividends 6.2 (7.1)
Increase in income taxes receivable (40.0) (0.5)
Other, net (7.3) 1.0
------ ------
(35.9) (41.6)
------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 33.6 59.5
Sales of equity securities 23.2 2.0
Maturities and mandatory calls
of fixed maturity investments 61.3 78.0
Purchases of fixed maturity investments (19.8) (1.0)
Purchases of equity securities (64.3) (86.9)
Decrease in short-term investments 24.2 21.3
Other, net (3.7) (4.8)
------ ------
54.5 68.1
------ -----
Cash flows from financing activities:
Repurchase of common stock (8.4) (23.6)
Payment of cash dividend (25.8) (23.2)
Exercise of stock options 0.5 0.2
------ -----
(33.7) (46.6)
------ ------
Decrease in cash and cash equivalents (15.1) (20.1)
Cash and cash equivalents, beginning of period 23.3 29.2
------ ------
Cash and cash equivalents, end of period $8.2 $9.1
====== ======
</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 recorded a consolidated net loss of $139.3 million ($5.82 per
common share) on total revenue of $55.5 million, compared to net income of
$10.3 million ($0.43 per common share) on total revenue of $77.3 million for
the same quarter last year. Results for the current quarter were
substantially affected by the establishment of increased loss reserves,
principally relating to certain general liability and reinsurance policies
described below. The majority of the increased losses relate to policies
written prior to 1979. For the nine months ended September 30, 1996, the
consolidated net loss was 109.6 million ($4.56 per common share) and total
revenue was $208 million, compared to net income of $39.8 million
($1.64 per common share) and total revenue of $239.5 million for the same
period in 1995.
Excluding gains on sales of investments, the consolidated operating loss
after taxes was $139.3 million for the 1996 third quarter, compared to an
operating income after taxes of $9.8 million for the same period last year.
For the nine months ended September 30, 1996, the consolidated operating loss
after taxes was $123.5 million, compared to operating income after taxes of
$39.1 million for the same period last year. For the current quarter, the
Company recorded no gain or loss on the sale of investments, compared to a
$700,000 gain recorded for the third quarter of 1995. For the nine months
ended September 30, 1996, gains on sales of investments were $21.3 million,
compared with $1.1 million for the same period last year.
Net income before taxes for the current quarter and the nine months ended
September 30, 1996 reflects charges for increased loss reserves totaling $229
million, including a $103 million charge for adverse developments affecting
certain general liability policies, and $123 million for unfavorable loss
developments under reinsurance contracts assumed in the early- and
mid-1970's. The reserve increase for reinsurance assumed, and $23.5 million
of the increases for general liability principally relate to asbestos and
environmental exposure. Reinsurance assumed has not been written since the
mid-1970's and is in a run-off mode. General liability asbestos and
environmental claims relate primarily to policies written in the 1970's and
early 1980's.
Page 7
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Establishing reserve liabilities for asbestos and environmental claims is
subject to significant uncertainties that make reserve estimation difficult.
Legal decisions have tended to expand insurance coverage beyond the intent
of the policies, and the disposition of such claims often requires lengthy
and costly litigation. Uncertainties as to required clean-up remedies and
difficulties in identifying the responsible parties add further to the
complexity of reserve estimation for these claims. To best manage these
uncertainties, Argonaut has long had, and recently expanded, a special claims
unit dedicated to handling asbestos and environmental claims and the run-off
of assumed reinsurance and medical malpractice claims.
Because the company was primarily a reinsurer in the asbestos and
environmental lines, claims are handled by the primary insurance carrier.
There has been a significant increase in the number of new claims received by
the primary insurance carriers, and many of their existing claims have
recently been settled and paid, or difficult coverage issues resolved through
litigation. This has resulted in a sharp increase in the number and severity
of new claims being reported to reinsurers, including claims relating to
Argonaut's coverage during the period from 1971 through 1975. As a result of
this recent trend, sources such as A.M. Best and the Reinsurance Association
of America have developed better industry data regarding the potential future
liability for this line.
The additional adjustments made in general liability relate primarily to
construction defect claims, and claims relating to the construction of the
subway system in Los Angeles, California. General liability policies for
contractors, later construed to cover construction defects, were written for
the most part from 1984 through 1990, with claims limited primarily to
California and Hawaii. Recent court decisions, including a significant case
decided in June, 1996, and increasing claim activity led the Company to do an
extensive review of this area, including a policy-by-policy review by the
claims staff to estimate potential exposure, and a detailed actuarial review.
