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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, 1996 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, 1997, registrant had 23,808,544 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, 1997 of such stock on
the National Association of Securities Dealers, Inc. Automated Quotation
System) was approximately $684 million.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II: Excerpts from Annual Report to Shareholders for the Year Ended
December 31, 1996
Part III: Excerpts from Proxy Statement for the 1997 Annual Meeting of
Shareholders
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Argonaut Group, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 1996
TABLE OF CONTENTS
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PART I
Item 1. Business 2
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
Item 10. Directors and Executive Officers of the Registrant 13
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial Owners
and Management 13
Item 13. Certain Relationships and Related Transactions 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14
</TABLE>
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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 80% of premiums in 1996. 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.
Argonaut Great Central Insurance Company ("Great Central") is Argonaut Group's
other principal insurance subsidiary. Established in Illinois in 1948, Great
Central specializes in providing package insurance policies including property,
general liability, workers compensation, and umbrella coverage 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 10 - Business Segments" in the Notes to the
Consolidated Financial Statements of the Annual Report. See Exhibit Index.
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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 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 and its
subsidiaries. Premiums for this line of business were $129.5 million, $176.7
million, and $240.2 million, in 1996, 1995, and 1994, respectively.
Other Property-Casualty Insurance
This product includes general and automobile liability, commercial
multiple-peril, and various other insurance coverages. Premiums for these
product lines were $32.2 million, $31.4 million, and $39.5 million, in 1996,
1995, and 1994, respectively.
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, one of Great Central's primary products,
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.
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, cessions 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 is $500,000 on the property treaty
and $300,000 on the casualty treaty.
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.
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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,
as of December 31, 1996 there are about 3,340 property-casualty insurance
companies operating in the United States, with the 100 largest companies
(groups and unaffiliated) writing about 80% of the industry's premiums.
The Company's principal competitors cannot be easily classified. The Company's
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
In January, 1996 the California Department of Insurance notified Argonaut
Insurance Company of it's obligation under the rollback provisions of
Proposition 103 and a hearing on the Company's obligation was commenced before
an Administrative Law Judge. In July, 1996, the California Insurance
Commissioner adopted a decision by the Administrative Law Judge granting the
Insurance Department's Proposition 103 rate rollback claim. Argonaut Insurance
Company has appealed the Insurance Commissioner's rejection of its rollback
exemption application but recorded its potential obligation and related
interest expense. This is discussed in the Notes to the Consolidated Financial
Statements of the Annual Report incorporated herein by reference as "Note 11 -
Commitments and Contingencies". See Exhibit Index.
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 increasing
regulatory remedies for companies that fail to comply with the RBC for Insurers
Model Act.
As of December 31, 1996, 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.
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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, 1996,
Argonaut Insurance could pay to Argonaut Group a maximum dividend of $17.6
million without the Insurance Commissioner's approval.
Marketing
Argonaut Insurance and Great Central Insurance operate in substantially
different markets.
Incorporated herein by reference is the information appearing as "Note 1 -
Business and Significant Accounting Policies" in the Notes to the Consolidated
Financial Statements of the Annual Report. See Exhibit Index.
Argonaut Insurance Company is authorized to operate in all 50 states. Its
primary line of business, workers compensation insurance, accounts for 93% of
its premiums (80% of total consolidated premiums). These policies are
primarily written on a retrospective rating basis or with large deductible
provisions. For retrospectively rated policies, 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
products are commercial multiple-peril and workers compensation insurance.
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
current year premiums associated with the current year losses on this line of
business.
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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
1995 as a result of maturities and sales. The proceeds from these maturities
and sales were re-invested in high quality preferred and common stocks and
Other U.S. Government Obligations (FNMA and FHLM). Corporate securities on
hand have decreased to zero as a result of a call.
The Company's investment policy is to invest only in investment-grade
securities. It does not invest in high-yield or so called "junk bonds",
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 set forth under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition-Results of Operations" in the Annual Report to Shareholders of
Argonaut Group for the fiscal year ended December 31, 1996 and in "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 $116.5 million and $46.2 million at
December 31, 1996 and 1995, respectively. Reserves for asbestos claims were
$113.7 and $72.7 million at December 31, 1996 and 1995. The Company recorded
additional loss reserves of $229 million in the third quarter. The increased
claim costs are related mostly to asbestos and environmental exposure on
certain general liability policies written in the 1970s and early 1980s, and
from reinsurance contracts assumed in the early 1970s. Additional charges also
relate to construction defect claims related to general liability policies
written for the most part from 1984 through 1990, and claims stemming from
construction of the subway system administered by the Los Angeles County
Metropolitan Transportation Agency (LACMTA). Company policies covering the
LACMTA construction were non-renewed effective June 30, 1996.
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 Insurance Company 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.
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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. 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.
In the opinion of management, the Company's reserves for each of these
liability issues 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.
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 (Table I) presented is net of the effects of reinsurance. The
second table (Table II) presented includes only amounts related to direct
insurance. Reserves for losses and loss adjustment expenses and cumulative
amounts paid on direct insurance are not available prior to 1989; therefore,
the second table reflects only the past seven years of 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, 1996.
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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Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
(Net of Reinsurance)
<TABLE>
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and LAE (a) $1,303.6 $1,309.6 $1,337.0 $1,348.5 $1,287.8 $1,201.9 $1,107.6 $1,011.4 $892.9 $985.8
Cumulative Amount
Paid as of: (b)
One year later 227.0 220.7 260.0 313.1 307.3 276.9 259.9 239.7 214.2
Two years later 382.3 384.4 464.9 537.5 525.8 489.2 444.7 417.9
Three years later 505.8 519.1 603.2 698.5 697.6 638.9 588.8
Four years later 605.0 613.0 704.4 835.7 821.4 759.5
Five years later 678.6 680.8 801.7 940.1 919.5
Six years later 734.8 752.2 884.5 1,021.3
Seven years later 793.1 819.7 952.3
Eight years later 853.4 876.2
Nine years later 901.7
Reserves Reestimated
as of:
One year later 1,316.0 1,289.1 1,317.2 1,358.3 1,285.2 1,197.1 1,086.8 996.5 1,073.6
Two years later 1,287.9 1,262.5 1,284.7 1,356.9 1,311.9 1,202.0 1,083.0 1,180.8
Three years later 1,277.1 1,195.5 1,261.3 1,381.9 1,315.9 1,203.0 1,283.4
Four years later 1,209.4 1,175.9 1,282.9 1,374.1 1,325.9 1,403.1
Five years later 1,196.8 1,176.4 1,257.5 1,384.9 1,514.9
Six years later 1,191.2 1,153.0 1,265.3 1,572.0
Seven years later 1,163.7 1,157.5 1,442.0
Eight years later 1,168.1 1,322.8
Nine years later 1,320.4
Cumulative (Deficiency)
Redundancy:(c) ($16.8) ($13.2) ($105.0) ($223.5) ($227.1) ($201.2) ($175.8) ($169.4) ($180.7)
</TABLE>
(a) Reserves for Losses and LAE, net of reserves for reinsurance
(b) Cumulative amount paid, net of reinsurance payments
(c) Represents changes of net reserves between the original estimate (for each
accident year) of the indicated year and the reserve re-estimated as of the
end of the current year. Reestimated reserves are calculated by adding
cumulative amount paid to unpaid loss and ALAE and IBNR at year end for each
accident year.
