SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Period Ended June 30, 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 August 9, 1996 there were outstanding 23,957,677 shares of
common stock, par value $.10 per share, of the registrant.
<PAGE>
ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995..............4
Consolidated Statements of Income
Three and Six Months Ended
June 30, 1996 and 1995......................5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996
and 1995......................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Second Quarter Ended June 30, 1996
and 1995.........................................7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.................8
Signatures................................................9
Exhibit Index............................................10
Page 2
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PART I. FINANCIAL INFORMATION
Item 1.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of June 30, 1996, and the
related consolidated statements of income for the three-month and
six-month periods ended June 30, 1996 and 1995 and the statements
of cash flows for the six-month periods ended June 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)
June 30, 1996 December 31, 1995
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities,
available for sale, at market $1,002.4 $1,063.8
(cost: 1996-$992.1; 1995-$1,032.9)
Equity securities,
available for sale, at market 422.1 393.4
(cost: 1996-$292.2; 1995-$252.3)
Short-term investments 10.0 34.9
Securities in transit (2.9) (2.9)
-------- --------
1,431.6 1,489.2
Cash and cash equivalents 4.1 23.3
Accrued investment income 21.8 23.9
Receivables:
Reinsurance 183.5 198.6
Agents' balances 68.1 74.0
Accrued retrospective premiums 115.4 127.3
Cost in excess of net assets purchased 42.5 43.9
Unearned premiums on ceded reinsurance 1.8 2.6
Deferred Federal income taxes receivable 20.1 15.7
Other assets 13.5 13.8
------- --------
$1,902.4 $2,012.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expenses $ 981.8 $1,060.9
Unearned premiums 53.5 64.0
Accrued policyholder dividends (0.3) (4.9)
Other liabilities 68.8 81.5
-------- --------
1,103.8 1,201.5
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 23,968,102 and
24,103,703 shares issued and
outstanding at 6/30/96 and
12/31/95, respectively 2.4 2.4
Additional paid-in capital 97.3 97.7
Retained earnings 607.7 598.9
Net unrealized appreciation
on securities 91.2 111.8
-------- --------
798.6 810.8
-------- --------
$1,902.4 $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 Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $41.0 $54.7 $88.5 $109.9
Net investment income 18.8 26.0 42.7 51.9
Gains on sales of investments 0.3 0.5 21.3 0.4
------ ------ ------ ------
Total Revenue 60.1 81.2 152.5 162.2
------ ------ ------ ------
Expenses:
Losses and loss adjustment expenses 35.9 41.3 68.9 89.8
Underwriting, acquisition,
and insurance expenses 13.5 15.5 31.5 31.4
Amortization of cost in excess of
net assets purchased 0.7 0.7 1.4 1.4
Policyholder dividends 7.7 4.3 8.0 3.4
------ ------ ------ ------
Total Expenses 57.8 61.8 109.8 126.0
------ ------ ------ ------
Income before income taxes 2.3 19.4 42.7 36.2
Provision for income taxes - 3.7 13.0 6.7
------ ------ ------ ------
Net Income $ 2.3 $15.7 $29.7 $29.5
====== ====== ====== ======
Income Per Common Share: $0.10 $0.65 $1.23 $1.21
====== ====== ====== ======
Weighted Average Common Shares 24,078,867 24,195,093 24,091,917 24,429,032
========== ========== ========== ==========
</TABLE>
Page 5
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
unaudited)
For the Six Months
Ended June 30,
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $29.7 $29.5
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 5.9 5.8
Increase in accrued investment income 2.1 2.0
Decrease in reinsurance receivables 15.1 12.1
Decrease in agents' balances 5.9 13.9
Increase in accrued retrospective premiums 11.9 0.6
Increase (decrease) in unearned premiums
on ceded reinsurance 0.8 (2.5)
Decrease in deferred Federal income tax
receivables 6.8 1.8
Decrease in reserves for losses and
loss adjustment expense (79.1) (58.1)
Decrease in unearned premiums (10.5) (32.6)
Increase (decrease) in accrued
policyholder dividends 4.6 (3.3)
Increase in income taxes payable
(receivable) (2.4) 1.2
Other, net (11.4) (5.5)
------ ------
(20.6) (35.1)
------ ------
Cash flows from investing activities:
Sales of fixed maturity investments 33.6 57.0
Sales of equity securities 21.7 8.3
Maturities and mandatory calls
of fixed maturity investments 6.6 2.0
Purchases of fixed maturity investments (2.3) 28.9
Purchases of equity securities (61.6) -
Decrease in short-term investments 24.9 (40.8)
Other, net - (6.0)
------ ------
22.9 49.4
------ ------
Cash flows from financing activities:
Repurchase of common stock (4.6) (23.0)
Payment of cash dividend (16.9) (15.2)
Exercise of stock options - -
------ ------
(21.5) (38.2)
------ ------
Decrease in cash and cash equivalents (19.2) (23.9)
Cash and cash equivalents, beginning of period 23.3 29.2
------ ------
Cash and cash equivalents, end of period $4.1 $5.3
====== ======
</TABLE>
Page 6
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
The Company recorded consolidated net income fo $2.3 million ($0.10 per common
share) on total revenue of $60.1 million for the second quarter of 1996,
compared with $15.7 million ($0.65 per common share) on total revenue of $81.2
million for the same quarter last year. For the six months ended June 30, 1996,
consolidated net income was $29.7 million ($1.23 per common share) on total
revenue of $152.5 million, compared with net income of $29.5 million ($1.21 per
common share) on total revenue of $162.2 million for the same period in 1995.
