SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Period Ended March 31, 1997
Commission file number 0-14950
Argonaut Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4057601
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1800 Avenue of the Stars, Suite 1175, Los Angeles, California
(Address of principal executive offices)
90067-6045
(Zip Code)
310.553.0561
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
As of May 9, 1997 there were outstanding 23,822,103 shares of
common stock, par value $.10 per share, of the registrant.
<PAGE>
ARGONAUT GROUP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996..............4
Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996 ........5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997
and 1996...........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
First Quarter Ended March 31, 1997 and 1996 .......7
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K....................8
Signatures...................................................9
Exhibit Index...............................................10
Page 2
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PART I. FINANCIAL INFORMATION
Item 1.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of March 31, 1997, and the
related consolidated statements of income for the three-month periods ended
March 31, 1997 and 1996 and the statements of cash flows for the three-month
periods ended March 31, 1997 and 1996 are unaudited, and, in the opinion of
management, include all adjustments which are necessary for a fair presenta-
tion 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 - 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 permit-
ted, 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 outstand-
ing 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 first quarter of 1997 are $0.65 and
$0.63 respectively, and for the first quarter of 1996 are $1.14 and $1.10,
respectively.
Page 3
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<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions except per share amounts)
March 31, 1997 December 31, 1996
(unaudited) (audited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities,
available for sale, at market $ 942.6 $ 945.3
(cost: 1997-$954.4; 1996-$938.5)
Equity securities,
available for sale, at market 419.4 442.9
(cost: 1997-$265.0; 1996-$288.1)
Short-term investments 8.6 6.1
Securities in transit 3.9 1.2
-------- --------
1,374.5 1,395.5
Cash and cash equivalents 11.2 30.6
Accrued investment income 22.7 22.4
Receivables:
Reinsurance 237.8 234.6
Agents' balances 78.4 76.5
Accrued retrospective premiums 78.6 115.4
Cost in excess of net assets purchased 40.4 41.1
Unearned premiums on ceded reinsurance 0.9 1.0
Deferred Federal income taxes receivable 42.0 46.8
Other assets 15.6 15.3
------- --------
$1,902.1 $1,979.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and
loss adjustment expenses $1,123.6 $1,193.7
Unearned premiums 57.8 65.3
Accrued policyholder dividends 1.7 1.3
Other liabilities 54.1 53.6
-------- --------
1,237.2 1,313.9
-------- --------
Shareholders' equity:
Common stock - $.10 par, 35,000,000
shares authorized, 23,809,103 and
23,788,285 shares issued and
outstanding at 3/31/97 and
12/31/96, respectively 2.4 2.4
Additional paid-in capital 97.3 97.1
Retained earnings 466.7 460.9
Net unrealized appreciation
on securities 98.5 104.9
-------- --------
664.9 665.3
-------- --------
$1,902.1 $1,979.2
======== ========
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions except per share amounts)
(unaudited)
For the Quarter
Ended March 31,
1997 1996
------ ------
<S> <C> <C>
Premiums and other revenue:
Premiums, net $45.6 $47.5
Net investment income 20.9 23.9
Gains (losses) on sales of investments 1.4 21.0
------ ------
Total Revenue 67.9 92.4
Expenses:
Losses and loss adjustment expenses 28.8 33.0
Underwriting, acquisition,
and insurance expenses 16.9 18.0
Amortization of cost in excess of
net assets purchased 0.7 0.7
Policyholder dividends 0.3 0.3
------ ------
Total Expenses 46.7 52.0
------ ------
Income before income taxes 21.2 40.4
Provision for income taxes 5.7 13.0
------ ------
Net Income $15.5 $27.4
====== ======
Income Per Common Share: $0.65 $1.14
===== =====
Weighted Average Common Shares 23,801,357 24,104,968
========== ==========
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
unaudited)
For the Three Months
Ended March 31,
1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $15.5 $27.4
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 3.0 2.4
Increase in accrued investment income (0.3) (1.9)
Decrease (increase) in reinsurance
receivables (3.2) (0.2)
Decrease in agents' balances (1.9) 1.9
Increase in accrued retrospective premiums 36.8 5.5
Increase in unearned premium on ceded
reinsurance 0.1 0.9
Decrease in deferred federal income taxes 8.3 7.0
Decrease in reserves for losses and
loss adjustment expenses (70.1) (47.8)
Decrease in unearned premiums (7.5) (0.1)
Increase (decrease) in accrued
policyholder dividends 0.4 (1.8)
Increase in income taxes payable
(receivable) 7.3 5.7
Other, net (7.7) (3.5)
------- ------
(19.3) (4.5)
------- -------
Cash flows from investing activities:
Sales of fixed maturity investments 70.2 20.0
Sales of equity securities 3.0 15.8
Maturities and mandatory calls
of fixed maturity investments 26.0 1.9
Purchases of fixed maturity investments (2.5) -
Purchases of equity securities (81.9) (41.5)
Decrease in short-term investments (2.9) 7.6
Other, net (2.6) (3.8)
------ ------
9.3 0.0
------ ------
Cash flows from financing activities:
Repurchase of common stock - -
Payment of cash dividend (9.6) (8.0)
Exercise of stock options 0.2 -
------ ------
(9.4) (8.0)
------ ------
Decrease in cash and cash equivalents (19.4) (12.5)
Cash and cash equivalents, beginning of period 30.6 23.3
------ ------
Cash and cash equivalents, end of period $11.2 $10.8
====== ======
</TABLE>
Page 6
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
The Company's consolidated net income was $15.5 million ($0.65 per common
share) on total revenue of $67.9 million for the quarter ended March 31, 1997.