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Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
(Direct Insurance Only)
<TABLE>
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
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Reserves for Losses
and LAE (a) NA NA $1,587.4 $1,561.8 $1,494.4 $1,390.9 $1,284.1 $1,196.3 $1,060.9 $1,193.7
Cumulative Amount
Paid as of: (b)
One year later NA NA 509.2 384.7 355.7 325.6 288.3 267.5 245.2
Two years later NA NA 770.5 656.2 621.6 564.4 499.3 474.8
Three years later NA NA 954.4 862.6 818.2 739.3 668.9
Four years later NA NA 1,097.1 1,023.5 965.1 884.2
Five years later NA NA 1,216.7 1,149.2 1,086.1
Six years later NA NA 1,318.7 1,252.8
Seven years later NA NA 1,408.1
Eight years later NA NA
Nine years later NA
Reserves Reestimated
as of:
One year later NA NA 1,770.2 1,619.3 1,512.6 1,414.2 1,291.7 1,179.7 1,300.3
Two years later NA NA 1,764.0 1,645.8 1,570.2 1,448.8 1,278.8 1,423.1
Three years later NA NA 1,772.2 1,702.3 1,603.7 1,440.6 1,533.8
Four years later NA NA 1,829.1 1,719.7 1,604.2 1,694.5
Five years later NA NA 1,820.3 1,723.6 1,841.5
Six years later NA NA 1,823.6 1,956.8
Seven years later NA NA 2,045.6
Eight years later NA NA
Nine years later NA
Cumulative (Deficiency)
Redundancy: (c) NA NA ($458.2) ($395.0) ($347.1) ($303.6) ($249.7) ($226.8) ($239.4)
</TABLE>
(a) Reserves for Losses and LAE, excluding effects of reinsurance
(b) Cumulative amount paid, excluding effects of reinsurance
(c) Represents changes of direct reserves between the original estimate (for
each accident year) of the indicated year and the reserve re-estimated as of
the end of the current year. Reestimated reserves are calculated by adding
cumulative amount paid to unpaid loss and ALAE and IBNR at year end for each
accident year.
NA: Not available
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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).
<TABLE>
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Year Ended December 31,
--------------------------
1996 1995 1994
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Ratio of:
Premium-to-surplus 0.3 0.3 0.4
======= ======= =======
Reserves-to-surplus 2.0 1.4 1.6
======= ======= =======
</TABLE>
The Company believes that its 1996 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 1996 and 1995. 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 1996 and 1995. "A-" is the fourth highest of A.M. Best's
ratings.
During 1996, Standard & Poor's affirmed its "AA+" rating to the claims-paying
ability of Argonaut Insurance and its pooled subsidiaries.
Employees
At December 31, 1996, the Company employed 602 full-time employees. Of this
total, Argonaut Insurance employed 487 people (407 professional/managerial and
80 clerical/operational). Great Central employed 100 people (65
professional/managerial and 35 clerical/operational). Argonaut Group employed
15 people (14 professional/managerial and 1 clerical/operational). The
Company is not a party to any collective bargaining agreements.
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
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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
See "Business - Regulation" for a description of pending claim relating to
California Proposition 103.
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 has responded to the Complaint, and brought 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.
Argonaut Insurance Company and Argonaut Southwest Insurance Company have been
sued in two recent lawsuits brought on behalf of an alleged classes of
purchasers of retrospectively rated worker's compensation insurance, alleging
that the defendants, including other compensation insurers, charged the
purported class unlawful premiums. The two lawsuits are El Chico Restaurants,
Inc. and Southwest Cafes of Tennessee, Inc. v. The Aetna Casualty and Surety
Company, et al, Civil Action No. 3;97-0113, pending in the United States
District Court for the Middle District of Tennessee, Nashville Division, filed
on January 8, 1997; and El Chico Restaurants, Inc. v. The Aetna Casualty and
Surety Company, et al, Civil Action No. 197-927, pending in the United States
District Court for the Southern District of Georgia, Augusta Division, filed on
January 10, 1997. Responsive pleadings have not yet been filed by any of the
defendants. The company intends to vigorously defend these lawsuits.
Management is unable to determine the potential financial impact of these
lawsuits at this time.
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, 1996.
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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, 1997 was $28.75 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,
1996, 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, 1997 was 8,768.
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, 1996 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.
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, 1996, 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, 1996,
is incorporated herein by reference. See Exhibit Index.
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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, 1996.
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 22, 1997.
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 22, 1997.
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 22, 1997.
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 22, 1997.
Page 13
<PAGE> 15
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, 1996 and 1995
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995, and 1994
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
SCHEDULE I - Condensed Financial Information of Registrant
December 31, 1996 and 1995
SCHEDULE V - Supplementary Insurance Information
December 31, 1996, 1995, and 1994
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.
Page 14
<PAGE> 16
(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).
10.4 Argonaut Group, Inc. 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).
Page 15
<PAGE> 17
13. The following materials are excerpted from the Annual Report to
Shareholders of Argonaut Group, Inc. for the fiscal year ended
December 31, 1996:
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, 1996 Form 10-K.
(b) Reports on Form 8-K
There were no Reports filed on Form 8-K for the quarter ended December
31, 1996
Page 16
<PAGE> 18
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 14, 1997
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 14, 1997
- ------------------------ Officer, and Director
Charles E. Rinsch
/s/ James B Halliday Vice President, Secretary, March 14, 1997
- ------------------------ and Treasurer (principal
James B Halliday financial and accounting
officer)
/s/ George A. Roberts Director March 14, 1997
- ------------------------
George A. Roberts
/s/ Henry E. Singleton Director March 14, 1997
- ------------------------
Henry E. Singleton
/s/ Arthur Rock Director March 14, 1997
- ------------------------
Arthur Rock
Page 17
<PAGE> 19
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, 1997. 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, 1997
<PAGE> 20
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
<TABLE>
<CAPTION>
BALANCE SHEET
December 31,
-------------------------------
Assets 1996 1995
----------- -----------
<S> <C> <C>
Short-term investments $ 3.1 $ 5.8
Cash & cash equivalents 0.2 0.1
Investment in subsidiary 538.5 708.9
Cost in excess of net assets purchased 41.1 43.9
Deferred Federal income taxes receivable 102.8 75.3
Other assets 8.3 6.4
----------- -----------
$ 694.0 $ 840.4
=========== ===========
Liabilities & Shareholders' Equity
Income taxes payable $ 1.2 $ 0.3
Other liabilities 0.3 0.4
Due from/(to) subsidiaries 27.2 28.9
Shareholders' equity 665.3 810.8
----------- -----------
$ 694.0 $ 840.4
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS For The Year Ended December 31,
----------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 4.4 $ 12.6 $ 3.2
Expenses:
Amortization of cost in excess of net assets 2.8 2.8 2.8
Other expenses 4.0 12.6 4.1
----------- ----------- -----------
Loss before tax and undistributed earnings (2.4) (2.8) (3.7)
Provision for income taxes 4.5 2.1 1.7
----------- ----------- -----------
Net loss before equity in earnings of subsidiary (6.9) (4.9) (5.4)
Equity (loss) in undistributed earnings of subsidiary (87.1) 61.8 82.1
----------- ----------- -----------
Net Income (loss) $ (94.0) $ 56.9 $ 76.7
=========== =========== ===========
</TABLE>
<PAGE> 21
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS For The Year Ended December 31,
----------- ----------- -----------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (94.0) $ 56.9 $ 76.7
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operations:
Amortization 2.8 2.8 2.8
Undistributed loss (earnings) in subsidiary 118.6 (72.2) (95.2)
Dividend from subsidiary 45.0 42.8 31.6
Decrease in deferred Federal income taxes
(payable) receivable (27.5) 12.3 18.0
Decrease (increase) in due from/to subsidiaries (1.7) 18.4 14.2
Increase in income taxes payable 0.9 2.2 1.4
Other, net (2.1) (1.5) (13.1)
----------- ----------- -----------
42.0 61.7 36.4
----------- ----------- -----------
Cash flows from investing activities:
Decrease (increase) in short-term investments 2.7 (5.8) 9.8
----------- ----------- -----------
2.7 (5.8) 9.8
----------- ----------- -----------
Cash flows from financing activities:
Repurchase of common stock (10.8) (25.8) (21.9)
Payment of cash dividend (34.6) (31.1) (28.7)
Exercise of stock options 0.8 0.5 0.3
----------- ----------- -----------
(44.6) (56.4) (50.3)
----------- ----------- -----------
Increase (decrease) in cash & cash equivalents 0.1 (0.5) (4.1)
Cash & cash equivalents, beginning of period 0.1 0.6 4.7
----------- ----------- -----------
Cash & cash equivalents, end of period $ 0.2 $ 0.1 $ 0.6
=========== =========== ===========
</TABLE>
<PAGE> 22
ARGONAUT GROUP, INC.
