1
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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)
Securities registered pursuant to section 12(g) of
the Act:
Title of Securities Exchanges on which Registered Common Stock, par
value of $.10 per share National Association of Securities Dealers, Inc.
Automated Quotation System.
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
As of March 3, 1998, registrant had 23,904,776 shares of Common Stock
outstanding, and the aggregate market value of the voting stock held by
nonaffiliates was approximately $869 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II: Excerpts from Argonaut Group, Inc.'s Annual Report to Shareholders for
the Year Ended December 31, 1997.
Part III: Excerpts from Argonaut Group, Inc.'s
Proxy Statement for the Annual Meeting of Shareholders to be held on April 21,
1998.
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Argonaut Group, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related 12
Stockholder Matters
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on 13
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 15
</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 85% of premiums in 1997. See "Item 6. Selected
Financial Data" for certain financial information regarding industry segments in
which the Company operates. Argonaut Group is incorporated in Delaware. 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 ("Argonaut Great Central") is Argonaut
Group's other principal insurance subsidiary. Established in Illinois in 1948,
Argonaut 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 Argonaut 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 $140.6 million, $129.5
million, and $176.7 million, in 1997, 1996, and 1995, 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 $24.3 million, $32.2 million, and $31.4 million, in 1997,
1996, and 1995, 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 Argonaut 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
are recognized ratably over the period to which the premium relates.
Argonaut Insurance's limit of retention on its primary reinsurance treaty is $2
million and $250,000 on its wrap up treaty. Argonaut 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, 1997, there are about 3,350 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
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, 1997, 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.
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, 1997,
Argonaut Insurance could pay to Argonaut Group a maximum dividend of $9.8
million without the Insurance Commissioner's approval.
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Marketing
Argonaut Insurance and Argonaut Great Central 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 99% of
its premiums (77% 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.
Argonaut Great Central is authorized to operate in 33 states and considers
itself to be a specialty company with a defined target market. Argonaut Great
Central's dominant products are commercial multiple-peril and workers
compensation insurance. Argonaut Great Central's policies are marketed through
agents.
Neither Argonaut Insurance nor Argonaut 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.
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 comprise the largest portion of the Company's holdings.
Obligations of states and political subdivisions have decreased from 1996 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.
Agencies (FNMA and FHLM).
The Company's investment policy is to invest only in securities issued by
investment-grade issuers. It does not invest in high-yield or so called "junk
bonds," derivatives, speculative real estate, or mortgage backed securities.
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.
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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, 1997 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 $98.2 million and $119.1 million at
December 31, 1997 and 1996, respectively. Reserves for asbestos claims were
$101.4 and $113.7 million at December 31, 1997 and 1996. The Company recorded
additional loss reserves of $229 million in 1996 which related principally 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 and 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.
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 on page 8 and 9 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 eight 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,
1997.
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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Table I
<TABLE>
<CAPTION>
Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
(Net of Reinsurance)
---------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and LAE (a) $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 $845.7
Cumulative Amount
Paid as of: (b)
One year later 220.7 260.0 313.1 307.3 276.9 259.9 239.7 214.2 179.0
Two years later 384.4 464.9 537.5 525.8 489.2 444.7 417.9 356.2
Three years later 519.1 603.2 698.5 697.6 638.9 588.8 531.5
Four years later 613.0 704.4 835.7 821.4 759.5 684.1
Five years later 680.8 801.7 940.1 919.5 839.9
Six years later 752.2 884.5 1,021.3 991.0
Seven years later 819.7 952.3 1,082.7
Eight years later 876.2 1,004.8
Nine years later 921.5
Reserves Re-estimated
as of:
One year later 1,289.1 1,317.2 1,358.3 1,285.2 1,197.1 1,086.8 996.5 1,073.6 934.0
Two years later 1,262.5 1,284.7 1,356.9 1,311.9 1,202.0 1,083.0 1,180.8 1,038.9
Three years later 1,195.5 1,261.3 1,381.9 1,315.9 1,203.0 1,283.4 1,159.2
Four years later 1,175.9 1,282.9 1,374.1 1,325.9 1,403.1 1,277.3
Five years later 1,176.4 1,257.5 1,384.9 1,514.9 1,400.6
Six years later 1,153.0 1,265.3 1,572.0 1,524.3
Seven years later 1,157.5 1,442.0 1,575.6
Eight years later 1,322.8 1,447.0
Nine years later 1,325.9
Cumulative (Deficiency)
Redundancy:(c) ($16.3) ($110.0) ($227.1) ($236.5) ($198.7) ($169.7) ($147.8) ($146.0) $51.8
</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. Re-estimated reserves are calculated by adding cumulative
amount paid to unpaid loss and LAE and incurred but not reported (IBNR) at
year end for each accident year.
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Table II
<TABLE>
<CAPTION>
Analysis of Losses and Loss Adjustment Expenses (LAE) Development (in millions)
(Direct Insurance Only)
----------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses & LAE 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 $1,024.9
Cumulative Amount
One year later NA 509.2 384.7 355.7 325.6 288.3 267.5 245.2 234.7
Two years later NA 770.5 656.2 621.6 564.4 499.3 474.8 437.8
Three years later NA 954.4 862.6 818.2 739.3 668.9 625.4
Four years later NA 1,097.1 1,023.5 965.1 884.2 787.9
Five years later NA 1,216.7 1,149.2 1,086.1 983.5
Six years later NA 1,318.7 1,252.8 1,174.5
Seven years later NA 1,408.1 1,327.6
Eight years later NA 1,473.3
Nine years later NA
Reserves Re-estimated
One year later NA 1,770.2 1,619.3 1,512.6 1,414.2 1,291.7 1,179.7 1,300.3 1,159.7
Two years later NA 1,764.0 1,645.8 1,570.2 1,448.8 1,278.8 1,423.1 1,282.8
Three years later NA 1,772.2 1,702.3 1,603.7 1,440.6 1,533.8 1,404.1
Four years later NA 1,829.1 1,719.7 1,604.2 1,694.5 1,526.6
Five years later NA 1,820.3 1,723.6 1,841.5 1,687.5
Six years later NA 1,823.6 1,956.8 1,850.4
Seven years later NA 2,045.6 1,958.8
Eight years later NA 2,052.8
Nine years later NA
Cumulative (Deficiency)
NA ($465.4) ($397.0) ($356.0) ($296.6) ($242.5) ($207.8) ($221.9) $34.0
</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. Re-estimated reserves are calculated by adding
cumulative amount paid to unpaid loss and LAE and incurred but not reported
(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 pressures 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>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C>
1997 1996 1995
Ratio of:
Premium-to-surplus 0.3 0.3 0.3
=== === ===
Reserves-to-surplus 1.5 2.0 1.4
=== === ===
</TABLE>
The Company believes that its 1997 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 1997 and 1996. Argonaut Great Central is rated separately and was
awarded an "A-" (Excellent) rating in both 1997 and 1996.
During 1997, Standard & Poor's affirmed its "AA+" rating to the claims-paying
ability of Argonaut Insurance and its pooled subsidiaries.
Employees
At December 31, 1997, the Company employed 582 full-time employees. Of this
total, Argonaut Insurance employed 466 people (408 professional/managerial and
58 clerical/operational). Argonaut Great Central employed 97 people (65
professional/managerial and 32 clerical/operational). Argonaut Group employed 19
people (17 professional/managerial and 2 clerical/operational). The Company is
not a party to any collective bargaining agreements.
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Item 2. Properties
Argonaut Insurance's headquarters are located in a facility that consists of an
office building on approximately two acres of land in Menlo Park, California.
Argonaut Great Central's headquarters are located in a facility in Peoria,
Illinois. Argonaut Insurance and Argonaut Great Central own the buildings in
which their 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
On August 30,1996, the Los Angeles County Metropolitan Transportation Authority
(MTA) filed a civil action against Argonaut Insurance 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.
