FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-14950
Argonaut Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 95-4057601
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Avenue of the Stars, Suite 1175, Los Angeles, California 90067-4213
(Address of principal executive offices) (Zip code)
310.553.0561
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
As of August 8, 1997, there were 23,840,050 shares of common stock,
par value $.10 per share , of the registrant
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996................................3
Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 1997 and 1996...........................................4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996................................5
Notes to The Condensed Consolidated Financial Statements.............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Second Quarter Ended June 30, 1997 and 1996.......................7
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings...........................................8
Item 6. Exhibits and Reports on Form 8-K..........................8
Signatures................................................9
Exhibit Index...............................................10
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Part I. Financial Information
Item 1. Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In million except per share amounts)
June 30, 1997 December
31, 1996
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities, available for sale, at market $913.7 $945.3
(cost: 1997 - $910.9; 1996 - $992.1)
Equity securities, available for sale, at market 451.0 442.9
(cost: 1997 - $254.8; 1996 - $292.2)
Short-term investments 55.1 6.1
Securities in transit 4.4 1.2
------------ -------------
1,424.2 1,395.5
Cash and cash equivalents 25.7 30.6
Accrued investment income 20.0 22.4
Receivables:
Reinsurance 229.4 234.6
Agents' balances 79.0 76.5
Accrued retrospective premiums 68.9 115.4
Cost in excess of net assets purchased 39.7 41.1
Unearned premiums on ceded reinsurance 0.8 1.0
Deferred Federal income taxes receivable 24.0 46.8
Other assets 15.3 15.3
------------ -------------
$1,927.0 $1,979.2
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $1,081.6 $1,193.7
Unearned premiums 51.8 65.3
Accrued policyholder dividends 0.5 1.3
Other liabilities 93.1 53.6
-------------
------------
1,227.0 1,313.9
------------ -------------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 23,827,629 and 23,788,285 shares
issued and outstanding at June 30, 1997
and December 31, 1996, respectively 2.4 2.4
Additional paid-in capital 97.6 97.1
Retained earnings 470.6 460.9
Net unrealized appreciation on securities 129.4 104.9
-------------
------------
700.0 665.3
------------ -------------
$1,927.0 $1,979.2
============ =============
See accompanying notes
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ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except amounts per share)
(unaudited)
For the Quarter For the Six Months
Ended June 30, Ended June 30,
-----------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Premiums and other revenue:
Premiums, net $37.7 $41.0 $83.3 $88.5
Net investment income 21.7 18.8 42.6 42.7
Gains on sales of investments 1.3 0.3 2.7 21.3
--------------- --------------- -------------- --------------
Total Revenue 60.7 60.1 128.6 152.5
Expenses:
Losses and loss adjustment expenses 25.5 35.9 54.3 68.9
Underwriting, acquisition, and
insurance expenses 18.6 13.5 35.5 31.5
Amortization of cost in excess of
net assets purchased 0.7 0.7 1.4 1.4
Policyholder dividends (1.1) 7.7 (0.8) 8.0
--------------- --------------- -------------- --------------
Total Expenses 43.7 57.8 90.4 109.8
--------------- --------------- -------------- --------------
Income before income taxes 17.0 2.3 38.2 42.7
Provision for Income Taxes 4.2 0.0 9.9 13.0
--------------- --------------- -------------- --------------
Net Income $12.8 $2.3 $28.3 $29.7
=============== =============== ============== ==============
Net Income Per Common Share: $0.54 $0.10 $1.19 $1.23
=============== =============== ============== ==============
Weighted Average Common Shares 23,819,102 24,078,867 23,810,278 24,091,917
=============== =============== ============== ==============
See accompanying notes
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the
Six Months
Ended
June 30,
-------------------------
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1997 1996
Cash flows from operating activities:
Net income 28.3 $29.7
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 6.3 5.9
Decrease in accrued investment income 2.4 2.1
Decrease in reinsurance receivables 5.2 15.1
Decrease (increase) in agents' balances (2.5) 5.9
Decrease in accrued retrospective premiums 46.5 11.9
Decrease in unearned premiums on ceded reinsurance 0.2 0.8
Decrease in deferred Federal income taxes receivable 9.9 6.8
Decrease in reserves for losses and
loss adjustment expense (112.1) (79.1)
Decrease in unearned premiums (13.5) (10.5)
Increase (decrease) in accrued policyholder dividends (0.8) 4.6
Increase (decrease) in income taxes payable 42.1 (2.4)
Decrease in other, net (4.1) (11.4)
------------ -----------
7.9 (20.6)
------------ -----------
Cash flows from investing activities:
Sales of fixed maturity investments 13.0 33.6
Sales of equity securities 39.1 21.7
Maturities and mandatory calls of fixed maturity investments 131.2 6.6
Purchases of fixed maturity investments (120.4) (2.3)
Purchases of equity securities (5.4) (61.6)
Decrease (increase) in short-term investments (49.0) 24.9
Increase in other, net (3.2) -
------------ -----------
5.3 22.9
------------ -----------
Cash flows from financing activities:
Repurchase of common stock 0.0 (4.6)
Payment of cash dividend (18.6) (16.9)
Exercise of stock options 0.5 -
------------
(18.1) (21.5)
------------ -----------
Decrease in cash and cash equivalents (4.9) (19.2)
Cash and cash equivalents, beginning of period 30.6 23.3
------------ -----------
Cash and cash equivalents, end of period $25.7 $4.1
============ ===========
See accompanying notes
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of June 30, 1997, and the related
consolidated statements of income for the three months and six month periods
ended June 30, 1997 and 1996 and the statements of cash flows for the six
month periods ended June 30, 1997 and 1996 are unaudited, and, in the
opinion of management, include all adjustments which are necessary for a
fair presentation of such statements. Such adjustments consist of only
normal recurring items. Interim results are not necessarily indicative of
results for other interim periods or for a full year.