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 1996, 1995, and 1994
($ in millions)
<TABLE>
<CAPTION>
Future Other Premium
DPAC Benefits UPR Payables Revenue
Segment (a) (b) (c) (d) (e)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Workers Comp 4.1 659.5 47.3 - 129.5
All Other 1.2 534.2 18.0 - 32.2
Unallocable - - - -
-------- -------- -------- -------- --------
5.2 1,193.7 65.3 - 161.7
======== ======== ======== ======== ========
Year Ended December 31, 1995
Workers Comp 3.6 737.7 43.0 - 176.7
All Other 1.0 323.2 21.0 - 31.4
Unallocable - - - -
-------- -------- -------- -------- --------
4.6 1,060.9 64.0 - 208.1
======== ======== ======== ======== ========
Year Ended December 31, 1994
Workers Comp 2.6 822.9 54.3 - 240.2
All Other 1.0 373.4 19.2 - 39.5
Unallocable - - - -
-------- ------- -------- -------- --------
3.6 1,196.3 73.5 - 279.7
======== ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Amortization
Net Invest. Ben, Loss, (Deferral) Other Premiums
Income & LAE DPAC Insur. Exp Written
Segment (f) (1) (g) (h) (i) (2) (j)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <<C> <<C> <C>
Year Ended December 31, 1996
Workers Comp 42.3 81.2 (0.5) 52.9 147.5
All Other 34.3 265.0 (0.1) 11.8 28.6
Unallocable 12.9 - - - -
-------- -------- -------- -------- --------
89.5 346.2 (0.6) 64.7 176.1
======== ======== ======== ======== ========
Year Ended December 31, 1995
Workers Comp 50.5 98.6 (0.9) 56.2 148.9
All Other 22.1 54.2 (0.1) 12.1 31.1
Unallocable 29.4 - - - -
-------- -------- -------- -------- --------
102.0 152.8 (1.0) 68.3 180.0
======== ======== ======== ======== ========
Year Ended December 31, 1994
Workers Comp 61.4 167.9 (2.3) 62.4 213.1
All Other 27.8 39.3 0.5 11.7 35.8
Unallocable 21.5 - - - -
-------- -------- -------- -------- --------
110.7 207.2 (1.8) 74.1 248.9
======== ======== ======== ======== ========
</TABLE>
(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 segment's share of investable funds
(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
(2) Other insurance expenses allocated based on specific identification,
where possible, and related activities.
<PAGE> 23
EXHIBIT INDEX
Exhibit
No. Document
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).
10.4 Argonaut Group, Inc. 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, 1996:
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, 1996 Form 10-K.
<PAGE> 1
EXHIBIT 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In millions For the Years Ended December 31, 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Premiums
Workers compensation $ 129.5 $ 176.7 $ 240.2 $ 280.0 $ 289.6
Other insurance 32.2 31.4 39.5 35.4 38.8
-------- -------- -------- -------- --------
161.7 208.1 279.7 315.4 328.4
Net investment income 89.5 102.0 110.7 118.1 123.2
Gains on sales of investments 21.6 3.1 3.8 5.4 18.0
-------- -------- -------- -------- --------
Total Revenue $ 272.8 $ 313.2 $ 394.2 $ 438.9 $ 469.6
======== ======== ======== ======== ========
Underwriting gain (loss) before
income taxes:
Workers compensation $ (7.5) $ (0.2) $ 3.9 $ (10.7) $ (32.4)
Other continuing lines (125.2) (35.2) (24.4) (19.8) (15.2)
Run off lines (127.4) - 12.0 24.9 22.0
-------- -------- -------- -------- --------
$ (260.1) $ (35.4) $ (8.5) $ (5.6) $ (25.6)
======== ======== ======== ======== ========
Income (Loss) Before Income Taxes $ (149.0) $ 69.7 $ 106.0 $ 117.9 $ 115.6
Provision for income taxes (55.0) 12.8 29.3 28.8 29.3
-------- -------- -------- -------- --------
Income (Loss) Before Cumulative
Effect of Accounting Change (94.0) 56.9 76.7 89.1 86.3
Cumulative effect of change in
accounting for income taxes - - - - 61.8
-------- -------- -------- -------- --------
Net Income (Loss) $ (94.0) $ 56.9 $ 76.7 $ 89.1 $ 148.1
======== ======== ======== ======== ========
Income (Loss) Per Common Share:
Income (Loss) Before Cumulative Effect
of Accounting Change $ (3.92) $ 2.34 $ 3.00 $ 3.48 $ 3.32
Cumulative effect of change in
accounting for income taxes - - - - 2.38
-------- -------- -------- -------- --------
Net Income (Loss) Per Common Share $ (3.92) $ 2.34 $ 3.00 $ 3.48 $ 5.70
======== ======== ======== ======== ========
BALANCE SHEET DATA
Portfolio investments $1,395.5 $1,489.2 $1,484.8 $1,564.4 $1,566.0
======== ======== ======== ======== ========
Total assets $1,979.2 $2,012.3 $2,093.6 $2,182.7 $2,178.1
======== ======== ======== ======== ========
Reserves for losses and loss
adjustment expenses $1,193.7 $1,060.9 $1,196.3 $1,284.1 $1,390.9
======== ======== ======== ======== ========
Shareholders' equity $ 665.3 $ 810.8 $ 745.6 $ 729.6 $ 653.6
======== ======== ======== ======== ========
Cash dividends declared per
common share $ 1.44 $ 1.28 $ 1.12 $ 0.96 $ 0.80
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
13-1
<PAGE> 2
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, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995, and their results of
operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As explained in the accompanying notes to the consolidated financial
statements, the Company adopted a new accounting standard effective January 1,
1994 for investments in certain debt and equity securities.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP
San Francisco, California
January 5, 1997
13-2
<PAGE> 3
EXHIBIT 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN MILLIONS EXCEPT PER SHARE AMOUNT DECEMBER 31, 1996 1995
-------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(cost 1996 - $938.5; 1995 - $1,032.9) $ 945.3 $1,063.8
Equity securities, available for sale, at fair value
(cost: 1996 - $288.1; 1995 - $252.3) 442.9 393.4
Short-term investments, available for sale, at fair value 6.1 34.9
Securities in transit 1.2 (2.9)
-------- --------
1,395.5 1,489.2
Cash and cash equivalent 30.6 23.3
Accrued investment income 22.4 23.9
Receivables;
Reinsurance 234.6 198.6
Agents' balances 76.5 74.0
Accrued retrospective premiums 115.4 127.3
Cost in excess of net assets purchased 41.1 43.9
Unearned premiums on ceded reinsurance 1.0 2.6
Deferred federal income taxes 46.8 15.7
Other assets 15.3 13.8
-------- --------
$1,979.2 $2,012.3