Argonaut Insurance Company has responded to the Complaint, and brought certain
counterclaims against the MTA, and possibly others, in connection with the facts
underlying the lawsuit. Argonaut Insurance Company believes it has meritorious
defenses, and intends to vigorously contest these claims. Argonaut Insurance
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 Group, Inc., Argonaut Insurance Company, Argonaut-Midwest Insurance
Company, Georgia Insurance Company,and/or Argonaut-Southwest Insurance
Company have been sued in eight recent lawsuits brought on behalf of 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 lawsuits are El
Chico Restaurants, Inc. and Southwest Cafes of Tennessee, Inc. v. The Aetna
Casualty and Surety Company, et al.; Civil Action No. 97-92-I, pending in the
Chancery Court for Davidson County, Tennessee, filed on January 8, 1997; El
Chico Restaurants, Inc. v. The Aetna Casualty and Surety Company, et al.;
Civil Action File No. 97-RCCV-28,
pending in the Superior Court of Richmond County, Georgia, filed on January
10, 1997; Bristol Hotel Management Corp., et al. v. Aetna Casualty & Surety
Co. A/K/A Aetna Group, et al.; Civil Action No. CL 9700727A, pending in
the Circuit Court of the Fifteenth Judicial Circuit, in and for Palm Beach
County, Florida, filed on August 15, 1997; Bristol Hotel Management Corp.,
et al. v. Aetna Casualty & Surety Co. A/K/A Aetna Group, et al.; Civil
Action No. 97-2240, pending in the United States District Court for the
Southern District of Florida, Miami Division, filed on July 17, 1997;
Foodarama Supermarkets, Inc. and WSR Corporation d/b/a Strauss Discount Auto v.
Aetna Casualty & Surety Co., et al.; Docket No. L-3556-97, pending in the
Superior Court of New Jersey Law Division, Morris County, filed on November
17, 1997; CR/PL Management Co., et al. v. Allianz Insurance Company,
et al.; Civil Action No. 98-01635; pending in the Circuit Court of Cook
County, Illinois County Department, Chancery Division, filed on February 6,
1998; Hill-Behan Lumber
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Company, et al.; v. Aetna Casualty and Surety Company, et al.; Case No.
982-00338; pending in the Circuit Court of the City of St. Louis, State of
Missouri, filed on February 12, 1998; and Foodrama Supermarkets, Inc., et al. v.
Allianz Insurance Company, et al.; Civil Action No. 001138; pending in the Court
of Common Pleas, Philadelphia County, Civil Division, filed on February 6, 1998.
Plaintiffs have threatened to bring similar claims against the Companies in
several other states. The Companies intend 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, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
The Company's common stock trades on the NASDAQ Stock Market under the symbol
AGII. The closing price on March 16, 1998 was $36.625 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, 1997, 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 March 16,
1998 was 8,084.
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, 1997 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, 1997, is incorporated herein by reference.
See Exhibit Index.
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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, 1997,
is incorporated herein by reference. See Exhibit Index.
On January 28, 1998, the Company announced that it was reviewing a range of
strategic alternatives to enhance shareholder value. These alternatives include
the potential combination with another company. The Company has engaged Credit
Suisse First Boston Corporation to assist in this process. There can be no
assurance that any strategic combination or other transaction will result from
this review.
The Company has developed a plan to ensure its systems are compliant with the
requirements to process transactions in the year 2000 and has a full-time
manager dedicated to addressing Year 2000 compliance for the Company. The
Company has utilized both internal and external resources to reprogram, or
replace, and test software for Year 2000 compliance and plans to complete this
project by late 1998. It is also working with each of its vendors to develop a
test plan related to year 2000 data. The total project cost is estimated to be
between $1.5 million and $2.0 million. All costs associated with the project
have been expensed as incurred.
Financial Accounting Board Statement No. 130 "Reporting Comprehensive
Income" was issued in June 1997. This pronouncement will require the
Company to make certain revisions in its annual and interim report format
beginning in 1998.
Financial Accounting Board Statement No. 131 "Disclosures About Segments of an
Enterprise and Related Information" was also issued in June 1997. This
pronouncement will require the company to disclose reportable segments on a
basis in which management disaggregates the company. It is effective for the
Company's 1998 Annual Statement. These pronouncements are not expected to
materially impact the company's financial position or results of operations.
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, 1997.
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.
Page 13
14
<PAGE>
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," "Security Ownership of Principal
Shareholders and Management" , and Section 16(a) Beneficial Ownership Reporting
Compliance 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 21, 1998.
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 21, 1998.
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 21, 1998.
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 21, 1998.
Page 14
15
<PAGE>
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, 1997 and 1996
Consolidated Statements of Income
For the Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996, and 1995
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, 1997 and 1996
Schedule V - Supplementary Insurance Information December 31,
1997, 1996, and 1995
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 15
16
<PAGE>
(a)3. Exhibits
The following exhibits are numbered in accordance with Item 601 of Regulation
S-K and, except as noted, are filed herewith.
2.0 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).
10.7 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 December 9, 1997).
10.8 Argonaut Group, Inc. Form of Employee Retention Agreement for
Messrs. Rinsch and Halliday dated as of February 24, 1998.
Page 16
17
<PAGE>
10.9 Argonaut Group, Inc. Form of Employee Retention Agreement for
Messrs. Mellin and Polak dated as of February 24, 1998.
10.10 Argonaut Group, Inc. Form of Employee Retention Agreement for
Argonaut Group, Inc. dated as of February 24, 1998.
13. The following materials are excerpted from the Annual Report to
Shareholders of Argonaut Group, Inc. for the fiscal year ended December
31, 1997:
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, 1997 Form 10-K.
(b) Reports on Form 8-K.
There were no Reports filed on Form 8-K for the quarter ended
December 31, 1997
Page 17
18
<PAGE>
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 25, 1998
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 25, 1998
- ---------------------------
Charles E. Rinsch Officer, and Director
/s/ James B Halliday Vice President, Secretary, March 25, 1998
James B Halliday and Treasurer (principal
financial and accounting
officer)
/s/ Henry E. Singleton Director March 25, 1998
- -------------------------
Henry E. Singleton
/s/ George A. Roberts Director March 25, 1998
- -------------------------
George A. Roberts
/s/ Arthur Rock Director March 25, 1998
Arthur Rock
/s/ Fayez S. Sarofim Director March 25, 1998
- -------------------------
Fayez S. Sarofim
Page 18
19
<PAGE>
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 7, 1998. 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 7, 1998
20
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
<TABLE>
<CAPTION>
BALANCE SHEET
December 31,
--------------------------
1997 1996
<S> <C> <C>
Assets
------------ ------------
Short-term investments $ 5.3 3.1
Cash & cash equivalents 0.5 0.2
Investment in subsidiary 604.0 538.5
Cost in excess of net assets purchased 38.3 41.1
Deferred federal income taxes receivable 89.7 102.8
Other assets 8.7 8.3
============ ============
$ 746.5 $694.0
============ ============
Liabilities & Shareholders' Equity
Income taxes payable $ 3.3 $1.2
Other liabilities 0.6 0.3
Due from/(to) subsidiaries 24.7 27.2
Shareholders' equity 717.9 665.3
============ ============
$746.5 $694.0
============ ============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS For The Year Ended December 31,
----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
------------ ------------ -------------
Revenues $ 5.3 $4.4 $12.6
Expenses:
Amortization of cost in excess of net assets 2.8 2.8 2.8
Other expenses 4.0 4.0 12.6
------------ ------------ -------------
Loss before tax and undistributed earnings (1.5) (2.4) (2.8)
Provision for income taxes 0.5 4.5 2.1
------------ ------------ -------------
Net loss before equity in earnings of subsidiary (2.0) (6.9) (4.9)
Equity (loss) in undistributed earnings of subsidiary 50.5 (87.1) 61.8
------------ ------------ -------------
Net Income (loss) $ 48.5 $(94.0) $ 56.9
============ ============ =============
</TABLE>
21
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
($ in millions)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS For The Year Ended December 31,
-------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 48.5 $ (94.0) $ 56.9
Adjustments to reconcile net income to
net cash provided by operations:
Amortization
2.8 2.8 2.8
Undistributed loss (earnings) in subsidiary (62.5) 118.6 (72.2)
Dividend from subsidiary 38.3 45.0 42.8
Decrease in deferred federal income taxes
(payable) receivable 13.1 (27.5) 12.3
Decrease (increase) in due from/to subsidiaries (2.5) (1.7) 18.4
Increase in income taxes payable 2.1 0.9 2.2
Other, net (0.4) (2.1) (1.5)
----------- ------------ ------------
39.4 42.0 61.7
----------- ------------ ------------
Cash flows from investing activities:
Decrease (increase) in short-term investments
(2.2) 2.7 (5.8)
----------- ------------ ------------
(2.2) 2.7 (5.8)
----------- ------------ ------------
Cash flows from financing activities:
Repurchase of common stock - (10.8) (25.8)
Payment of cash dividend (38.1) (34.6) (31.1)
Exercise of stock options 1.2 0.8 0.5
----------- ------------ ------------
(36.9) (44.6) (56.4)
----------- ------------ ------------
Increase (decrease) in cash & cash equivalents
0.3 0.1 (0.5)
Cash & cash equivalents, beginning of period
0.2 0.1 0.6
=========== ============ ============
Cash & cash equivalents, end of period $ 0.5 $0.2 $ 0.1
=========== ============ ============
</TABLE>
22
<PAGE>
ARGONAUT GROUP, INC.