For the first quarter of 1996, net income was $27.4 million ($1.14 per common
share) on total revenue of $92.4 million. Consolidated operating income after
tax of $14.6 million for the quarter ended March 31, 1997, compared with $13.8
million for the same period last year. Operating income excludes gain on the
sale of investments.
Total revenue includes gains on sales of investments of $1.4 million for the
current quarter, compared with a gain of $21.0 million for the same period in
1996. Gains during 1996 resulted primarily from Federal Paper Board's sale to
International Paper for a combination of cash and International Paper common
stock. We cannot anticipate when or if similar gains or losses may occur in
the future.
Net written premiums were $40.0 million for the first quarter of 1997, compared
with $53.0 million last year. Earned premiums were $45.6 million in the cur-
rent quarter, compared with $47.5 million for the first quarter of 1996. The
slight decline in earned premium is a result of rate decreases and reform
legislation in several states related to workers compensation insurance -
Argonaut's primary line of business. Decline in written premium is a result of
this same trend but is also impacted by the return of premiums on participating
programs written in prior periods, reflecting improved loss experience.
Loss and loss adjustment expenses decreased to $28.8 million for the first
quarter of 1997 from $33.0 million for the same period in 1996. The Company's
loss ratio decreased to 63% for the current quarter compared with 70% for the
first quarter of 1996. As discussed above this is due to favorable loss
experience on workers compensation policies for recent years, and an impact
of workers compensation policies written with large deductible provisions.
Page 7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company have been met by funds provided from
premiums and investment income as well as maturities of invested assets. The
primary use of funds was to pay claims, policy benefits, operating expenses,
and commissions and to purchase new investments.
Management believes that the Company maintains sufficient liquidity to pay
claims and expenses. Management also believes that the Company possesses
adequate capital resources to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index
(b) During the quarter covered by this
report, the Registrant did not file any reports
on Form 8-K.
Page 8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Argonaut Group, Inc.
(Registrant)
/s/ Charles E. Rinsch
- - ----------------------
Charles E. Rinsch
President (principal executive
officer)
/s/ James B Halliday
- - ---------------------
James B Halliday
Vice President and Treasurer
(principal financial and
accounting officer)
14-May-97
Page 9
<PAGE>
EXHIBIT INDEX
Exhibits are numbered in accordance with Item 601 of Regulation S-K.
Exhibit
No. Description
- - -------- ----------------
27 Financial Data Schedule for March 31, 1997 Form 10-Q.
Page 10
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 942,600
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 419,400
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,374,500
<CASH> 11,200
<RECOVER-REINSURE> 237,800
<DEFERRED-ACQUISITION> 5,300
<TOTAL-ASSETS> 1,902,100
<POLICY-LOSSES> 1,123,600
<UNEARNED-PREMIUMS> 57,800
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<POLICY-HOLDER-FUNDS> 0
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<COMMON> 2,400
0
0
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45,600
<INVESTMENT-INCOME> 20,900
<INVESTMENT-GAINS> 1,400
<OTHER-INCOME> 0
<BENEFITS> 28,800
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 16,900
<INCOME-PRETAX> 21,200
<INCOME-TAX> 5,700
<INCOME-CONTINUING> 15,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,500
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.63
<RESERVE-OPEN> 1,193,700
<PROVISION-CURRENT> (12,500)
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</TABLE>