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $1,193.7 $1,060.9
Unearned premiums 65.3 64.0
Accrued policyholder dividends 1.3 (4.9)
Other liabilities 53.6 81.5
-------- --------
1,313.9 1,201.5
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 23,788,285 and 24,103,703 shares
issued and outstanding at December 31, 1996
and December 31, 1995, respectively 2.4 2.4
Additional paid-in capital 97.1 97.7
Retained earnings 460.9 598.9
Net unrealized appreciation on securities 104.9 111.8
-------- --------
665.3 810.8
-------- --------
$1,979.2 $2,012.3
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
13-3
<PAGE> 4
EXHIBIT 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS) --------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums and other revenue:
Premiums, net $161.7 $208.1 $279.7
Net investment income 89.5 102.0 110.7
Gains on sales of investments 21.6 3.1 3.8
------- ------ ------
Total Revenue 272.8 313.2 394.2
------- ------ ------
Expenses:
Losses and loss adjustment expenses 346.2 152.8 207.2
Underwriting, acquisition, and
insurance expenses 64.1 67.3 72.3
Amortization of cost in excess of
net assets purchased 2.8 2.8 2.8
Policyholder dividends 8.7 20.6 5.9
------- ------ ------
Total Expenses 421.8 243.5 288.2
------- ------ ------
Income (loss) before income taxes (149.0) 69.7 106.0
Provision for income taxes (55.0) 12.8 29.3
------- ------ ------
Net Income (Loss) $ (94.0) $ 56.9 $ 76.7
------- ------ ------
Net Income (Loss) Per Common Share $ (3.92) $ 2.34 $ 3.00
------- ------ ------
</TABLE>
The accompanying notes are an integral part of these statements.
13-4
<PAGE> 5
EXHIBIT 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED APPRECIATION SHAREHOLDERS'
IN MILLIONS EXCEPT PER SHARE AMOUNTS STOCK CAPITAL EARNINGS ON SECURITIES EQUITY
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 2.6 $103.3 $566.3 $ 57.4 $729.6
Cummulative 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 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
Net income 56.9 56.9
Change in net unrealized
appreciation on securities 64.8 64.8
Retirement of common stock (0.1) (3.4) (22.4) (25.9)
Cash dividends ($1.28 per share) (31.1) (31.1)
Stock options exercised 0.5 0.5
----- ------ ------ ------ ------
Balance, December 31, 1995 2.4 97.7 598.9 111.8 810.8
Net loss (94.0) (94.0)
Change in net unrealized
appreciation on securities (6.9) (6.9)
Retirement of common stock (1.4) (9.4) (10.8)
Cash dividends ($1.44 per share) (34.6) (34.6)
Stock options exercised 0.8 0.8
----- ------ ------ ------ ------
Balance, December 31, 1996 $ 2.4 $ 97.1 $460.9 $104.9 $665.3
===== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
13-5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1996 1995 1994
------- ------- -------
(In millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (94.0) $ 56.9 $ 76.7
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Amortization and depreciation 12.1 11.9 7.0
Decrease in accrued investment income 1.5 5.7 4.0
Decrease (increase) in reinsurance receivables (36.0) 36.8 (11.1)
Decrease (increase) in agents' balances (2.5) 1.1 17.4
Decrease (increase) in accrued retrospective premiums 11.9 (17.3) (26.8)
Decrease (increase) in unearned premiums on ceded reinsurance 1.6 0.8 (0.2)
Decrease (increase) in deferred federal income taxes receivable (27.6) 6.7 18.0
Increase (decrease) in reserves for losses and loss adjustment expenses 132.8 (135.4) (87.8)
Increase (decrease) in unearned premiums 1.3 (9.5) (4.3)
Increase (decrease) in accrued policyholder dividends 6.2 (5.2) (11.8)
Increase (decrease) in income taxes payable (36.8) 1.3 (7.7)
Increase (decrease) in other assets and liabilities 4.4 (1.2) 4.4
------- ------- -------
(25.1) (47.4) (22.2)
------- ------- -------
Cash flows from investing activities:
Sales of fixed maturity investments 35.3 220.9 102.2
Maturities and mandatory calls of fixed maturity investments 165.5 31.9 123.8
Sales of equity securities 28.5 4.6 --
Purchases of fixed maturity investments (112.6) (2.2) (77.1)
Purchases of equity securities (64.4) (155.4) (72.9)
Decrease (increase) in short-term investments 28.8 0.3 (20.8)
Other, net (4.1) (2.1) 5.1
------- ------- -------
77.0 98.0 60.3
------- ------- -------
Cash flows from financing activities:
Repurchase of common stock (10.8) (25.9) (21.9)
Payment of cash dividend (34.6) (31.1) (28.7)
Exercise of stock options 0.8 0.5 0.3
------- ------- -------
(44.6) (56.5) (50.3)
------- ------- -------
Increase (decrease) in cash and cash equivalents 7.3 (5.9) (12.2)
Cash and cash equivalents, beginning of period 23.3 29.2 41.4
------- ------- -------
Cash and cash equivalents, end of period $ 30.6 $ 23.3 $ 29.2
======== ====== ======
Additional disclosure:
Income taxes paid $ 9.2 $ 3.1 $ 19.0
======== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
13-6
<PAGE> 7
EXHIBIT 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Argonaut Group, Inc. (the Company) 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 is the primary line of insurance written by Argonaut Insurance
Company, the larger insurance subsidiary. The Company also writes a limited
amount of complementary lines of commercial insurance, primarily general and
automobile liability. Argonaut Insurance's target market is companies whose
workers compensation needs will result in significant annual premiums
(generally between $250,000 and $5 million) in classes of insurance which
require specific expertise to underwrite prudently, enhance the safety of the
workplace, and effectively manage losses through partnership with the insured.
These classes include contractors, wholesalers, retailers, light manufacturers
and "high tech" firms, service firms (such as in the hospitality industry), and
clients who use self-insurance to meet some or all of their insurance needs.
Argonaut Great Central specializes in commercial multiple-peril,
workers compensation, and umbrella coverages specifically for food merchants,
restaurants, churches, and laundry/dry cleaners. They also provide workers
compensation for mid-sized accounts, generally with annual premiums of $100,000
to $300,000.