SCHEDULE V
SUPPLEMENTARY INSURANCE INFORMATION
Years Ended December 31, 1997, 1996, and 1995
($ in millions)
<TABLE>
<CAPTION>
Net Amort.
Future Other Premium Invest. Ben, Loss, (Deferral) Other Prem.
DPAC Benefits UPR Payables Revenue Income & LAE DPAC Insur. Exp Written
Segment (a) (b) (c) (d) (e) (f) (1) (g) (h) (i) (2) (j)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31,1997
Workers Comp 2.7 572.4 20.8 - 140.6 36.5 91.1 (1.3) 132.3 69.4
All Other 1.3 452.5 19.4 - 24.3 28.8 21.7 0.1 10.0 25.9
Unallocable - - - - - 21.9 - - -
======== ========== ======= ========== ========== ======== =========== ======== =========== =========
4.0 1,024.9 40.2 - 164.9 87.2 112.8 (1.2) 79.4 158.2
======== ========== ======= ========== ========== ======== =========== ======== =========== =========
Year Ended
December 31, 1996
Workers Comp 4.1 659.5 47.3 - 129.5 42.3 81.2 (0.5) 52.9 147.5
All Other 1.2 534.2 18.0 - 32.2 34.3 265.0 (0.1) 11.8 28.6
- -
Unallocable - - - - - 12.9 - -
======== ========== ======= ========== ========== ======== =========== ======== =========== =========
5.2 1,193.7 65.3 - 161.7 89.5 346.2 (0.6) 64.7 176.1
======== ========== ======= ========== ========== ======== =========== ======== =========== =========
Year Ended
December 31, 1995
Workers Comp 3.6 737.7 43.0 - 176.7 50.5 98.6 (0.9) 56.2 148.9
All Other 1.0 323.2 21.0 - 31.4 22.1 54.2 (0.1) 12.1 31.1
Unallocable - - - - - 29.4 - - - -
======== ========== ======= ========== ========== ======== =========== ======== =========== =========
4.6 1,060.9 64.0 - 208.1 102.0 152.8 (1.0) 68.3 180.0
======== ========== ======= ========== ========== ======== =========== ======== =========== =========
</TABLE>
(a) Deferred Policy Acquisition Costs
(b) Future Policy Benefits, Claims, and Claim Adj Exp
(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 segment's share of
investable funds.
(2) Other insurance expenses allocated based on specific identification,
where possible, and related activities.
23
<PAGE>
Exhibit EXHIBIT INDEX
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).
10.7 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 December 9, 1997).
10.8 Argonaut Group, Inc. Form of Employee Retention Agreement for
Messrs. Rinsch and Halliday dated as of February 24, 1998.
10.9 Argonaut Group, Inc. Form of Employee Retention Agreement for
Messrs. Mellin and Polak dated as of February 24, 1998.
10.10 Argonaut Group, Inc. Form of Employee Retention Agreement for
Argonaut Group, Inc. dated as of February 24, 1998.
13. The following materials are excerpted from the Annual Report to
Shareholders of Argonaut Group, Inc. for the fiscal year
ended December 31, 1997:
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, 1997 Form 10-K.
1
<PAGE>
EXHIBIT 10.8
[FORM OF RETENTION AGREEMENT
FOR MESSRS. RINSCH AND HALLIDAY]
ARGONAUT GROUP, INC.
250 Middlefield Road
Menlo Park, California 94025
February __, 1998
Mr. [__________________]
Argonaut Group, Inc.
250 Middlefield Road
Menlo Park, CA 94025
Dear [__________________]:
This letter sets forth the agreement (the "Agreement") between
you and Argonaut Group, Inc. (the "Company") regarding severance payments and
related benefits if your employment terminates in connection with a Change in
Control (as defined below).
ARTICLE I
DEFINITIONS
1.1 Definitions
Whenever used in this Agreement, the following capitalized terms shall have
the meanings set forth in this Section 1.1, certain other capitalized terms
being defined elsewhere in this Agreement:
(a) "Board" means the Board of Directors of the Company.
(b) "Change in Control" shall mean the occurrence of any of the following:
(i) Any "Person" or "Group" (as such terms are
defined in Section 13(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations promulgated thereunder) is
or becomes the "Beneficial Owner" (within the meaning of Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company, or of any entity resulting from a merger or consolidation
involving the Company, representing more than fifty percent (50%) of
the combined voting power of the then outstanding securities of
the Company or such entity.
(ii)The individuals who, as of the date hereof, are members of the Board (the
"Existing Directors"), cease, for any reason, to constitute more than fifty
percent (50%) of the number of authorized directors of the Company as
determined in the manner prescribed in
10.8-1
2
<PAGE>
EXHIBIT 10.8
the Company's Certificate of Incorporation and Bylaws; provided, however, that
if the election, or nomination for election, by the Company's stockholders
of any new director was approved by a vote of at least fifty percent (50%)
of the Existing Directors, such new director shall be considered an Existing
Director; provided further, however, that no individual shall be considered
an Existing Director if such individual initially assumed office as a result
of either an actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies by or on behalf of anyone other than the Board (a
"Proxy Contest"), including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest.
(iii)The consummation of (x) a merger, consolidation or reorganization to which
the Company is a party, whether or not the Company is the Person surviving or
resulting therefrom, or (y) a sale, assignment, lease, conveyance or other
disposition of all or substantially all of the assets of the Company, in one
transaction or a series of related transactions, to any Person other than
the Company, where any such transaction or series of related transactions as
is referred to in clause (x) or clause (y) above in this subparagraph (iii)
(a "Transaction") does not otherwise result in a "Change in Control"
pursuant to subparagraph (i) of this definition of "Change in Control";
provided, however, that no such Transaction shall constitute a "Change in
Control" under this subparagraph (iii) if the Persons who were the
stockholders of the Company immediately before the consummation of such
Transaction are the Beneficial Owners, immediately following the
consummation of such Transaction, of fifty percent (50%) or more of the
combined voting power of the then outstanding voting securities of the
Person surviving or resulting from any merger, consolidation or
reorganization referred to in clause (x) above in this subparagraph (iii) or
the Person to whom the assets of the Company are sold, assigned, leased,
conveyed or disposed of in any transaction or series of related transactions
referred in clause (y) above in this subparagraph (iii).
