FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
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 No.)
1800 Avenue of the Stars, Suite 1175, Los Angeles, California 90067-4213
(Address of principal executive offices) (Zip code)
310.553.0561
(Registrant's telephone number including area code)
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of October 24, 1997.
Title Outstanding
Common Stock, par value $.10 per share 23,844,733
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996................................3
Consolidated Statements of Income
Three Months and Nine Months Ended
September 30,1997 and 1996..............................................4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996...........................5
Notes to The Condensed Consolidated Financial Statements................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Third Quarter Ended September 30, 1997 and 1996.......................7
Part II. OTHER INFORMATION:
Item 1. Legal
Proceedings..................................................................8
Item 6. Exhibits and Reports on Form 8-K.................................8
Signatures...........................................9
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<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
<S> <C> <C>
September 30, 1997 December 31, 1996
(unaudited) (audited)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $939.4 $945.3
(cost: 1997 - $931.9; 1996 - $938.5.4)
Equity securities, available for sale, at fair value 465.2 442.9
(cost: 1997 - $243.4; 1996 - $288.1)
Short-term investments 14.2 6.1
Securities in transit 2.1 1.2
------------- ------------
1,420.9 1,395.5
Cash and cash equivalents 15.7 30.6
Accrued investment income 21.5 22.4
Receivables:
Reinsurance 233.1 234.6
Agents' balances 86.6 76.5
Accrued retrospective premiums 66.7 115.4
Cost in excess of net assets purchased 39.0 41.1
Unearned premiums on ceded reinsurance 0.8 1.0
Deferred Federal income taxes receivable 12.6 46.8
Other assets 15.0 15.3
------------- ------------
$1,911.9 $1,979.2
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $1,058.5 $1,193.7
Unearned premiums 49.6 65.3
Accrued policyholder dividends (2.7) 1.3
Other liabilities 86.9 53.6
------------
-------------
1,192.3 1,313.9
------------- ------------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares authorized, 23,844,516 and
23,788,285 shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively 2.4 2.4
Additional paid-in capital 98.0 97.1
Retained earnings 470.1 460.9
Net unrealized appreciation on securities 149.1 104.9
------------
-------------
719.6 665.3
------------- ------------
$1,911.9 $1,979.2
============= ============
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except amounts per share)
(unaudited)
<S> <C> <C>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
------------------------------------------------------
1997 1996 1997 1996
Premiums and other revenue:
Premiums, net $37.8 $32.4 $121.1 $120.9
Net investment income 22.1 23.1 64.7 65.8
Gains on sales of investments 0.4 0.0 3.1 21.3
------------ ------------ ------------ ------------
Total Revenue 60.3 55.5 188.9 208.0
Expenses:
Losses and loss adjustment expenses 26.2 252.5 80.5 321.4
Underwriting, acquisition, and
insurance expenses 21.5 18.2 57.0 49.7
Amortization of cost in excess of
net assets purchased 0.7 0.7 2.1 2.1
Policyholder dividends 0.2 0.4 (0.6) 8.4
------------ ------------ ------------ ------------
Total Expenses 48.6 271.8 139.0 381.6
------------ ------------ ------------ ------------
Income before income taxes 11.7 (216.3) 49.9 (173.6)
Provision for Income Taxes 2.4 (77.0) 12.3 (64.0)
------------ ------------ ------------ ------------
Net Income $9.3 ($139.3) $37.6 ($109.6)
============ ============ ============ ============
Net Income Per Common Share: $0.39 ($5.82) $1.58 ($4.56)
============ ============ ============ ============
Weighted Average Common Shares 23,840,831 23,928,390 23,820,575 24,037,012
============ ============ ============ ============
See accompanying notes
</TABLE>
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
<S> <C>
For the Nine Months
Ended September 30,
------------------------
1997 1996
Cash flows from operating activities:
Net income 37.6 ($109.6)
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation 9.4 8.5
Decrease (increase) in accrued investment income 0.9 (0.8)
Decrease (increase) in reinsurance receivables 1.5 (38.0)
Increase in agents' balances (10.1) (6.0)
Decrease in accrued retrospective premiums 48.7 11.9
Decrease in unearned premiums on ceded reinsurance 0.2 1.3
Decrease (increase) in deferred Federal income taxes receivable 10.7 (33.0)
Increase (decrease) in reserves for losses and
loss adjustment expense (135.2) 167.5
Increase (decrease) in unearned premiums (15.7) 3.4
Increase (decrease) in accrued policyholder dividends (4.0) 6.2
Increase (decrease) in income taxes payable 43.3 (40.0)
Decrease in other, net (11.8) (7.3)
----------- -----------
(24.5) (35.9)
----------- -----------
Cash flows from investing activities:
Sales of fixed maturity investments 13.0 33.6
Sales of equity 52.8 23.2
securities
Maturities and mandatory calls of fixed maturity investments 159.5 61.3
Purchases of fixed maturity investments (171.4) (19.8)
Purchases of equity securities (7.8) (64.3)
Decrease (increase) in short-term investments (8.1) 24.2
Increase in other, net (0.9) (3.7)
----------- -----------
37.1 54.5
----------- -----------
Cash flows from financing activities:
Repurchase of common stock 0.0 (8.4)
Payment of cash dividend (28.4) (25.8)
Exercise of stock 0.9 0.5
options
----------- -----------
(27.5) (33.7)
----------- -----------
Decrease in cash and cash equivalents (14.9) (15.1)
Cash and cash equivalents, beginning of period 30.6 23.3
----------- -----------
Cash and cash equivalents, end of period $15.7 $8.2
=========== ===========
See accompanying notes
</TABLE>
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of September 30, 1997, and the related
consolidated statements of income for the three months and nine month periods
ended September 30, 1997 and 1996 and the statements of cash flows for the nine
month periods ended September 30, 1997 and 1996 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.