Additional reserves were also required for significant damage claims relating
to tunneling and construction for the subway project administered by the
Los Angeles County Metropolitan Transportation Agency (LACMTA). Company
policies covering the LACMTA were non-renewed effective June 30, 1996.
In the opinion of management, the company's reserves for each of these
liability issues at September 30, 1996 represent the company's best estimate
of its ultimate liabilities, based on currently known facts, current law,
current technology, and assumptions considered reasonable where facts are not
known. Due to significant uncertainties and related management judgments,
however, there can be no assurance that future loss development, favorable
or unfavorable, can be accurately predicted.
Page 8
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On August 30,1996, the Los Angeles County Metropolitan Transportation
Authority (MTA) filed a civil action against the Company alleging breach of
contract, breach of the covenant of good faith and fair dealing, and
requesting ancillary relief in the form of an accounting, an injunction and
restitution in connection with allegations regarding failures to perform
under certain contracts of insurance.
The Company will be responding to the Complaint on or before
November 8, 1996, and at this time intends, among other things, to bring
certain counterclaims against the MTA, and possibly others, in connection
with the facts underlying the lawsuit. The Company believes it has
meritorious defenses, and intends to vigorously contest these claims. The
Company is unable, with any degree of certainty, to comment upon the range of
any potential loss, or whether such an outcome is probable or remote, in
light of the lack of any discovery conducted in the case, and the preliminary
investigation conducted thus far.
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. Although
the results for the third quarter and year to date were significantly
impacted by large loss reserve increases, the Company's book value at the end
of the quarter was $654 million, or $27.41 per common share. Given that, and
with no long-term debt on the balance sheet, Argonaut Group remains well
capitalized and financially strong.
Page 9
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on April 23, 1996, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
[S] [C] [C]
Charles E. Rinsch 21,706,873 203,804
George A. Roberts 21,700,682 209,995
Arthur Rock 21,707,766 202,911
Fayez S. Sarofim 21,709,035 201,642
Henry E. Singleton 21,701,126 209,551
The following proposal was approved at the Company's Annual Meeting:
Affimative Negative Votes
Votes Votes Withheld
[S] [C] [C] [C]
Amendment of the Company's
1986 Stock Option Plan,
increasing the number of
shares of Common Stock
issuable under the plan from
1,500,000 to 2,000,000. 20,473,935 855,823 580,919
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 10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Argonaut Group, Inc.
(Registrant)
/s/ Charles E. Rinsch
Charles E. Rinsch
President (principal executive
officer)
/s/ James B Halliday
James B Halliday
Vice President and Treasurer
(principal financial and
accounting officer)
October 29, 1996
Page 11
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EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
27 Financial Data Schedule for September 30, 1996 Form 10-Q
Page 12
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEPT-30-1996
<DEBT-HELD-FOR-SALE> 962,500
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 435,700
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,409,700
<CASH> 8,200
<RECOVER-REINSURE> 236,600
<DEFERRED-ACQUISITION> 4,600
<TOTAL-ASSETS> 1,987,500
<POLICY-LOSSES> 1,228,400
<UNEARNED-PREMIUMS> 67,400
<POLICY-OTHER> 1,300
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,400
0
0
<OTHER-SE> 651,800
<TOTAL-LIABILITY-AND-EQUITY> 1,987,500
120,900
<INVESTMENT-INCOME> 65,800
<INVESTMENT-GAINS> 21,300
<OTHER-INCOME> 0
<BENEFITS> 321,400
<UNDERWRITING-AMORTIZATION> 2,100
<UNDERWRITING-OTHER> 49,700
<INCOME-PRETAX> (173,600)
<INCOME-TAX> (64,000)
<INCOME-CONTINUING> ($109,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> ($109,600)
<EPS-PRIMARY> (4.56)
<EPS-DILUTED> (4.56)
<RESERVE-OPEN>
<PROVISION-CURRENT> 1,060,900
<PROVISION-PRIOR> 367,500
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 200,000
<RESERVE-CLOSE> 1,228,400
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</TABLE>