(c) "Company" means Argonaut Group, Inc., a Delaware corporation, and any
successor or assignee as provided in Article V.
(d) "Compensation" means and includes all of your base salary attributable
to your employment with the Company and/or any of its Subsidiaries
(including, but not limited to, any amounts excludable from your gross
income for federal income tax purposes pursuant to Section 125 or Section
401(k) of the Internal Revenue Code of 1986, as amended), in effect
immediately before a Change in Control. "Compensation" shall not include
your bonuses or other cash or non-cash compensations or reimbursements, if
any (e.g., the grant or vesting of restricted stock, the grant, vesting, or
exercise of stock options, automobile allowance and gasoline reimbursement).
(e) "Disability" means a physical or mental infirmity which substantially
impairs your ability to perform your material duties for a period of at
least one hundred eighty (180) consecutive calendar days, and, as a result
of such Disability, you have not returned to your full-time regular
employment prior to termination.
(f) "Effective Time" means February __, 1998.
10.8-2
3
<PAGE>
EXHIBIT 10.8
(g) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended. (h) "Good Reason" means the occurrence, on or after the Effective
Time, of any of the following:
(i) The Company or any of its Subsidiaries
reduces your Compensation as in effect on
the Effective Time.
(ii)Without your express written consent, the Company or any of its Subsidiaries
requires you to change the location of your job or office, so that you will be
based at a location which is outside Los Angeles County, California; provided,
however, that "Good Reason" shall not be deemed to occur solely on account of
a requirement by the Company or any of its Subsidiaries that you perform
services at a location within fifty (50) miles of Menlo Park, California if
the Company or its Subsidiaries pay or reimburse you for your normal travel
and lodging expenses.
(iii) A successor to the Company fails or refuses
to assume the obligations of the Company
under this Agreement.
(iv) The Company or any successor breaches any of
the material provisions of this Agreement.
(i) "Just Cause" means the termination of your employment as a
result of (i) fraud, misappropriation of or intentional and
material damage to the property or business of the Company
(including its Subsidiaries), (ii) conviction of a felony
involving moral turpitude, (iii) material neglect, failure or
refusal to follow the reasonable directions of the Board, to
perform the duties reasonably assigned to you, or to follow
material Company policies, if you do not begin to cure such
neglect, failure or refusal within ten (10) days after
receiving written notice from the Company to do so.
(j) "Person" shall have the meaning set forth in the definition of
"Change in Control."
(k) "Release" means the Separation and General Release Agreement
in the form attached hereto as Exhibit "A".
(l) "Severance Payment" means the payment of severance compensation as
provided in Article III.
(m) "Subsidiary" means any corporation or other Person, a majority
of the voting power, equity securities or equity interest of
which is owned directly or indirectly by the Company.
(n) "WARN" means the Worker Adjustment and Retraining Notification
Act, 29 U.S.C. ss. 2101 et seq.
10.8-3
4
<PAGE>
EXHIBIT 10.8
ARTICLE II
EXCISE TAX LIMITATION
2.1 Limitation
Notwithstanding anything contained in this Agreement to the contrary,
in the event that any payment or benefit (within the meaning of Section
280G(b)(2) of the Code) to you or for your benefit paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise in connection with, or arising out of, your employment with the
Company or any of its Subsidiaries or a Change of Control within the meaning of
Section 280G of the Code (a "Payment" or "Payments"), would be subject to the
excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the
Payments shall be reduced (but not below zero) but only to the extent necessary
that no portion thereof shall be subject to the excise tax imposed by Section
4999 of the Code (the "Section 4999 Limit"). Unless you shall have given prior
written notice specifying a different order to the Company to effectuate the
limitations described in the preceding sentence, the Company shall reduce or
eliminate the Payments by first reducing or eliminating those Payments or
benefits which are not payable in cash and then by reducing or eliminating cash
Payments, in each case in reverse order beginning with payments or benefits
which are to be paid the farthest in time from the Determination (as hereinafter
defined). Any notice given by you pursuant to the preceding sentence shall take
precedence over the provisions of any other plan, arrangement or agreement
governing your rights and entitlements to any benefits or compensation.
2.2 Determinations
All determinations required to be made under this Article III (each, a
"Determination") shall be made, at the Company's expense, by a nationally
recognized accounting firm designated by the Company and reasonably acceptable
to you (the "Accounting Firm"). The Accounting Firm shall provide its
calculations, together with detailed supporting documentation, both to the
Company and to you before payment of your Severance Payment hereunder (if
requested at that time by the Company or you) or such other time as requested by
the Company or you (in either case provided that the Company or you believe in
good faith that any of the Payments may be subject to the Excise Tax); provided,
however, that if the Accounting Firm determines that no Excise Tax is payable by
you with respect to a Payment or Payments, it shall furnish you with an opinion
reasonably acceptable to you that no Excise Tax will be imposed with respect to
any such Payment or Payments. Within ten (10) calendar days of the delivery of
the Determination to you, you shall have the right to dispute the Determination
(the "Dispute"). The existence of any Dispute shall not in any way affect your
right to receive the Payments in accordance with the Determination. If there is
no Dispute, the Determination by the Accounting Firm shall be final, binding and
conclusive upon the Company and you, subject to the application of Section 2.3.
2.3 Adjustments
As a result of the uncertainty in the application of Sections 4999 and
280G of the Code, it is possible that the Payments either will have been made or
will not have been made by the Company, in either case in a manner inconsistent
with the limitations provided in Section 2.1 (an "Excess Payment" or
"Underpayment", respectively). If it is established pursuant to (i) a final
determination of a court for which all appeals have been taken and finally
resolved or the time
10.8-4
5
<PAGE>
EXHIBIT 10.8
for all appeals has expired, or (ii) an Internal Revenue Service (the "IRS")
proceeding which has been finally and conclusively resolved, that an Excess
Payment has been made, such Excess Payment shall be deemed for all purposes to
be a loan to you made on the date you received the Excess Payment and you shall
repay the Excess Payment to the Company on demand, together with interest on the
Excess Payment at one hundred twenty percent (120%) of the applicable federal
rate (as defined in Section 1274(d) of the Code) compounded semi-annually from
the date of your receipt of such Excess Payment until the date of such
repayment. If it is determined (i) by the Accounting Firm, the Company (which
shall include the position taken by the Company, together with its consolidated
group, on its federal income tax return) or the IRS, (ii) pursuant to a
determination by a court, or (iii) upon the resolution to your satisfaction of
the Dispute, that an Underpayment has occurred, the Company shall pay an amount
equal to the Underpayment to you within ten (10) calendar days of such
determination or resolution, together with interest on such amount at one
hundred twenty percent (120%) of the applicable federal rate compounded
semi-annually from the date such amount should have been paid to you pursuant to
the terms of this Agreement or otherwise, but for the operation of this Section
2.3, until the date of payment.
ARTICLE III
SEVERANCE PAYMENTS
3.1 Right to Severance Payment; Release
Conditioned on the execution and delivery by you (or your beneficiary
or personal representative, if applicable) of the Release, you shall be entitled
to receive a Severance Payment from the Company in the amount provided in
Section 3.2 if (a) you are an active employee of the Company or any Subsidiary
on the Effective Time, and (b) within eighteen (18) months after the occurrence
of a Change in Control, your employment is involuntarily terminated by the
Company or any of its Subsidiaries for any reason other than Just Cause or your
death or Disability, or you voluntarily terminate your employment with the
Company and all Subsidiaries for Good Reason within sixty (60) days after the
occurrence of such Good Reason. For purposes of clause (a) of the preceding
sentence, you will still be considered to be an active employee on the Effective
Time if you are then on sick leave, military leave or any other leave of absence
approved by the Company or any of its Subsidiaries. Notwithstanding the
foregoing, you will not be entitled to receive a Severance Payment to the extent
you receive payments which the Company or its Subsidiaries are required to make
to you under WARN.
