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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 October 24, 1998.
Title Outstanding
Common Stock, par value $.10 per share 24,043,764
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION: Page
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1998 and December 31, 3
1997................................................
Consolidated Statements of Income
Three Months and Nine Months Ended, September 30, 1998 and 1997...... 4
Consolidated Statement of Comprehensive Income
Three Months and Nine Months Ended, September 30, 1998 and 1997...... 5
Consolidated Statements of Cash Flow
Three Months and Nine Months Ended September 30, 1998 and 1997...... 6
Notes to The Condensed Consolidated Financial 7
Statements......................
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Third Quarter Ended September 30, 1998 and 1997......... 8
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings..................... 9
Item 6. Exhibits and Reports on Form 9
K............................................
Signatures................................................ 10
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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>
Sept 30, 98 Dec 31, 97
(unaudited) (audited)
ASSETS
Investments:
Fixed maturities, available for sale, at market $958.2 $857.6
(cost: 1998 - $916.2; 1997 - $845.8)
Equity securities, available for sale, at market 375.3 440.1
(cost: - 1998 - $198.4; 1997 - $227.4)
Short-term investments 54.6 80.9
Securities in transit 0.9 (9.5)
------------ -----------
1,389.0 1,369.1
Cash and cash equivalents 21.7 59.0
Accrued investment income 15.6 20.3
Receivables:
Reinsurance 203.5 210.2
Agents' balances 61.0 74.2
Accrued retrospective premiums 56.0 61.8
Cost in excess of net assets purchased 36.2 38.3
Unearned premiums on ceded reinsurance 0.9 0.8
Deferred Federal income taxes receivable (7.4) 11.5
Other assets 16.7 15.3
------------ ----------
$1,793.2 $1,860.5
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $932.6 $1,024.9
Unearned premiums 43.9 40.2
Accrued policyholder dividends (1.3) (2.4)
Other liabilities 75.8 79.9
-----------
------------
1,051.0 1,142.6
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Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 23,948,665 and
23,854,720 shares issued and outstanding
at September 30, 1998
and December 31, 1997, respectively 2.4 2.4
Additional paid-in capital 99.9 98.3
Retained earnings 497.6 471.2
Net unrealized appreciation on securities 142.3 146.0
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742.2 717.9
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$1,793.2 $1,860.5
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In millions except amounts per share) For the Quarter For the Nine Months
(unaudited) Ended September 30, Ended September 30,
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1998 1997
1998 1997
Premiums and other revenue:
Premiums, net $33.6 $37.8 $105.8 $121.1
Net investment income 19.0 22.1 58.8 64.7
Gains on sales of investments 7.8 0.4 50.1 3.1
------------ ------------- ------------- ------------
Total Revenue 60.4 60.3 214.7 188.9
Expenses:
Losses and loss adjustment expenses 25.8 26.2 72.6 80.5
Underwriting, acquisition, and
insurance expenses 18.1 21.5 56.4 57.0
Amortization of cost in excess of
net assets purchased 0.7 0.7 2.1 2.1
Policyholder dividends 0.2 0.2 0.7 (0.6)
------------ ------------- ------------- ------------
Total Expenses 44.8 48.6 131.8 139.0
------------ ------------- ------------- ------------
Income before tax 15.6 11.7 82.9 49.9
Provision for taxes 5.2 2.4 27.0 12.3
---------- ------------- ------------- ------------
Net Income $10.4 $9.3 $55.9 $37.6
============ ============= ============= ============
Income per common share:
Basic $0.43 $0.39 $2.34 $1.58
============ ============= ============= ============
Diluted $0.43 $0.39 $2.32 $1.56
============ ============= ============= ============
Weighted Average Common Shares:
Basic 23,947,899 23,840,831 23,923,593 23,820,575
============ ============= ============= ============
Diluted 24,091,347 24,105,412 24,136,986 24,038,016
============ ============= ============= ============
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions except amounts per share) For the Quarter For the Nine Months
(unaudited) Ended September 30, Ended September 30,
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1998 1997 1998 1997
Net Income $10.4 $9.3 $55.9 $37.6
Other comprehensive income:
Unrealized gain on securities:
Gains arising during the year 13.4 30.9 44.3 71.1