BASIS OF PRESENTATION
The consolidated financial statements of Argonaut Group, Inc. and subsidiaries
have been prepared in accordance with generally accepted accounting principles
(GAAP), which differ from statutory insurance accounting practices. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The financial statements include the accounts and operations of
Argonaut Group, Inc. and its subsidiaries. All material intercompany accounts
and transactions have been eliminated. Certain prior year amounts have been
reclassified to conform with the current year's presentation.
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and securities with an original maturity of less than ninety days.
INVESTMENTS
Investments in fixed maturities at December 31, 1996 and 1995 include bonds,
notes, and redeemable preferred stocks. Equity securities include common and
nonredeemable preferred stocks. Short-term investments consist of funds which
are in excess of the Company's near term operating and claims paying needs and
are invested in repurchase agreements, commercial paper, and money market funds.
All Investments are considered available for sale and are carried at
fair value. Fair values for fixed maturity investments and equity securities
are based on quoted market prices or dealer quotes. Unrealized appreciation or
depreciation on fixed maturity investments and equity securities is included,
net of applicable deferred income taxes, in shareholders' equity. Gains and
losses on sales of investments are computed on the specific identification
method and are reflected in total revenue.
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". 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.
RECEIVABLES
Agents' balances are presented net of a reserve for uncollectible accounts of
$1.4 million and $1.9 million at December 31, 1996 and 1995 respectively.
Accrued retrospective premiums are based upon actuarial estimates of
expected ultimate losses. Management believes that the accrued retrospective
premium receivable is reasonable. While the eventual receivable may differ from
the current estimates, 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.
COST IN EXCESS OF NET ASSETS PURCHASED
Cost in excess of net assets purchased of $41.1 million at December 31, 1996
and $43.9 million at December 31, 1995, relate to Teledyne, Inc.'s acquisition
of Argonaut Insurance Company in 1969, and is net of accumulated amortization
of $28.6 million and $25.8 million, respectively. Cost in excess of net assets
purchased is being amortized on a straight-line basis
22 13-7
<PAGE> 8
EXHIBIT 13
over a 25-year period beginning October 1, 1986. At each balance sheet date,
the Company evaluates the recoverability of its cost in excess of net assets
purchased in relation to anticipated future cash flows on an undiscounted
basis. If the carrying value of the cost in excess of net assets purchased
exceeds anticipated future cash flows on an undiscounted basis, then the cost
in excess of net assets purchased is deemed to be impaired and written down to
the value of the anticipated future cash flows. Based on this annual
assessment, the Company expects its cost in excess of net assets purchased to
be fully recovered.
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
period in which the related premium is earned. Deferred policy acquisition
costs are limited to their estimated realizable value based on the related
unearned premium and take into account anticipated claims and claims expenses,
based on historical and current experience, and anticipated investment income.
PER SHARE DATA
Per share data have been computed based on the weighted average number of
shares outstanding, which were: 23,984,543, 24,286,245, and 25,541,039 shares
for the years ending December 31, 1996, 1995, and 1994, 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.
2 INVESTMENTS
Gains on sales and calls of investments for the years ended December 31, were
as follows.
<TABLE>
<CAPTION>
- --------------------------------------------
In millions 1996 1995 1994
---------------------
<S> <C> <C> <C>
Fixed maturities $ 0.3 $2.9 $3.8
Equity securities 21.3 0.2 --
---------------------
$21.6 $3.1 $3.8
- --------------------------------------------
</TABLE>
The amortized cost and market values of fixed maturity investments as of
December 31, were as follows.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
In millions 1996 1995
-------------------------------------------------------------------------------------------------
Amortized Gross Gross Fair Amortized Gross Gross Fair
Cost Unrealized Unrealized Value Cost Unrealized Unrealized Value
Gains Losses Gains Losses
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $766.6 $6.4 $1.2 $771.9 $ 863.8 $27.2 $ -- $ 891.0
U.S. Government Agencies 47.5 0.1 0.5 47.1 -- -- -- --
Obligations of states and
political subdivisions 110.7 1.8 0.2 112.2 138.4 3.4 (0.6) 141.2
Corporate securities -- -- -- -- 16.0 0.3 -- 16.3
Redemptive preferred stock 13.7 0.6 0.2 14.1 14.7 0.7 (0.1) 15.3
----------------------------------------------------------------------------------------------
$938.5 $8.9 $2.1 $945.3 $1,032.9 $31.6 $(0.7) $1,063.8
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
13 - 8
<PAGE> 9
EXHIBIT 13
The amortized cost and market value of fixed maturity investments as of
December 31, 1996, by contractual maturity, are shown below.
- -------------------------------------------------------------------------------
In millions Amortized Fair
Cost Value
--------- ------
Due in one year or less $376.2 $379.6
Due after one year to five years 455.5 459.9
Due after five years to ten years 104.7 104.0
Due after ten years 2.1 1.8
------ ------
$938.5 $945.3
- -------------------------------------------------------------------------------
The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations without penalties.
Proceeds from sales of fixed maturity investments were $35.7 million,
$224.2 million, and $102.2 million in 1996, 1995, and 1994 respectively. Gross
gains of $0.4 million, $4.0 million, and $4.1 million and gross losses of $0,
$0.7 million, and $0.3 million were realized on those sales in 1996, 1995 and
1994, respectively.
The fair value and amortized cost of bonds on deposit with various
insurance regulatory agencies was $463.9 million and $459.7 million,
respectively, at December 31, 1996. Additionally, U.S. Treasury Notes with an
amortized cost of $7.7 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, 1996 and 1995, there were no investments in any one
investee exceeding 10% of shareholders' equity.
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 $7.4 million as of both December 31, 1996 and
1995. Under certain of the reinsurance agreements, funds are held to secure
performance of reinsurers in meeting their obligations. The amount of such funds
was $29.3 million and $30.5 million at December 31, 1996 and 1995, respectively.
Estimated losses recoverable from reinsurers and the ceded portion of
unearned premiums are reported as assets.
Losses and loss adjustment expenses of $346.2 million, $152.8 million,
and $207.2 million for the years ending December 31, 1996, 1995, and 1994,
respectively, are net of cessions of $55.4 million, $27.3 million, and $21.2
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.
In previous years, the Company actively assumed various forms of
casualty reinsurance for which it continues to maintain reserves for loss and
loss adjustment expenses (Note 12).
Premiums for the years ended December 31, were as follows.