3.2 Amount of Severance Payment
If you become entitled to a Severance Payment under this Agreement, the
amount of your Severance Payment, when added to any payments which the Company
or its Subsidiaries are required to make to you under WARN, shall equal the sum
of:
(a) three (3) times your annual Compensation; plus
(b) the amount of your annual bonus for the fiscal year of the
Company preceding the fiscal year in which the Change in Control occurs.
10.8-5
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<PAGE>
EXHIBIT 10.8
No Mitigation
The Company acknowledges and agrees that you shall be entitled to
receive your entire Severance Payment regardless of any income which you may
receive from other sources following your termination on or after the Effective
Time.
3.4 Payment of Severance Payment
The Severance Payment to which you are entitled shall be paid to you,
in cash and in full, not later than eight (8) calendar days after execution and
delivery by you (or your beneficiary or personal representative, if applicable)
of the Release Agreement, but in no event before the date on which such Release
becomes effective. If you should die before all amounts payable to you have been
paid, such unpaid amounts shall be paid to your beneficiary under this Agreement
or, if you have not designated such a beneficiary in writing to the Company, to
the personal representative(s) of your estate.
3.5 Health Benefits Coverage
If you are entitled to receive a Severance Payment under Section 3.1,
you will also be entitled to receive health benefits coverage for you and your
dependents under the same plan(s) or arrangement(s) under which you were covered
immediately before your termination of employment or plan(s) established or
arrangement(s) provided by the Company or any of its Subsidiaries thereafter.
Such health benefits coverage shall be paid for by the Company to the same
extent as if you were still employed by the Company, and you will be required to
make such payments as you would be required to make if you were still employed
by the Company. The benefits provided under this Section 3.5 shall continue
until the earlier of (a) the expiration of three (3) years following the date of
your termination of employment, or (b) the date you become covered under any
other group health plan not maintained by the Company or any of its
Subsidiaries; provided, however, that if such other group health plan excludes
any pre-existing condition that you or your dependents may have when coverage
under such group health plan would otherwise begin, coverage under this Section
3.5 shall continue (subject to the three (3) year limitation of clause (a) of
this sentence) with respect to such pre-existing condition until such exclusion
under such other group health plan lapses or expires. In the event you are
required to make an election under Sections 601 through 607 of ERISA (commonly
known as COBRA) to qualify for the benefits described in this Section 3.5, the
obligations of the Company and its Subsidiaries under this Section 3.5 shall be
conditioned upon your timely making such an election. 3.6 Automobile
If you become entitled to receive a Severance Payment under Section
3.1, and you then have the use of an automobile that is provided to you at the
expense of the Company or any Subsidiary, you shall have the right, for ninety
(90) days following your termination of employment, (a) to continue your use of
the automobile on the same basis on which you used it immediately before your
termination of employment, or (b) to purchase the automobile from the Company or
Subsidiary for its low wholesale bluebook value, or, if the Company or
Subsidiary has leased the automobile, to assume the lease, or (c) to take the
actions described in clauses (a) and (b) of this sentence.
10.8-6
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<PAGE>
EXHIBIT 10.8
3.7 Withholding of Taxes
The Company may withhold from any amounts payable under this Agreement
all federal, state, city or other taxes required by applicable law to be
withheld by the Company.
ARTICLE IV
OTHER RIGHTS AND BENEFITS NOT AFFECTED
4.1 Other Benefits
This Agreement does not provide a pension for you, nor shall any
payment hereunder be characterized as deferred compensation. Except as set forth
in Section 4.2, neither the provisions of this Agreement nor the Severance
Payment provided for hereunder shall reduce any amounts otherwise payable, or in
any way diminish your rights as an employee, whether existing now or hereafter,
under any written benefit, incentive, retirement, stock option, stock bonus or
stock purchase plan or any written employment agreement or other written plan or
arrangement not related to severance.
4.2 Other Severance Agreements Superseded
As of the Effective Time, this Agreement will supersede any and all
other severance plans of the Company or its Subsidiaries and severance
agreements between you and the Company and its Subsidiaries, and your
participation in any other severance plan of the Company and its Subsidiaries
will be hereby terminated.
4.3 Employment Status
This Agreement does not constitute a contract of employment or impose
on you any obligation to remain in the employ of the Company, nor does it impose
on the Company or any of its Subsidiaries any obligation to retain you in your
present or any other position, nor does it change the status of your employment
as an employee at will. Nothing in this Agreement shall in any way affect the
right of the Company or any of its Subsidiaries in its absolute discretion to
change or reduce your compensation at any time, or to change at any time one or
more benefit plans, including but not limited to pension plans, dental plans,
health care plans, savings plans, bonus plans, vacation pay plans, disability
plans, and the like.
ARTICLE V
SUCCESSOR TO COMPANY
The Company shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally to assume and agree to perform the Company's obligations under
this Agreement, in the same manner and to the same extent that the Company would
be required to perform if no such succession or assignment had taken place. In
such event, the term "Company," as used in this Agreement, shall mean (from and
after, but not before, the occurrence of such event) the Company as herein
before defined and any successor or
10.8-7
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EXHIBIT 10.8
assignee to the business or assets which by reason hereof becomes bound by the
terms and provisions of this Agreement.
ARTICLE VI
CONFIDENTIALITY
6.1 Nondisclosure of Confidential Material
In the performance of your duties, you have previously had, and may in
the future have, access to confidential records and information, including, but
not limited to, development, marketing, purchasing, organizational, strategic,
financial, managerial, administrative, manufacturing, production, distribution
and sales information, data, specifications and processes presently owned or at
any time hereafter developed by the Company or its agents or consultants or used
presently or at any time hereafter in the course of its business, that are not
otherwise part of the public domain (collectively, the "Confidential Material").
All such Confidential Material is considered secret and has been and/or will be
disclosed to you in confidence. By your acceptance of your Severance Payment
under this Agreement, you shall be deemed to have acknowledged that the
Confidential Material constitutes proprietary information of the Company which
draws independent economic value, actual or potential, from not being generally
known to the public or to other persons who could obtain economic value from its
disclosure or use, and that the Company has taken efforts reasonable under the
circumstances, of which this Section 6.1 is an example, to maintain its secrecy.
Except in the performance of your duties to the Company, you shall not, directly
or indirectly for any reason whatsoever, disclose or use any such Confidential
Material, except that the foregoing disclosure prohibition shall not apply as to
Confidential Material that (i) has been publicly disclosed or was within your
possession prior to its being furnished to you by the Company or becomes
available to you on a nonconfidential basis from a third party (in any of such
cases, not due to a breach by you of your obligations to the Company or by
breach of any other person of a confidential, fiduciary or confidential
obligation, the breach of which you know or reasonably should know), (ii) is
required to be disclosed by you pursuant to applicable law, and you provide
notice to the Company of such requirement as promptly as possible, or (iii) was
independently acquired or developed by you without violating any of the
obligations under this Agreement and without relying on Confidential Material of
the Company. All records, files, drawings, documents, equipment and other
tangible items, wherever located, relating in any way to the Confidential
Material or otherwise to the Company's business, which you have prepared, used
or encountered or shall in the future prepare, use or encounter, shall be and
remain the Company's sole and exclusive property and shall be included in the
Confidential Material. Upon your termination of employment with the Company, or
whenever requested by the Company, you shall promptly deliver to the Company any
and all of the Confidential Material and copies thereof, not previously
delivered to the Company, that may be, or at any previous time has been, in your
possession or under your control.