Reclassification adjustment for gains included
in net income (7.7) (0.4) (50.1) (3.1)
------------ ------------- ------------- ------------
Other comprehensive income (loss) before tax 5.7 30.5 (5.8) 68.0
Income tax expense related to other
comprehensive income (loss) 2.0 10.7 (2.0) 23.8
------------ ------------- -------------
------------
Other comprehensive income (loss), net of tax 3.7 19.8 (3.8) 44.2
------------ ------------- ------------- ------------
Comprehensive income $14.1 $29.1 $52.1 $81.8
============ ============= ============= ============
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ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Nine Months
Ended September 30,
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1998 1997
Cash flows from operating activities:
Net income $55.9 $37.6
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation 6.8 9.4
Decrease in accrued investment income 4.7 0.9
Decrease in reinsurance receivables 6.7 1.5
Decrease (increase) in agents' balances 13.3 (10.1)
Decrease in accrued retrospective premiums 5.8 48.7
Decrease (increase) in unearned premiums on ceded reinsurance (0.2) 0.2
Decrease in deferred Federal income taxes receivable 20.9 10.7
Decrease in reserves for losses and
loss adjustment expense (92.3) (135.2)
Increase (decrease) in unearned premiums 3.7 (15.7)
Increase (decrease) in accrued policyholder dividends 1.1 (4.0)
Increase in income taxes payable 5.6 43.3
Decrease in other, net (12.6) (11.8)
-------- ---------
19.3 (24.5)
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Cash flows from investing activities:
Sales of fixed maturity investments 13.0
-
Sales of equity 37.3 52.8
securities
Maturities and mandatory calls of fixed maturity investments 231.8 159.5
Purchases of fixed maturity investments (305.6) (171.4)
Purchases of equity securities (8.2) (7.8)
Decrease (increase) in short-term investments 26.3 (8.1)
Increase in other, net (10.4) (0.9)
-------- ---------
(28.8) 37.1
-------- ---------
Cash flows from financing activities:
Payment of cash dividend (29.4) (28.4)
Exercise of stock options 1.6 0.9
-------- ---------
(27.8) (27.5)
-------- ---------
Decrease in cash and cash equivalents (37.3) (14.9)
Cash and cash equivalents, beginning of period 59.0 30.6
-------- ---------
Cash and cash equivalents, end of period $21.7 $15.7
======== =========
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 September 30, 1998, and the related
consolidated statements of income for the three and nine month periods ended
September 30, 1998 and 1997 and the statements of cash flows for the nine month
periods ended September 30, 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 October 19, the Company declared a cash dividend of $0.41 per common share
payable to shareholders of record on November 3, 1998. The dividend will be paid
on November 17, 1998.
Note 3 - Recently Issued Accounting Pronouncements
In February of 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
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 "basic" earnings per
common share. 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 third quarter of 1998 is $0.43, and for the nine
months ended 1998 are $2.34 and $2.32, respectively. Basic and diluted EPS for
the third quarter of 1997 is $0.39, and for the nine months ended 1997 are $1.58
and $1.56, respectively.
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 requirements of SFAS No. 130.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The Company reported consolidated net income of $10.4 million ($0.43 per diluted
common share) on total revenue of $60.4 million for the third quarter of 1998,
compared with $9.3 million ($0.39 per diluted common share) on total revenue of
$60.3 million for the same quarter last year. For the nine months ended
September 30, 1998, consolidated net income was $55.9 million ($2.32 per diluted
common share) on total revenue of $214.7 million, compared with net income of
$37.6 million ($1.56 per diluted common share) on total revenue of $188.9
million for the same period in 1997. Shareholder's book value at September 30,
1998 increased to $30.99 per common share compared with $30.82 at June 30, 1998
and $30.18 at September 30, 1997.
Consolidated operating income after tax was $5.3 million for the quarter ended
September 30, 1998, compared with $9.0 million for the same period last year.
For the nine months ended September 30, 1998, consolidated operating income
after tax was $23.3 million, compared with $35.6 million for the same nine-month
period last year. Operating income excludes gains on the sale of investments.
