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Previous: PXRE CORP, 10-Q, 1998-05-13 |
Next: CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP, 10-Q, 1998-05-13 |
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 March 31, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-14950
Argonaut Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 95-4057601
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Avenue of the Stars, Suite 1175, Los Angeles, California 90067-4213
(Address of principal executive offices) (Zip code)
310.553.0561
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of May 5, 1998.
Title Outstanding
Common Stock, par value $.10 per share 23,937,742
<PAGE>
<TABLE>
<CAPTION>
ARGONAUT GROUP, INC.
TABLE OF CONTENTS
<S> <C> <C>
PART I. FINANCIAL INFORMATION: Page
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1998 and December 31, 3
1997...................................................................
Consolidated Statements of Income and Comprehensive Income
Three Months Ended, March 31, 1998 and 4
1997.......................................................
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 5
1997........................................................
Notes to The Condensed Consolidated Financial 6
Statements....................................
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
First Quarter Ended March 31, 1998 and 7
1997..........................................................
PART II. OTHER INFORMATION:
Item 1. Legal 8
Proceedings.................................................................
Item 6. Exhibits and Reports on Form 8
8-K.........................................................................
Signatures.............................................................................9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In million except per share amounts)
<S> <C> <C>
Mar 31, 98 Dec 31, 97
(unaudited) (audited)
ASSETS
Investments:
Fixed maturities, available for sale, at market $1,000.6 $857.6
(cost: 1998 - $990.4; 1997 - $845.8)
Equity securities, available for sale, at market 393.2 440.1
(cost: - 1998 - $199.1; 1997 - $227.4)
Short-term investments 22.8 80.9
Securities in transit (11.0) (9.5)
------------- -------------
1,405.6 1,369.1
Cash and cash equivalents 31.3 59.0
Accrued investment income 17.3 20.3
Receivables:
Reinsurance 197.4 210.2
Agents' balances 69.4 74.2
Accrued retrospective premiums 61.5 61.8
Cost in excess of net assets purchased 37.6 38.3
Unearned premiums on ceded reinsurance 0.9 0.8
Deferred Federal income taxes receivable 7.7 11.5
Other assets 16.3 15.3
------------- -------------
$1,845.0 $1,860.5
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $990.2 $1,024.9
Unearned premiums 44.6 40.2
Accrued policyholder dividends (2.3) (2.4)
Other liabilities 80.2 79.9
-------------
-------------
1,112.7 1,142.6
------------- -------------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 23,909,945 and
23,854,720 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 2.4 2.4
Additional paid-in capital 99.0 98.3
Retained earnings 498.1 471.2
Net unrealized appreciation on securities 132.8 146.0
-------------
-------------
732.3 717.9
------------- -------------
$1,845.0 $1,860.5
============= =============
</TABLE>
<TABLE>
Argonaut Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(In millions except amounts per share) For the Quarter
(unaudited) Ended March 31,
--------------------------------
<S> <C> <C>
1998 1997
Premiums and other revenue:
Premiums, net $35.5 $45.6
Net investment income 20.3 20.9
Gains on sales of investments 42.2 1.4
------------- ------------
Total Revenue 98.0 67.9
Expenses:
Losses and loss adjustment expenses 24.2 28.8
Underwriting, acquisition, and
insurance expenses 19.2 16.9
Amortization of cost in excess of
net assets purchased 0.7 0.7
Policyholder dividends 0.2 0.3
-------------
------------- ------------
Total Expenses 44.3 46.7
------------- ------------
Income before tax 53.7 21.2
Provision for taxes 17.0 5.7
============= ============
Net Income $36.7 $15.5
============= ============
Income per common share:
Basic $1.54 $0.65
Diluted $1.52 $0.65
Weighted Average Common Shares 23,887,688 23,801,357
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Argonaut Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions except amounts per share) For the Three Months
(unaudited) Ended March 31,
--------------------------------
<S> <C> <C>
1998 1997
Net Income $36.7 $15.5
Other comprehensive income:
Unrealized gain (loss) on securities:
Gain (loss) arising during the 21.9 (8.5)
period
Reclassification adjustment for gains included
in net income (42.2) (1.4)
------------- ------------
Other comprehensive income (loss) before tax (20.3) (9.9)
Income tax expense related to other
comprehensive income (loss) (7.1) (3.5)
------------- ------------
Other comprehensive income (loss), net of tax (13.2) (6.4)
------------- ------------
Comprehensive income $23.5 $9.1
============= ============
See accompanying notes
</TABLE>
<PAGE>
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------
<S> <C> <C>
1998 1997
Cash flows from operating activities:
Net income $36.7 $15.5
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation 2.4 3.0
Decrease (increase) in accrued investment income 3.0 (0.3)
Decrease (increase) in reinsurance receivables 12.8 (3.2)
Decrease (increase) in agents' balances 4.8 (1.9)
Decrease in accrued retrospective premiums 0.3 36.8
Decrease (increase) in unearned premiums on ceded reinsurance (0.1) 0.1
Decrease in deferred Federal income taxes receivable 10.8 8.3
Decrease in reserves for losses and
loss adjustment expense (34.7) (70.1)
Increase (decrease) in unearned premiums 4.4 (7.5)
Increase in accrued policyholder dividends 0.1 0.4
Increase in income taxes payable 7.2 7.3
Decrease in other, net (8.3) (7.7)
----------- -----------
39.4 (19.3)
----------- -----------
Cash flows from investing activities:
Sales of fixed maturity investments 70.2
-
Sales of equity 31.9 3.0
securities
Maturities and mandatory calls of fixed maturity investments 57.4 26.0
Purchases of fixed maturity investments (203.3) (2.5)
Purchases of equity securities (3.7) (81.9)
Decrease (increase) in short-term investments 58.1 (2.9)
Decrease (increase) in other, net 1.6 (2.6)
----------- -----------
(58.0) 9.3
----------- -----------
Cash flows from financing activities:
Payment of cash dividend (9.8) (9.6)
Exercise of stock 0.7 0.2
options
----------- -----------
(9.1) (9.4)
----------- -----------
Decrease in cash and cash equivalents (27.7) (19.4)
Cash and cash equivalents, beginning of period 59.0 30.6
----------- -----------
Cash and cash equivalents, end of period $31.3 $11.2
=========== ===========
$15.7 $41.8
=========== ===========
See accompanying notes
</TABLE>
<PAGE>
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of March 31, 1998, and the related
consolidated statements of income for the three months ended March 31, 1998 and
1997 and the statements of cash flows for the three months ended March 31, 1998
and 1997 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 April 21, the Company declared a cash dividend of $0.41 per share payable
to stockholders of record on May 5, 1998. The dividend
will be paid on May 19, 1998.