6.2 Nonsolicitation of Employees
By your acceptance of your Severance Payment under this Plan, you agree
that, for a period of two (2) years following your termination of employment
with the Company or its Subsidiaries, neither you nor any Person or entity in
which you have an interest shall solicit any person who was employed on the date
of your termination of employment by the Company or
10.8-8
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<PAGE>
EXHIBIT 10.8
any of its Subsidiaries to leave the employ of the Company or any of its
Subsidiaries. Nothing in this Section 6.2, however, shall prohibit you or any
Person or entity in which you have an interest from placing advertisements in
periodicals of general circulation soliciting applications for employment, or
from employing any person who answers any such advertisement. For purposes of
this Section 6.2, you shall not be deemed to have an interest in any corporation
whose stock is publicly traded merely because you are the owner of not more than
two percent (2%) of the outstanding shares of any class of stock of such
corporation, provided you have no active participation in the business of such
corporation (other than voting your stock) and you do not provide services to
such corporation in any capacity (whether as an employee, an independent
contractor or consultant, a board member, or otherwise).
6.3 Equitable Relief
By your acceptance of your Severance Payment under this Agreement, you
shall be deemed to have acknowledged that violation of Sections 6.1 or 6.2 would
cause the Company irreparable damage for which the Company cannot be reasonably
compensated in damages in an action at law, and that therefore in the event of
any breach by you of Sections 6.1 or 6.2, the Company shall be entitled to make
application to a court of competent jurisdiction for equitable relief by way of
injunction or otherwise (without being required to post a bond). This provision
shall not, however, be construed as a waiver of any of the rights which the
Company may have for damages under this Agreement or otherwise, and, except as
limited in Article VII, all of the Company's rights and remedies shall be
unrestricted.
10.8-9
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<PAGE>
EXHIBIT 10.8
ARTICLE VII
ARBITRATION
Except for equitable relief as provided in Section 6.3, arbitration in
accordance with the then most applicable rules of the American Arbitration
Association shall be the exclusive remedy for resolving any dispute or
controversy between you and the Company or any of its Subsidiaries, including,
but not limited to, any dispute regarding your employment or the termination of
your employment or any dispute regarding the application, interpretation or
validity of this Agreement not otherwise resolved through the claims procedure
set forth in Section 8.10. The arbitrator shall be empowered to grant only such
relief as would be available in a court of law. In the event of any conflict
between this Agreement and the rules of the American Arbitration Association,
the provisions of this Agreement shall be determinative. If the parties are
unable to agree upon an arbitrator, they shall select a single arbitrator from a
list designated by the office of the American Arbitration Association having
responsibility for the city in which you primarily performed services for the
Company or its Subsidiaries immediately before your termination of employment of
seven arbitrators, all of whom shall be retired judges who are actively involved
in hearing private cases or members of the National Academy of Arbitrators, and
who, in either event, are residents of the area in which you primarily performed
services for the Company or its Subsidiaries immediately before your termination
of employment. If the parties are unable to agree upon an arbitrator from such
list, they shall each strike names alternatively from the list, with the first
to strike being determined by lot. After each party has used three strikes, the
remaining name on the list shall be the arbitrator. The fees and expenses of the
arbitrator shall initially be borne equally by the parties; provided, however,
that each party shall initially be responsible for the fees and expenses of its
own representatives and witnesses. Unless mutually agreed otherwise by the
parties, any arbitration shall be conducted at a location within fifty (50)
miles from the location in which you primarily performed services for the
Company or any of its Subsidiaries immediately before your termination of
employment. If the parties cannot agree upon a location for the arbitration, the
arbitrator shall determine the location within such fifty (50) mile radius.
Judgment may be entered on the award of the arbitrator in any court having
jurisdiction. The prevailing party in the arbitration proceeding, as determined
by the arbitrator, and in any enforcement or other court proceedings, shall be
entitled to the extent provided by law to reimbursement from the other party for
all of the prevailing party's costs (including but not limited to the
arbitrator's compensation), expenses and reasonable attorney's fees.
ARTICLE VIII
MISCELLANEOUS
8.1 Applicable Law
To the extent not preempted by the laws of the United States, the laws of the
State of
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<PAGE>
EXHIBIT 10.8
California shall be the controlling law in all matters relating to this
Agreement, regardless of the choice-of-law rules of the State of California or
any other jurisdiction.
8.2 Construction
No term or provision of this Agreement shall be construed so as to
require the commission of any act contrary to law, and wherever there is any
conflict between any provision of this Agreement and any present or future
statute, law, ordinance, or regulation, the latter shall prevail, but in such
event the affected provision of this Agreement shall be curtailed and limited
only to the extent necessary to bring such provision within the requirements of
the law.
8.3 Severability
If a provision of this Agreement shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of this Agreement
and this Agreement shall be construed and enforced as if the illegal or invalid
provision had not been included.
8.4 Headings
The Section headings in this Agreement are inserted only as a matter of
convenience, and in no way define, limit, or extend or interpret the scope of
this Agreement or of any particular Section.
8.5 Assignability
Your rights or interests under this Agreement shall not be assignable
or transferrable (whether by pledge, grant of a security interest, or otherwise)
by you, your beneficiaries or legal representatives, except by will or by the
laws of descent and distribution.
8.6 Term
If no Change in Control has theretofore occurred, this Agreement shall
expire and be of no further force and effect on December 31, 1999; provided that
the Board may, at any time prior to the expiration hereof, extend the term of
this Agreement. If a Change in Control occurs on or before December 31, 1999 (or
before the expiration of the extended term if the Board had extended the term of
this Agreement), this Agreement shall continue in full force and effect until
its terms and provisions are completely carried out.
10.8-11
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<PAGE>
EXHIBIT 10.8
8.7 Amendment
Except as set forth in Section 8.6, no provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by you and the Company. No waiver by the
Company or you at any time or any breach by the other party of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or any prior or subsequent time. No agreement or representations,
written or oral, express or implied, with respect to the subject matter hereof,
have been made by either party which are not expressly set forth in this
Agreement. 10.8-11 8.8 Notices
For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly
given when personally delivered, telecopied, or sent by certified or overnight
mail, return receipt requested, postage prepaid, addressed to the respective
addresses, or sent to the respective telecopier numbers, last given by each
party to the other, provided that all notices to the Company shall be directed
to the attention of the Board of Directors with a copy to the General Counsel.
All notices and communications shall be deemed to have been received on the date
of delivery thereof if personally delivered, upon return confirmation if
telecopied, on the third business day after the mailing thereof, or on the date
after sending by overnight mail, except that notice of change of address shall
be effective only upon actual receipt. No objection to the method of delivery
may be made if the written notice or other communication is actually received.
8.9 Administration
This Agreement is part of the Argonaut, Inc. Employee Retention Plan,
which is a welfare benefit plan within the meaning of Section 3(1) of ERISA. The
Administrator of such Plan, within the meaning of Section 3(16) of ERISA, and
the Named Fiduciary thereof, within the meaning of Section 402 of ERISA, is the
Company. Attached hereto as Exhibit "B" is a statement of your rights under
ERISA.
8.10 Claims
If you believe you are entitled to a benefit under this Agreement, you
may make a claim for such benefit by filing with the Company a written statement
setting forth the amount and type of payment so claimed. The statement shall
also set forth the facts supporting the claim. The claim may be filed by mailing
or delivering it to the Secretary of the Company.
Within sixty (60) calendar days after receipt of such a claim, the
Company shall notify you in writing of its action on such claim and if such
claim is not allowed in full, shall state the following in a manner calculated
to be understood by you:
(a) The specific reason or reasons for the denial;
10.8-12
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<PAGE>
EXHIBIT 10.8
(b) Specific reference to pertinent provisions of this Agreement on which
the denial is based;
(c) A description of any additional material or information necessary for
you to be entitled to the benefits that have been denied and an
explanation of why such material or information is necessary; and
(d) An explanation of this Agreement's claim review procedure.
If you disagree with the action taken by the Company, you or your duly
authorized representative may apply to the Company for a review of such action.
Such application shall be made within one hundred twenty (120) calendar days
after receipt by you of the notice of the Company's action on your claim. The
application for review shall be filed in the same manner as the claim for
benefits. In connection with such review, you may inspect any documents or
records pertinent to the matter and may submit issues and comments in writing to
the Company. A decision by the Company shall be communicated to you within sixty
(60) calendar days after receipt of the application. The decision on review
shall be in writing and shall include specific reasons for the decision, written
in a manner calculated to be understood by you, and specific references to the
pertinent provisions of this Agreement on which the decision is based.