- -------------------------------------------------------------------------------
In millions 1996 1995 1994
------ ------ ------
Direct written premiums $187.8 $196.6 $250.8
Reinsurance ceded to
other companies (15.6) (30.4) (19.7)
Reinsurance assumed from
other companies 4.0 13.8 17.8
------ ------ ------
Net written premiums $176.2 $180.0 $248.9
====== ====== ======
Direct earned premiums $172.2 $223.9 $281.9
Reinsurance ceded to
other companies (17.4) (29.2) (20.1)
Reinsurance assumed from
other companies 6.9 13.4 17.9
------ ------ ------
Net earned premiums $161.7 $208.1 $279.7
====== ====== ======
Percentage of reinsurance
assumed to net earned premiums 4.3% 6.4% 6.4%
- -------------------------------------------------------------------------------
24 13 - 9
<PAGE> 10
EXHIBIT 13
4 RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of reserves of losses and loss
adjustment expenses for the years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
In millions 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Reserves for losses and loss
adjustment expenses at
beginning of year $1,060.9 $1,196.3 $1,284.1
Losses and loss adjustment expenses:
Provision for losses and loss
adjustment expenses for claims
occurring in the current year 178.8 183.6 235.3
Increase (decrease) in estimated
losses and loss adjustment
expenses for claims occurring
in prior years 240.3 (15.5) 8.4
-------- -------- --------
419.1 168.1 243.7
-------- -------- --------
Losses and loss adjustment
expenses payments for claims
occurring during:
Current year 42.1 38.4 43.7
Prior years 244.2 265.1 287.8
-------- -------- --------
286.3 303.5 331.5
-------- -------- --------
Reserves for losses and loss
adjustment expenses at
end of year $1,193.7 $1,060.9 $1,196.3
- ------------------------------------------------------------------------------
</TABLE>
Reserves for losses and loss adjustment expenses represent the estimated
indemnity cost and related adjustment expenses necessary to investigate and
settle 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 including, the uncertain time period
for reporting claims, changes in the legal environment and court decisions and
federal and state legislation which may dramatically increase the liability
between the time a policy is written and associated claims are ultimately
resolved.
As an 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 complicated by long
periods of time between the date of occurrence and the date of the Company's
notification of the claim.
Loss reserves were increased by $229 million in the third quarter.
These reserves relate primarily to adverse developments affecting construction
defect claims, asbestos and environmental claims, and claims relating to the
construction of the subway system in Los Angeles. Policies covering
construction defects were written for the most part from 1984 through 1990.
Environmental claims relate primarily to policies written in the 1970s and
early 1980s. Company policies covering the Los Angeles subway construction were
non-renewed effective June 30, 1996.
The additional charges for increased reserves included $123 million for
unfavorable loss developments under reinsurance contracts assumed in the early
and mid-1970s. This line of business has not been written since the mid-70s and
has been in a run off mode since that time. The reserve increase principally
relates to asbestos and environmental exposure.
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, and 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 for loss and loss adjustment expenses
established are adequate and the associated estimate of reinsurance recoverable
is reasonable. While the eventual ultimate liability and reinsurance
recoverable may differ from the current estimates, 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 3.5% in 1996 and 1995. The amount of
unamortized discount was $26.7 million at December 31, 1996 and $23.3 million
at December 31, 1995.
25
13 - 10
<PAGE> 11
EXHIBIT 13
5 INCOME TAXES
The Company's income tax provision includes the following components.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
In Millions 1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Current tax provision $(27.6) $ 6.1 $11.6
Deferred tax provision related to:
Future tax deductions (6.7) 11.0 17.7
Net operating loss carryforward (18.8) -- --
Deferred alternative minimum
tax provision (1.9) (4.3) --
-------------------------------------
Income tax provision $(55.0) $12.8 $29.3
- -----------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
In Millions 1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Income tax provision at statutory
tax rates (35%) $(52.6) $24.0 $36.8
Tax effect of:
Tax exempt interest (1.9) (4.7) (8.0)
Dividends received deduction (5.0) (4.2) (2.5)
Other permanent adjustments, net 3.4 (3.4) 2.0
State income tax provision 1.1 1.1 1.0
-------------------------------------
Income tax provision $(55.0) $12.8 $29.3
- -----------------------------------------------------------------------------
</TABLE>
Deferred taxes arise from temporary differences in the recognition of revenue
and expenses for tax and financial reporting purposes. Net deferred tax assets
at December 31, 1996 and 1995 result from the following tax-effected temporary
differences.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
In Millions 1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Deferred liability on
unrealized gains $(56.5) $(60.2) $(16.6)
Deferred tax assets:
Reserve discounting 74.9 68.9 85.4
Alternative minimum tax 6.3 4.3 --
Net operating loss carryforward 18.8 -- --
Other, net 3.3 2.7 (2.8)
-------------------------------------
Deferred tax asset, net $ 46.8 $15.7 $66.0
- -----------------------------------------------------------------------------
</TABLE>
Realization of deferred tax assets is dependent upon the Company's generation
of sufficient taxable income in the future to recover tax benefits that cannot
be recovered from taxes paid in the carryback period, generally three years.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced. The Company has a regular federal tax net operating loss carryforward
of $53.7 million which will expire after 2011.
6 SHAREHOLDERS' EQUITY
The Company is authorized to issue 5,000,000 shares of $0.10 par value preferred
stock. No preferred shares were issued or outstanding at December 31, 1996.
During 1996 and 1995, the Company reacquired and retired 360,245 and
845,766 shares of its common stock, respectively, at prevailing market prices.
The Company's insurance subsidiaries are regulated by the various states
in which they do business 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
In Millions 1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Net income (loss) $(126.1) $ 56.2 $ 77.1
Surplus $ 468.9 $631.1 $552.6
- -----------------------------------------------------------------------------
</TABLE>
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, 1996, $17.6 million was available for
dividends to Argonaut Group without prior regulatory approval. During 1996,
dividends of $45.0 million were paid to Argonaut Group.
26 13-11
<PAGE> 12
EXHIBIT 13
7 NET INVESTMENT INCOME
Investment income and expenses for the years ended December 31, were as
follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In millions 1996 1995 1994
<S> <C> <C> <C>
Investment income:
Interest and dividends on
fixed maturities $69.2 $ 82.9 $ 99.7
Dividends on equity securities 24.2 17.9 9.3
Interest on short-term
investments 1.6 1.2 1.2
Other 1.2 1.1 2.2
----- ------ ------
96.2 103.1 112.4
Investment expenses (1.0) (1.1) (1.7)
Interest relating to Prop 103 (Note 11) (5.7) - -
----- ------ ------
Net investment income $89.5 $102.0 $110.7
- -------------------------------------------------------------------------------
</TABLE>
8 UNDERWRITING, ACQUISITION, AND INSURANCE EXPENSES
Underwriting, acquisition, and insurance expenses for the years ended
December 31, were as follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In millions 1996 1995 1994
<S> <C> <C> <C>
Commissions $13.0 $12.2 $20.0
General expenses 44.3 44.8 40.9
State assessments 3.1 6.8 6.2
Taxes, licenses, and bureau fees 4.3 4.5 7.0
----- ----- -----
64.7 68.3 74.1
Amortization (deferral) of
policy acquisition costs (0.6) (1.0) (1.8)
----- ----- -----
$64.1 $67.3 $72.3
- -------------------------------------------------------------------------------
</TABLE>
9 BENEFIT PLANS
PENSION
The company sponsors a qualified defined benefit plan which covers
substantially all of its employees. The benefits are based on years of service
and the employee's compensation during the last ten years of employment. The
Company's funding policy is to contribute annually the maximum allowable by the
Employee Retirement Income Security Act of 1974, as amended. Contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
The Company also maintains a non-qualified unfunded supplemental
defined benefit plan designed to compensate individuals to the extent their
benefits under the Company's qualified plan are curtailed due to Internal
Revenue Code Limitations.