Total revenue includes gains on sales of investments of $7.8 million for the
current quarter, compared with $400,000 for the third quarter in 1997. For the
nine months ended September 30, 1998, gains on sales of investments were $50.1
million, compared with $3.1 million for the same period last year. The gains in
the third quarter of 1998 resulted primarily from resolution of class action
litigation related to investment transactions in prior years. Other gains in
1998 resulted primarily from the call of Navistar International Series D
preferred stock. The Company cannot anticipate when or if similar gains may
occur in the future.
Argonaut Group continues to maintain a conservative investment portfolio, with
over 70% of the portfolio value invested in U S Treasuries, other
investment-grade bonds, and short-term securities. During the current quarter,
the unrealized gains in the investment portfolio increased, since the value of
fixed maturities more than offset the decline in equities.
The decline in premium in the third quarter and for the nine months ended
September 30, 1998 from the comparable periods in 1997 was primarily the result
of discontinuing providing workers compensation coverage for employee leasing
businesses at Argonaut Insurance Company, the reduction in mid-market workers
compensation accounts at Argonaut Great Central in late 1977, and the increase
in premiums ceded to reinsurers for providing increased coverage in 1998.
The decline in operating results for the current quarter compared with the third
quarter of 1997 resulted from higher than normal losses (including Hurricane
Georges) at our Argonaut Great Central subsidiary; costs to upgrade computer
systems for Year 2000; and costs related to the review of strategic alternatives
to enhance shareholder value.
The Company established a Year 2000 project team in November, 1996, to prepare
the Company's computer hardware, operating system software, computer programs,
and voice and data communications to remedy Year 2000 compliant/remediation
issues. The Company's external Year 2000 plan includes validating and testing,
the readiness of its outsource data center service providers, and the
information exchange process with vendors and business partners.
It is the opinion of management that the Company's state of readiness is more
than 95% complete. The Company's client server policy management, policy rating,
and claims processing systems were Year 2000 compliant as of April 30, 1998. In
addition, as of September 30, 1998, Argonaut's mission critical mainframe legacy
systems have been remediated to process dates beyond the Year 2000. The Company
has completed testing its mission critical business processing client server and
mainframe legacy systems, computer hardware, computer infrastructure systems
software, and office automation software to assure continuity of service beyond
the Year 2000.
During the remainder of 1998 and into the first quarter of 1999, the project
team will continue testing non-mission critical user systems and validating the
above mission critical systems for Year 2000 compliance/remediation. After
completion of these activities, the Company will prepare a contingency plan that
will include a designated team to resolve any unforeseen problems that arise
beyond the Year 2000.
The total project cost is estimated to be approximately $3.8 million. All
costs associated with the project have been expensed as incurred.
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.
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 September 30, 1998 Form 10-Q.
2. The Registrant filed a Form 8-K on September 22, 1998 for Item 5. Other
Events. The resignation of an outside director from the Company's Board of
Directors. There were no financial statements filed therewith.
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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.
(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)
October 29, 1998
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<ARTICLE> 7
<MULTIPLIER> 1,000,000
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<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<DEBT-HELD-FOR-SALE> 1,013
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 375
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,389
<CASH> 22
<RECOVER-REINSURE> 204
<DEFERRED-ACQUISITION> 5
<TOTAL-ASSETS> 1,793
<POLICY-LOSSES> 933
<UNEARNED-PREMIUMS> 44
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2
<NOTES-PAYABLE> 0
0
0
<COMMON> 2
<OTHER-SE> 742
<TOTAL-LIABILITY-AND-EQUITY> 1793
106
<INVESTMENT-INCOME> 59
<INVESTMENT-GAINS> 50
<OTHER-INCOME> 0
<BENEFITS> 73
<UNDERWRITING-AMORTIZATION> 2
<UNDERWRITING-OTHER> 56
<INCOME-PRETAX> 83
<INCOME-TAX> 27
<INCOME-CONTINUING> 26
<DISCONTINUED> 1
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56
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<PROVISION-CURRENT> 88
<PROVISION-PRIOR> (15)
<PAYMENTS-CURRENT> 28
<PAYMENTS-PRIOR> 133
<RESERVE-CLOSE> 756
<CUMULATIVE-DEFICIENCY> (15)
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