Note 2 - Dividends Declared
On July 23, the Company declared a cash dividend of $0.41 per share
payable to stockholders of record on August 5, 1997. The dividend will be
paid on August 19, 1997.
Note 3 - Recently Issued Accounting Pronouncements
In February of 1997, the FASB issued SFAS No. 128, Earnings Per Share,
which becomes effective for the 1997 Annual Report. Earlier application is
not permitted, however, restatement of all prior periods presented is
required. The Statement replaces primary earnings per share (EPS) with
earnings per common share (basic EPS). Basic EPS is computed by dividing
income available to common stockholders by the weighted -average number of
common shares outstanding for the period. The Statement also requires
presentation of EPS assuming dilution. This is computed similarly to the
fully diluted EPS that is now required. Basic and diluted EPS for the six
month period ended 1997 are $1.19 and $1.17 respectively, and for the six
months ended 1996 are $1.29 and $1.27 respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Consolidated Operating Results
The Company recorded consolidated net income of $12.8 million ($0.54 per
common share) on total revenue of $60.7 million for the second quarter of
1997, compared with $2.3 million ($0.10 per common share) on total revenue
of $60.1 million for the same quarter last year. For the six months ended
June 30, 1997, consolidated net income was $28.3 million ($1.19 per common
share) on total revenue of $128.6 million, compared with net income of $29.7
million ($1.23 per common share) on total revenue of $152.5 million for the
same period in 1996.
Consolidated operating income after tax was $12.0 million for the quarter
ended June 30, 1997, compared with $2.1 million for the same period last
year. For the six months ended June 30, 1997, consolidated operating
income after tax was $26.5 million, compared with $15.9 million for the same
six month period last year. Operating income excludes gains on the sale of
investments.
Net written and earned premiums were $76.8 and $83.3 million respectively for
the six months ended June 30, 1997, compared with $90.4 and 88.5 million
respectively for the same period last year. Premium revenues and operating
results, particularly for workers compensation, continue to be impacted
unfavorably by severe price competition and declining premium rates. For
example, rates have dropped significantly in Hawaii and Pennsylvania during
1997 - both key states for Argonaut.
For the six months ended June 30, 1997 loss and loss adjustment expenses were
$54.3 million compared with $68.9 million for the same six month period last
year. Losses in 1996 included reserve increases of $5.0 million in the
general liability line representing primarily asbestos and construction
defect claims and $3.0 million in run off lines. The Companys statutory loss
ratio declined to 65% for the first six months of 1997 from 86% for the same
period in 1996. Without the additional reserve increases the previous year
loss ratio would have been 76%. The decline is primarily the result of
favorable loss experience on workers compensation policies
for recent years, and the impact of workers compensation policies written with
large deductible provisions.
Total revenue includes gains on sales of investments of $1.3 million for the
current quarter, compared with $300,000 for the second quarter in 1996. For
the six months ended June 30, 1997, gains on sales of investments were
$2.7 million, compared with $21.3 million for the same period last year.
Gains in 1996 resulted primarily from Federal Paper Boards sale to
International Paper for a combination of cash and International Paper
common stock. Management cannot anticipate when or if similar gains may
occur in the future.
On November 8, 1988, California voters passed the initiative known as
Proposition 103 which provided in part for a rollback of rates for certain
lines of business (excluding workers compensation) to 20% below rate
levels on November 9, 1987. The Insurance Commissioner rejected the
rollback exemption application, and, in the second quarter of 1996, the
Company recorded a pre-tax provision of $12.7 million for potential liability
and accrued interest under Proposition 103.
The Company believes that it complied with the rate rollback provisions of
Proposition 103 by implementing a 20% reduction in rates and that no refund
is due. Although Argonaut pursued an appeal of the Commissioners Order,
it did not prevail. Therefore, the Company has agreed to a settlement of its
Proposition 103 liability with the California Department of Insurance for an
amount within the currently carried accrual.
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Liquidity and Capital Resources
The liquidity requirements of the Company have been met by funds provided
from premiums and investment income as well as maturities of invested assets.
The primary use of funds was to pay claims, policy benefits, operating
expenses, and commissions and to purchase new investments.
Management believes that the Company maintains sufficient liquidity to pay
claims and expenses. Management also believes that the Company possesses
adequate capital resources to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to Item 3 of the Companys Annual Report to Stockholders on
Form 10-K for the fiscal year ended December 31, 1996. For a description of
the claim relating to California Proposition 103 see item 2 of part I of this
report.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibit 27 Financial Data Schedule for June 30, 1997 Form 10-Q.
2. During the quarter covered by this report, the Registrant did not file any
reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Argonaut Group, Inc.
August 8, 1997 By:___________________________________________
Date /s/ Charles E. Rinsch, President
(principal executive officer)
August 8, 1997 By:___________________________________________
Date /s/ James B Halliday, Vice President and Treasurer
(principal financial and accounting
officer)
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EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
27 Financial Data Schedule for June 30, 1997 Form 10-Q
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 913,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 451,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,424,200
<CASH> 25,700
<RECOVER-REINSURE> 229,400
<DEFERRED-ACQUISITION> 5,200
<TOTAL-ASSETS> 1,927,000
<POLICY-LOSSES> 1,081,600
<UNEARNED-PREMIUMS> 51,800
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<OTHER-SE> 697,600
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84,100
<INVESTMENT-INCOME> 42,600
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<UNDERWRITING-AMORTIZATION> 10,000
<UNDERWRITING-OTHER> 26,800
<INCOME-PRETAX> 35,500
<INCOME-TAX> 9,900
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