The following table sets forth a reconciliation of the plan's funded
status and amounts recognized in the Company's balance sheet as of December 31
with respect to the qualified and non-qualified pension plans.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
In millions 1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation (vested benefits:
1996-$(16.2); 1995-$(14.1) $(16.7) $(14.5)
------ ------
Projected benefit obligation for service
rendered to date $(21.9) $(20.6)
Plan assets at fair value, primarily Treasury bonds 27.1 25.2
------ ------
Plan assets in excess of projected
benefit obligation 5.2 4.6
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (4.4) (4.4)
Unrecognized prior service cost 1.4 1.6
Unrecognized net asset (0.4) (0.5)
Adjustment required to recognize
minimum liability (0.5) -
------ ------
Pension asset recognized in the Balance Sheet $ 1.3 $ 1.3
- -------------------------------------------------------------------------------
</TABLE>
27 13-12
<PAGE> 13
EXHIBIT 13
Net pension cost included the following.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(In million) 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 1.5 $ 1.3 $ 1.8
Interest cost on projected
benefit obligation 1.4 1.4 1.2
Actual return on plan assets (1.4) (2.9) (1.0)
Net amortization (0.3) 1.5 -
----- ----- -----
Net periodic pension cost $ 1.2 $ 1.3 $ 2.0
===== ===== =====
- -------------------------------------------------------------
</TABLE>
In determining the actuarial present value of the projected benefit obligation
as of December 31, 1996 and 1995, the weighted average discount rate was 7.5%.
The rate of increase in future compensation levels was 4.5% and the long-term
rate of return on assets was 6.0% in 1996 and 1995.
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. On April 23, 1996, shareholders approved an amendment to the Plan
increasing the number of shares from 1,500,000 to 2,000,000. 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 grant date. 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 as accounted for under APB Opinion No. 25. The
options are nontransferable and are exercisable in installments.
In October, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS 123). As permitted by FAS 123, the Company will not change
its method of accounting for stock options but has provided the additional
required disclosures in the tables below. The additional compensation costs that
would have been recorded if the Company had adopted FAS 123 are not material.
Because the FAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
At December 31, 1996, 639,190 shares were available for future grant. The
option are fully vested after 6 years and expire after 11 years.
A summary of the status of the Company's stock option plan at December 31, 1996
and 1995 is presented in the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1996 1995
Number Weighted-Average Number Weighted-Average
of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year 970,860 $22.32 924,790 $21.60
Granted 168,250 32.86 120,600 30.00
Exercised (43,440) 17.39 (19,380) 22.16
Cancelled (59,500) 30.23 (55,150) 27.05
--------- -------
Outstanding at end of the year 1,036,170 $23.79 970,860 $22.32
Exercisable at end of year 521,040 18.13 456,860 16.06
Weighted-average fair value of options
granted during the year $ 4.69 $ 4.93
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Options
Options Outstanding Exercisable
Number Weighted-Average ------------------- Number ----------------
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$8.58 to $23.75 374,920 2.75 yrs. $14.32 366,940 $14.14
$26.25 to $33.00 661,250 8.33 yrs. $29.15 154,100 $27.62
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
28
13-13
<PAGE> 14
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; risk-free rates of
6.00, 6.04, and 6.31% for options issued in 1996 and 7.08% and 6.79% for
options issued in 1995; expected dividend yields of 4.62 and 4.17%; expected
lives of 5.51 and 4.85 years; and expected volatility of 15.39 and 15.82%.
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 $0.6 million, $0.6 million, and $0.5
million, in 1996, 1995, and 1994, respectively.
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, is as follows.
<TABLE>
<CAPTION>
In millions 1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Premiums:
Workers compensation $ 129.5 $176.7 $240.2
Other insurance 32.2 31.4 39.5
------- ------ ------
$ 161.7 $208.1 $279.7
Pre-tax underwriting income (loss):
Workers compensation $ (7.5) $ (0.2) $ 3.9
Other insurance (252.6) (35.2) (12.4)
------- ------ ------
$(260.1) $(35.4) $ (8.5)
Net investment income 89.5 102.0 110.7
Gains on sales of investments 21.6 3.1 3.8
------- ------ ------
Income (loss) before income taxes $(149.0) $ 69.7 $106.0
======= ====== ======
</TABLE>
11 COMMITMENTS AND CONTINGENCIES
Rental expenses for operating leases, principally for offices, were $3.8
million, $3.8 million, and $3.5 million in 1996, 1995, and 1994, respectively.
As of December 31, 1996, future minimum noncancellable operating lease
commitments are as follows: $3.8 million in 1997, $2.5 million in 1998, $1.7
million in 1999, $1.5 million in 2000, $1.3 million in 2001, and thereafter for
a total of $10.9 million.
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 the 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.
On November 8, 1988, California voters passed an initiative known as
Proposition 103. The Proposition, in part, provided for a rollback of rates for
certain lines of business (excluding workers compensation) to 20% below the
rate levels of November 8, 1987. The Insurance Commissioner rejected the
rollback exemption. The California Insurance Commissioner adopted a decision by
an Administrative Law Judge granting the Insurance Department's Proposition 103
rate rollback claim for $7.4 million plus interest accrued. Although the
Company is appealing the decision, it has recorded pre-tax reserves of $13.1
million ($8.5 million net after tax) consisting of policyholder dividend
expense of $7.4 million and $5.7 million interest expense.
13-14
<PAGE> 15
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 MTA contends that it has been damaged by an
unspecified amount.
The Company has responded to the Complaint, and brought 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.
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.
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 reserves for
losses and loss adjustment expenses and their underwriting loss, including
detailed information for the years ended December 31.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
In millions 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Run off lines:
Medical liability $ 11.2 $ 12.6 $ 15.9
Hospital liability 46.6 49.3 65.4
Other* 229.4 134.7 151.5
------ ------ ------
287.2 196.6 232.8
Continuing lines 906.5 864.3 963.5
-------- -------- --------
Total reserves $1,193.7 $1,060.9 $1,196.3
- ----------------------------------------------------------------
*Primarily casualty reinsurance assumed
</TABLE>
UNDERWRITING INCOME (LOSS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
In millions 1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Run off lines:
Medical liability $ 0.0 $ 2.4 $ 5.0
Hospital liability 0.1 9.9 16.0
Other* (127.5) (12.3) (9.0)
------- ------ ------
(127.4) 0.0 12.0
Continuing lines (132.7) (35.4) (20.5)
------- ------ ------
Total underwriting income (loss) $(260.1) $(35.4) $ (8.5)
- ----------------------------------------------------------------------
*Primarily casualty reinsurance assumed
</TABLE>
13-15
<PAGE> 16
EXHIBIT 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 in which they are domiciled. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissions ("NAIC"), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed but which the
appropriate regulatory agencies has allowed in practice.
The Company's insurance subsidiaries do not apply any permitted statutory
accounting practices, which individually or in the aggregate materially affect
statutory surplus or risk-based capital.
QUARTERLY FINANCIAL DATA -- UNAUDITED
The following table represents unaudited quarterly financial data for the years
ended December 31, 1996 and 1995. In the opinion of management, all adjustments
necessary to present fairly the results of operations for such periods have
been made. Total revenues and net income include gains on the sale of
investments. The Company cannot anticipate when or if similar gains may occur
in the future. Since financial results rely heavily on estimates, caution
should be used in drawing specific conclusions from quarterly consolidated
results.