The results for the quarter and the six months were adversely impacted by
establishment of reserves for liabilities under California Proposition 103,
described below.
Consolidated operating income after tax was $2.1 million for the quarter ended
June 30, 1996, compared with $15.4 million for the same period last year. For
the six months ended June 30, 1996, consolidated operating income after tax was
$15.9 million, compared with $29.2 million for the same six month period last
year. Operating income excludes gains on the sale of investments.
Total revenue includes gains on sales of investments of $300,000 for the current
quarter, compared with $500,000 for the second quarter in 1995. For the six
months ended June 30, 1996, gains on sales of investments were $21.3 million,
compared with $400,000 for the same period last year. We cannot anticipate when
or if similar gains may occur in the future.
The week of July 8, 1996 the California Insurance Commissioner adopted a
decision by an Administrative Law Judge granting the Insurance Department's Pro-
position 103 rate rollback claim for $7.4 millin plus $5.3 million in interest
accrued as of July 1, 1996. Although the Company will appeal the decision, it
has recorded pre-tax reserves of $12.7 million ($8.2 million net after tax) for
the quarter and six months ended June 30, 1996: policyholder dividend expense
of $7.4 million, and $5.3 million investment expense.
On November 8, 1988, California voters passed the initiative known as Proposi-
tion 103 which provided in part for a rollback of rates for certain lines of
business (excluding workers compensation) to 20% below rate levels on November
9, 1987. The Insurance Commissioner previously rejected the rollback exemption
application of the Company.
The Company believes that it complied with the rate rollback provisions of
Proposition 103 by implementing a 20% reduction in rates and that no refund
is due. In addition, the Company believes that the decision is arbitrary and
not supported by facts. The Company has paid losses and adjustment expenses to
date on the Proposition 103 book of business in excess of earned premium. The
Company will vigorously pursue an appeal of the Commissioner's Order.
Page 7
<PAGE>
Other factors reflected in the quarterly results include: a decline in
investment income compared to 1995 (excluding the impact of Proposition 103)
of $1.9 million for the quarter and $3.9 million year to date, primarily
resulting from restructuring the portfolio to include more common stocks;
and unfavorable development in the run off lines of business($1.5 million
for the quarter, and $3.0 million year to date). There was no similar
developement for run off lines last year.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company have been met by funds provided from
premiums and investment income as well as maturities of invested assets. The
primary use of funds was to pay claims, policy benefits, operating expenses,
and commissions and to purchase new investments.
Management believes that the Company maintains sufficient liquidity to pay
claims and expenses. Management also believes that the Company possesses
adequate capital resources to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index
(b) During the quarter covered by this
report, the Registrant did not file any reports
on Form 8-K.
Page 8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Argonaut Group, Inc.
(Registrant)
/s/ Charles E. Rinsch
- ----------------------
Charles E. Rinsch
President (principal executive
officer)
/s/ James B Halliday
- ---------------------
James B Halliday
Vice President and Treasurer
(principal financial and
accounting officer)
August 9, 1996
Page 9
<PAGE>
EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
- -------- ----------------
27 Financial Data Schedule for June 30, 1996 Form 10-Q.
Page 10
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 1,002,400
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 422,100
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,431,600
<CASH> 4,100
<RECOVER-REINSURE> 183,500
<DEFERRED-ACQUISITION> 4,400
<TOTAL-ASSETS> 1,431,600
<POLICY-LOSSES> 981,800
<UNEARNED-PREMIUMS> 53,500
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,400
0
0
<OTHER-SE> 796,200
<TOTAL-LIABILITY-AND-EQUITY> 1,902,400
88,500
<INVESTMENT-INCOME> 42,700
<INVESTMENT-GAINS> 21,300
<OTHER-INCOME> 0
<BENEFITS> 68,900
<UNDERWRITING-AMORTIZATION> 200
<UNDERWRITING-OTHER> 31,300
<INCOME-PRETAX> 42,700
<INCOME-TAX> 13,000
<INCOME-CONTINUING> 29,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,700
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
<RESERVE-OPEN> 1,004,800
<PROVISION-CURRENT> 108,874
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 131,874
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 981,800
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