8.11 Notice of Termination
Following the Effective Time, any purported termination of your
employment by the Company or any of its Subsidiaries shall be communicated by a
written notice of termination, which such notice shall indicate the specific
termination provision in this Agreement, if any, relied upon and which shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of your employment under any provision so indicated.
If this Agreement is acceptable to you, please sign the enclosed copy
of this Agreement in the space provided below and return it to me.
Sincerely,
ARGONAUT GROUP, INC.
By: _____________________
ACCEPTED AND AGREED TO:
- -----------------------
10.8-13
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<PAGE>
EXHIBIT 10.9
[FORM OF RETENTION AGREEMENT
FOR MESSRS. MELLIN AND POLAK]
ARGONAUT GROUP, INC.
250 Middlefield Road
Menlo Park, California 94025
February __, 1998
Mr. [______________]
Argonaut Group, Inc.
250 Middlefield Road
Menlo Park, CA 94025
Dear [_________]:
This letter sets forth the agreement (the "Agreement") between
you and Argonaut Group, Inc. (the "Company") regarding severance payments and
related benefits if your employment terminates in connection with a Change in
Control (as defined below).
ARTICLE I
DEFINITIONS
1.1 Definitions
Whenever used in this Agreement, the following capitalized terms shall have
the meanings set forth in this Section 1.1, certain other capitalized terms
being defined elsewhere in this Agreement:
(a) "Board" means the Board of Directors of the Company.
(b) "Change in Control" shall mean the occurrence of any of the following:
(i)Any "Person" or "Group" (as such terms are defined in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations promulgated thereunder) is or becomes the "Beneficial Owner"
(within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company, or of any entity resulting from a
merger or consolidation involving the Company, representing more than fifty
percent (50%) of the combined voting power of the then outstanding
securities of the Company or such entity.
(ii) The individuals who, as of the date hereof, are members of the Board
10.9-1
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<PAGE>
EXHIBIT 10.9
(the"Existing Directors"), cease, for any reason, to constitute more than fifty
percent (50%) of the number of authorized directors of the Company as
determined in the manner prescribed in the Company's Certificate of
Incorporation and Bylaws; provided, however, that if the election, or
nomination for election, by the Company's stockholders of any new director
was approved by a vote of at least fifty percent (50%) of the Existing
Directors, such new director shall be considered an Existing Director;
provided further, however, that no individual shall be considered an
Existing Director if such individual initially assumed office as a result of
either an actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies by or on behalf of anyone other than the Board (a
"Proxy Contest"), including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest.
(iii) The consummation of (x) a merger, consolidation or reorganization to
which the Company is a party, whether or not the Company is the Person
surviving or
resulting therefrom, or (y) a sale, assignment, lease, conveyance or other
disposition of all or substantially all of the assets of the Company, in one
transaction or a series of related transactions, to any Person other than
the Company, where any such transaction or series of related transactions as
is referred to in clause (x) or clause (y) above in this subparagraph (iii)
(a "Transaction") does not otherwise result in a "Change in Control"
pursuant to subparagraph (i) of this definition of "Change in Control";
provided, however, that no such Transaction shall constitute a "Change in
Control" under this subparagraph (iii) if the Persons who were the
stockholders of the Company immediately before the consummation of such
Transaction are the Beneficial Owners, immediately following the
consummation of such Transaction, of fifty percent (50%) or more of the
combined voting power of the then outstanding voting securities of the
Person surviving or resulting from any merger, consolidation or
reorganization referred to in clause (x) above in this subparagraph (iii) or
the Person to whom the assets of the Company are sold, assigned, leased,
conveyed or disposed of in any transaction or series of related transactions
referred in clause (y) above in this subparagraph (iii).
(c) "Company" means Argonaut Group, Inc., a Delaware corporation, and any
successor or assignee as provided in Article V.
(d) "Compensation" means and includes all of your base salary attributable
to your employment with the Company and/or any of its Subsidiaries
(including, but not limited to, any amounts excludable from your gross
income for federal income tax purposes pursuant to Section 125 or Section
401(k) of the Internal Revenue Code of 1986, as amended), in effect
immediately before a Change in Control. "Compensation" shall not include
your bonuses or other cash or non-cash compensations or reimbursements, if
any (e.g., the grant or vesting of restricted stock, the grant, vesting, or
exercise of stock options, automobile allowance and gasoline reimbursement).
(e) "Disability" means a physical or mental infirmity which substantially
impairs your ability to perform your material duties for a period of at
least one hundred eighty (180) consecutive calendar days, and, as a result
of such Disability, you have not returned to your full-time regular
employment prior to termination.
10.9-2
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<PAGE>
EXHIBIT 10.9
(f) "Effective Time" means February __, 1998.
(g) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(h) "Good Reason" means the occurrence, on or after the Effective Time, of
any of the following:
(i) The Company or any of its Subsidiaries
reduces your Compensation as in effect on
the Effective Time.
(ii) Without your express written consent, the
Company or any of its Subsidiaries requires
you to change the location of your job or
office, so that you will be based at a
location more than fifty (50) miles from the
location of your job or office on the
Effective Time.
(iii) A successor to the Company fails or refuses
to assume the obligations of the Company
under this Agreement.
(iv) The Company or any successor breaches any of
the material provisions of this Agreement.
(i) "Just Cause" means the termination of your employment as a
result of (i) fraud, misappropriation of or intentional and
material damage to the property or business of the Company
(including its Subsidiaries), (ii) conviction of a felony
involving moral turpitude, (iii) material neglect, failure or
refusal to follow the reasonable directions of the Board, to
perform the duties reasonably assigned to you, or to follow
material Company policies, if you do not begin to cure such
neglect, failure or refusal within ten (10) days after
receiving written notice from the Company to do so.
(j) "Person" shall have the meaning set forth in the definition
of
"Change in Control."
(k) "Release" means the Separation and General Release Agreement
in the form attached hereto as Exhibit "A".
(l) "Severance Payment" means the payment of severance compensation as
provided in Article III.
(m) "Subsidiary" means any corporation or other Person, a majority
of the voting power, equity securities or equity interest of
which is owned directly or indirectly by the Company.
(n) "WARN" means the Worker Adjustment and Retraining
Notification
Act, 29 U.S.C. ss. 2101 et seq.
ARTICLE II
EXCISE TAX LIMITATION
10.9-3
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<PAGE>
EXHIBIT 10.9
2.1 Limitation
Notwithstanding anything contained in this Agreement to the contrary,
in the event that any payment or benefit (within the meaning of Section
280G(b)(2) of the Code) to you or for your benefit paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise in connection with, or arising out of, your employment with the
Company or any of its Subsidiaries or a Change of Control within the meaning of
Section 280G of the Code (a "Payment" or "Payments"), would be subject to the
excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the
Payments shall be reduced (but not below zero) but only to the extent necessary
that no portion thereof shall be subject to the excise tax imposed by Section
4999 of the Code (the "Section 4999 Limit"). Unless you shall have given prior
written notice specifying a different order to the Company to effectuate the
limitations described in the preceding sentence, the Company shall reduce or
eliminate the Payments by first reducing or eliminating those Payments or
benefits which are not payable in cash and then by reducing or eliminating cash
Payments, in each case in reverse order beginning with payments or benefits
which are to be paid the farthest in time from the Determination (as hereinafter
defined). Any notice given by you pursuant to the preceding sentence shall take
precedence over the provisions of any other plan, arrangement or agreement
governing your rights and entitlements to any benefits or compensation.