<TABLE>
<CAPTION>
In millions except per share amounts Three months ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1996
Total revenues $92.4 $ 60.1 $ 55.5 $64.8
Underwriting income (loss) (4.5) $(16.8) (239.3) 0.5
Net income (loss) 27.4 2.3 (139.3) 15.6
Net income (loss) per share* $1.14 $ 0.10 $ (5.82) 0.66
1995
Total revenues $81.0 $ 81.2 $ 77.3 $73.7
Underwriting income (loss) (9.0) (7.1) (14.1) (5.2)
Net income 13.8 15.7 10.3 17.1
Net income per share 0.56 0.65 0.43 0.71
</TABLE>
*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.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
----------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
High 35 34-1/4 31-1/2 32-1/4
Low 30-1/4 30-1/2 28-3/8 27-1/4
Close 31 31-1/4 29-1/2 30-3/4
1995
High 31-1/4 32-1/2 31-3/4 34-1/2
Low 27-3/4 29-1/4 29-1/2 28-7/8
Close 30 31-3/4 30-1/2 32-1/2
</TABLE>
13-16
<PAGE> 17
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Earned premium income was $161.7 million, $208.1 million, and $279.7 million in
1996, 1995, and 1994 respectively. This decline is primarily due to the
following factors:
Loss experience on recent policy years for Workers Compensation
continues to develop more favorably than anticipated, increasing the amount of
premium returned to policyholders under retrospectively rated policies.
A significant number of Workers Compensation policies are being written
with large deductible provisions, reducing premium, but also reducing exposure
to losses. The impact of large deductible programs on inforce premiums is
approximately $100 million at both December 31, 1996 and 1995, up from $60
million at December 31, 1994.
Net investment income was $89.5 million, $102.0 million, and $110.7
million for 1996, 1995, and 1994, respectively. The decrease is largely the
result of $5.7 million in interest related to the potential Proposition 103
obligation. Lower interest rates, some restructuring of the investment
portfolio, and negative cash flow as claims from discontinued lines of business
are paid also contribute to the decrease.
Pre-tax gains on sales of investments were $21.6 million, $3.1 million,
and $3.8 million for 1996, 1995, and 1994, respectively. The current year gain
resulted primarily from Federal Paper Board's sale to International Paper for a
combination of cash and International Paper stock. We cannot anticipate when
or if other gains or losses may occur in the future.
Losses and loss adjustment expenses were $346.2 million, $152.8 million
and $207.2 million in 1996, 1995, and 1994, respectively. The Company's loss
ratio, including our run off lines of business, was 214% in 1996, 81% in 1995,
and 76% in 1994. The loss ratio in our workers compensation line of business
was 63% in 1996 and 1995, and 72% in 1994, reflecting improved loss trends
throughout the industry. The loss ratio in other continuing lines of business
was 427%, 173%, and 130% in 1996, 1995, and 1994, respectively. The
significant increase in the current year loss ratio reflects charges for
increased loss reserves of $229 million recorded in the third quarter. The
increased claim costs are related mostly to asbestos and environmental exposure
on certain general liability policies written in the 1970s and early 1980s, and
from reinsurance contracts assumed in the early 1970s. Additional charges also
relate to construction defect claims related to general liability policies
written for the most part from 1984 through 19909, and claims stemming from
construction of the subway system administered by the Los Angeles County
Metropolitan Transportation Agency (LACMTA). Company policies covering the
(LACMTA) construction were non-renewed effective June 30, 1996. This is
further discussed in Note 4 of the financial statements.
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 related 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.
In the opinion of management, the Company's reserves for each of these
liability issues 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 uncer-
13-17
<PAGE> 18
tainties and related management judgments, however, there can be no assurance
that future loss development, favorable or unfavorable, can be accurately
predicted.
Underwriting expenses totaled $64.1 million in 1996, $67.3 million in
1995, and $72.3 million in 1994. Underwriting expenses are composed of four
components: general expenses, commissions, premium taxes, and state fees and
assessments. The $3.2 million decrease from 1995 is due primarily to lower
state assessments.
Policyholder dividend expense was $8.7 million in 1996, $20.6 million
in 1995, and $5.9 million in 1994. These charges reflect the loss experience
of participating policyholders, the basis for dividend payments. Particularly
in California, with the advent of open rating in 1995, fewer participating
policies are being written. 1996 policyholder dividend expense includes $7.4
million that could be returned to policyholders under California Proposition
103 (described below).
Loss from operations after tax was $108.0 million in 1996 compared to
income of $54.9 million in 1995, and $74.2 million in 1994. Operations for the
year were impacted primarily by the significant increase in claim reserves
related to asbestos and environmental exposure recorded in the third quarter
and the establishment of reserves for liabilities under California Proposition
103 in the second quarter. These additional charges were partially offset by a
large realized gain on sale of investments recorded in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries require a 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, 1996, the Company generated sufficient capital from operating
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 liability 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 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, 1996, Argonaut
Insurance could pay to Argonaut Group, Inc. a maximum dividend of $17.6 million
without the Insurance Commissioner's approval. During 1996, Argonaut Insurance
paid the Company dividends of $45.0 million.
On April 23, 1996, the Company's Board of Directors increased the
quarterly dividend from $0.33 per common share to $0.37 per common share.
During 1996, total cash dividends paid by the Company to its shareholders were
$1.44 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 CHANGE
In October, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS 123). As permitted by FAS 123, the Company will not change
its method of accounting for stock options but has provided the additional
required disclosures in Note 9 to the financial statements. The additional
compensation costs that would have been recorded if the Company had adopted FAS
123 are not material.
LEGISLATION
Historically, over 30% of Argonaut's premium has 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 files its own rate schedules and rating plans.
Proposition 103 in California, voted into law on November 8, 1988,
provides in part for a rollback of rates for certain lines of business
(excluding workers compensation) to 20% below rate levels of November 8, 1987.
Argonaut Insurance Company is appealing the Insurance Commissioner's rejection
of its rollback exemption application but recorded its potential obligation and
related interest expense. This is discussed in Note 11 to the financial
statements.
13-18
<PAGE> 1
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, 1997, included in Argonaut Group, Inc.'s 1996 Annual Report to
Shareholders. It should be noted that we have not audited any consolidated
financial statements of the Company subsequent to December 31, 1996 or
performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
San Francisco, California
March 6, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 945
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 443
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,396
<CASH> 31
<RECOVER-REINSURE> 24
<DEFERRED-ACQUISITION> 5
<TOTAL-ASSETS> 1,979
<POLICY-LOSSES> 1,194
<UNEARNED-PREMIUMS> 65
<POLICY-OTHER> 1
<POLICY-HOLDER-FUNDS> 48
<NOTES-PAYABLE> 0
0
0
<COMMON> 2
<OTHER-SE> 663
<TOTAL-LIABILITY-AND-EQUITY> 1,979
162
<INVESTMENT-INCOME> 90
<INVESTMENT-GAINS> 22
<OTHER-INCOME> 0
<BENEFITS> 346
<UNDERWRITING-AMORTIZATION> 1
<UNDERWRITING-OTHER> 65
<INCOME-PRETAX> 149
<INCOME-TAX> 55
<INCOME-CONTINUING> 133
<DISCONTINUED> 127
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94)
<EPS-PRIMARY> (4)
<EPS-DILUTED> (4)
<RESERVE-OPEN> 1,061
<PROVISION-CURRENT> 179
<PROVISION-PRIOR> 240
<PAYMENTS-CURRENT> 42
<PAYMENTS-PRIOR> 244
<RESERVE-CLOSE> 1,194
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