Note 3 - Recently Issued Accounting Pronouncements
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share", became
effective for the 1997 Annual Report. Earlier application was 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 was previously required. Basic and
diluted EPS for the three months period ended 1998 are $1.58 and $1.52
respectively, and for the three months ended 1997 are $0.65.
In June of 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. The
Company has adopted this standard which requires the display of comprehensive
income and its components in the financial statements. The Company has chosen to
disclose Comprehensive Income, which includes unrealized gains and losses on
debt and equity securities classified as available for sale, as a separate
statement of comprehensive income. Prior years have been restated to conform to
the SFAS No.130 requirements.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The Company reported consolidated net income of $36.7 million ($1.52 per common
share, diluted) on total revenue of $98.0 million for the quarter ended March
31, 1998. For the first quarter of 1997, net income was $15.5 million ($0.65 per
common share) on total revenue of $67.9 million. Operating income after tax was
$9.3 million for the quarter, compared with $14.6 million for the same period
last year.
Operating income excludes gains on the sale of investments.
Total revenue includes gains on sales of investments of $42.2 million for the
current quarter, compared with gains of $1.4 million for the same period in
1997. The 1998 gains resulted primarily from the call of Navistar International
Series D preferred stock. The Company cannot anticipate when or if similar gains
or losses may occur in the future.
While written premiums were consistent with the first quarter of 1997, earned
premiums were lower, primarily as a result of adjustments to accrued
retrospective premiums related to prior periods, and the timing of premium on
some large construction wrap-up policies.
During the first quarter, Standard & Poor's affirmed their AA+ rating of claims
paying ability for Argonaut Insurance Company.
On January 28, 1998, the Company announced that it had engaged Credit Suisse
First Boston Corporation to assist in reviewing a range of strategic
alternatives, including the potential combination of the Company with another
company. There can be no assurance that any strategic combination or other
transaction will result from this review.
Liquidity and Capital Resources
The liquidity requirements of the Company have been met by funds provided from
premiums and investment income as well as maturities of invested assets. The
primary use of funds was to pay claims, policy benefits, operating expenses, and
commissions and to purchase new investments.
Management believes that the Company maintains sufficient liquidity to pay
claims and expenses. Management also believes that the Company possesses
adequate capital resources to cover unforeseen events such as reinsurer
insolvencies, inadequate premium rates, or reserve deficiencies.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report to Stockholders
on Form 10-K for the fiscal year ended December 31,
1997.
Item 6. Exhibits and Reports on Form 8-K.
1. Exhibit 27 Financial Data Schedule for March 31, 1998 Form 10-Q.
2. During the quarter covered by this report, the Registrant filed a Form 8-K
on March 25, 1998 for Item 5. Amended and Restated By-Laws of the
Registrant, a copy of which was provided as Exhibit 3.2. There were no
financial statements filed therewith.
<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)
May 11, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<DEBT-HELD-FOR-SALE> 1001
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 393
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1394
<CASH> 31
<RECOVER-REINSURE> 197
<DEFERRED-ACQUISITION> 5253
<TOTAL-ASSETS> 1845
<POLICY-LOSSES> 990
<UNEARNED-PREMIUMS> 45
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> (2)
<NOTES-PAYABLE> 0
<COMMON> 2
0
0
<OTHER-SE> 732
<TOTAL-LIABILITY-AND-EQUITY> 1845
36
<INVESTMENT-INCOME> 20
<INVESTMENT-GAINS> 42
<OTHER-INCOME> 0
<BENEFITS> 24
<UNDERWRITING-AMORTIZATION> 1
<UNDERWRITING-OTHER> 19
<INCOME-PRETAX> 54
<INCOME-TAX> 17
<INCOME-CONTINUING> 37
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37
<EPS-PRIMARY> 2
<EPS-DILUTED> 2
<RESERVE-OPEN> 845
<PROVISION-CURRENT> 18
<PROVISION-PRIOR> 6
<PAYMENTS-CURRENT> 5
<PAYMENTS-PRIOR> 45
<RESERVE-CLOSE> 820
<CUMULATIVE-DEFICIENCY> 109
</TABLE>
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