Note 2 - Dividends Declared
On October 21, the Company declared a cash dividend of $0.41 per share payable
to stockholders of record on November 4, 1997. The dividend will be paid on
November 20, 1997.
Note 3 - Recently Issued Accounting Pronouncements
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
becomes effective for the 1997 Annual Report. Earlier application is not
permitted, however, restatement of all prior periods presented is required. The
Statement replaces primary earnings per share (EPS) with earnings per common
share (basic EPS). Basic EPS is computed by dividing income available to common
stockholders by the weighted -average number of common shares outstanding for
the period. The Statement also requires presentation of EPS assuming dilution.
This is computed similarly to the fully diluted EPS that is now required. Basic
and diluted EPS for the nine months period ended 1997 are $1.58 and $1.52
respectively, and for the nine months ended 1996 are $1.29 and $1.25
respectively.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The Company reported consolidated net income of $9.3 million ($0.39 per common
share) on total revenue of $60.3 million, compared to a net loss of $139.3
million ($5.82 per common share) on total revenue of $55.5 million for the same
quarter last year. For the nine months ended September 30, 1997, the
consolidated net income was $37.6 million ($1.58 per common share) and total
revenue was $188.9 million, compared to a net loss of $109.6 million ($4.56 per
common share) and total revenue of $208.0 million for the same period in 1996.
Consolidated operating income after tax was $9.0 million for the quarter ended
September 30, 1997, compared to a $139.3 million operating loss for the same
period last year. For the nine months ended September 30, 1997, consolidated
operating income after tax was $35.6 million, compared to an operating loss of
$123.5 million for the same period last year. Operating income excludes gains on
the sale of investments.
Total revenue includes gains on the sale of investments of $400,000 for the
current quarter, compared to no gain or loss for the third quarter of 1996. For
the nine months ended September 30, 1997, gains on sales of investments were
$3.1 million, compared with $21.3 million for the same period last year. Gains
in 1996 resulted primarily from Federal Paper Board's sale to International
Paper for a combination of cash and International Paper common stock. The
Company cannot anticipate when or if similar gains may occur in the future.
Premium revenues and operating results, particularly for workers compensation,
continue to be impacted unfavorably by severe price competition and declining
premium rates. The current quarter result also includes a $2.5 million charge
related to mandatory assigned risk pools, primarily $1.7 million in assessments
to cover pool charges unpaid from the bankruptcy of another carrier. 1996
results for both the third quarter and nine months ended September 30 were
substantially affected by a $229 million increase of loss reserves, principally
relating to certain general liability and reinsurance policies.
Liquidity and Capital Resources
The liquidity requirements of the Company have been met by funds provided from
premiums and investment income as well as maturities of invested assets. The
primary use of funds was to pay claims, policy benefits, operating expenses, and
commissions and to purchase new investments.
Management believes that the Company maintains sufficient liquidity to pay
claims and expenses. Management also believes that the Company possesses
adequate capital resources to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report to Stockholders on
Form 10-K for the fiscal year ended December 31,
1996.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibit 27 Financial Data Schedule for September 30, 1997 Form 10-Q.
2. During the quarter covered by this report, the Registrant did not file any
reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Argonaut Group, Inc.
October 24, 1997 By:___________________________________________
Date /s/ Charles E. Rinsch, President (principal executive officer)
October 24, 1997 By:___________________________________________
Date /s/ James B Halliday, Vice President and Treasurer
(principal financial and accounting officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1.0000
<DEBT-HELD-FOR-SALE> 939,400
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 465,200
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,404,600
<CASH> 15,700
<RECOVER-REINSURE> 233,100
<DEFERRED-ACQUISITION> 1,505,000
<TOTAL-ASSETS> 1,911,900
<POLICY-LOSSES> 1,058,500
<UNEARNED-PREMIUMS> 49,600
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> (2,700)
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,400
<OTHER-SE> 717,200
<TOTAL-LIABILITY-AND-EQUITY> 1,911,900
121,100
<INVESTMENT-INCOME> 64,700
<INVESTMENT-GAINS> 3,100
<OTHER-INCOME> 0
<BENEFITS> 80,500
<UNDERWRITING-AMORTIZATION> 2,100
<UNDERWRITING-OTHER> 57,000
<INCOME-PRETAX> 49,900
<INCOME-TAX> 12,300
<INCOME-CONTINUING> 37,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,600
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.29
<RESERVE-OPEN> 985,812
<PROVISION-CURRENT> 82,619
<PROVISION-PRIOR> (9,278)
<PAYMENTS-CURRENT> 23,070
<PAYMENTS-PRIOR> 135,767
<RESERVE-CLOSE> 864,267
<CUMULATIVE-DEFICIENCY> (34,852)
</TABLE>