2.2 Determinations
All determinations required to be made under this Article III (each, a
"Determination") shall be made, at the Company's expense, by a nationally
recognized accounting firm designated by the Company and reasonably acceptable
to you (the "Accounting Firm"). The Accounting Firm shall provide its
calculations, together with detailed supporting documentation, both to the
Company and to you before payment of your Severance Payment hereunder (if
requested at that time by the Company or you) or such other time as requested by
the Company or you (in either case provided that the Company or you believe in
good faith that any of the Payments may be subject to the Excise Tax); provided,
however, that if the Accounting Firm determines that no Excise Tax is payable by
you with respect to a Payment or Payments, it shall furnish you with an opinion
reasonably acceptable to you that no Excise Tax will be imposed with respect to
any such Payment or Payments. Within ten (10) calendar days of the delivery of
the Determination to you, you shall have the right to dispute the Determination
(the "Dispute"). The existence of any Dispute shall not in any way affect your
right to receive the Payments in accordance with the Determination. If there is
no Dispute, the Determination by the Accounting Firm shall be final, binding and
conclusive upon the Company and you, subject to the application of Section 2.3.
2.3 Adjustments
As a result of the uncertainty in the application of Sections 4999 and
280G of the Code, it is possible that the Payments either will have been made or
will not have been made by the Company, in either case in a manner inconsistent
with the limitations provided in Section 2.1 (an "Excess Payment" or
"Underpayment", respectively). If it is established pursuant to (i) a final
determination of a court for which all appeals have been taken and finally
resolved or the time for all appeals has expired, or (ii) an Internal Revenue
Service (the "IRS") proceeding which has been finally and conclusively resolved,
that an Excess Payment has been made, such Excess Payment shall be deemed for
all purposes to be a loan to you made on the date you received the
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EXHIBIT 10.9
Excess Payment and you shall repay the Excess Payment to the Company on demand,
together with interest on the Excess Payment at one hundred twenty percent
(120%) of the applicable federal rate (as defined in Section 1274(d) of the
Code) compounded semi-annually from the date of your receipt of such Excess
Payment until the date of such repayment. If it is determined (i) by the
Accounting Firm, the Company (which shall include the position taken by the
Company, together with its consolidated group, on its federal income tax return)
or the IRS, (ii) pursuant to a determination by a court, or (iii) upon the
resolution to your satisfaction of the Dispute, that an Underpayment has
occurred, the Company shall pay an amount equal to the Underpayment to you
within ten (10) calendar days of such determination or resolution, together with
interest on such amount at one hundred twenty percent (120%) of the applicable
federal rate compounded semi-annually from the date such amount should have been
paid to you pursuant to the terms of this Agreement or otherwise, but for the
operation of this Section 2.3, until the date of payment.
ARTICLE III
SEVERANCE PAYMENTS
3.1 Right to Severance Payment; Release
Conditioned on the execution and delivery by you (or your beneficiary
or personal representative, if applicable) of the Release, you shall be entitled
to receive a Severance Payment from the Company in the amount provided in
Section 3.2 if (a) you are an active employee of the Company or any Subsidiary
on the Effective Time, and (b) within eighteen (18) months after the occurrence
of a Change in Control, your employment is involuntarily terminated by the
Company or any of its Subsidiaries for any reason other than Just Cause or your
death or Disability, or you voluntarily terminate your employment with the
Company and all Subsidiaries for Good Reason within sixty (60) days after the
occurrence of such Good Reason. For purposes of clause (a) of the preceding
sentence, you will still be considered to be an active employee on the Effective
Time if you are then on sick leave, military leave or any other leave of absence
approved by the Company or any of its Subsidiaries. Notwithstanding the
foregoing, you will not be entitled to receive a Severance Payment to the extent
you receive payments which the Company or its Subsidiaries are required to make
to you under WARN.
3.2 Amount of Severance Payment
If you become entitled to a Severance Payment under this Agreement, the
amount of your Severance Payment, when added to any payments which the Company
or its Subsidiaries are required to make to you under WARN, shall equal the sum
of:
(a) [two and one-half (2-1/2) for Mr. Mellin] [one (1) for Mr.
Polak] times your annual Compensation; plus
(b)the amount of your annual bonus for the fiscal year of the Company preceding
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EXHIBIT 10.9
the fiscal year in which the Change in Control occurs.
3.3 No Mitigation
The Company acknowledges and agrees that you shall be entitled to
receive your entire Severance Payment regardless of any income which you may
receive from other sources following your termination on or after the Effective
Time.
3.4 Payment of Severance Payment
The Severance Payment to which you are entitled shall be paid to you,
in cash and in full, not later than eight (8) calendar days after execution and
delivery by you (or your beneficiary or personal representative, if applicable)
of the Release Agreement, but in no event before the date on which such Release
becomes effective. If you should die before all amounts payable to you have been
paid, such unpaid amounts shall be paid to your beneficiary under this Agreement
or, if you have not designated such a beneficiary in writing to the Company, to
the personal representative(s) of your estate.
3.5 Health Benefits Coverage
If you are entitled to receive a Severance Payment under Section 3.1,
you will also be entitled to receive health benefits coverage for you and your
dependents under the same plan(s) or arrangement(s) under which you were covered
immediately before your termination of employment or plan(s) established or
arrangement(s) provided by the Company or any of its Subsidiaries thereafter.
Such health benefits coverage shall be paid for by the Company to the same
extent as if you were still employed by the Company, and you will be required to
make such payments as you would be required to make if you were still employed
by the Company. The benefits provided under this Section 3.5 shall continue
until the earlier of (a) the expiration of [two and one-half (2-1/2) years for
Mr. Mellin] [one (1) year for Mr. Polak] following the date of your termination
of employment, or (b) the date you become covered under any other group health
plan not maintained by the Company or any of its Subsidiaries; provided,
however, that if such other group health plan excludes any pre-existing
condition that you or your dependents may have when coverage under such group
health plan would otherwise begin, coverage under this Section 3.5 shall
continue (subject to the [two and one-half (2-1/2) for Mr. Mellin] [one (1) year
for Mr. Polak] limitation of clause (a) of this sentence) with respect to such
pre-existing condition until such exclusion under such other group health plan
lapses or expires. In the event you are required to make an election under
Sections 601 through 607 of ERISA (commonly known as COBRA) to qualify for the
benefits described in this Section 3.5, the obligations of the Company and its
Subsidiaries under this Section 3.5 shall be conditioned upon your timely making
such an election.
3.6 Automobile
If you become entitled to receive a Severance Payment under Section
3.1, and you then have the use of an automobile that is provided to you at the
expense of the Company or any Subsidiary, you shall have the right, for ninety
(90) days following your termination of
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EXHIBIT 10.9
employment, (a) to continue your use of the automobile on the same basis on
which you used it immediately before your termination of employment, or (b) to
purchase the automobile from the Company or Subsidiary for its low wholesale
bluebook value, or, if the Company or Subsidiary has leased the automobile, to
assume the lease, or (c) to take the actions described in clauses (a) and (b) of
this sentence.
3.7 Withholding of Taxes
The Company may withhold from any amounts payable under this Agreement
all federal, state, city or other taxes required by applicable law to be
withheld by the Company.
ARTICLE IV
OTHER RIGHTS AND BENEFITS NOT AFFECTED
4.1 Other Benefits
This Agreement does not provide a pension for you, nor shall any
payment hereunder be characterized as deferred compensation. Except as set forth
in Section 4.2, neither the provisions of this Agreement nor the Severance
Payment provided for hereunder shall reduce any amounts otherwise payable, or in
any way diminish your rights as an employee, whether existing now or hereafter,
under any written benefit, incentive, retirement, stock option, stock bonus or
stock purchase plan or any written employment agreement or other written plan or
arrangement not related to severance.
4.2 Other Severance Agreements Superseded
As of the Effective Time, this Agreement will supersede any and all
other severance plans of the Company or its Subsidiaries and severance
agreements between you and the Company and its Subsidiaries, and your
participation in any other severance plan of the Company and its Subsidiaries
will be hereby terminated.
4.3 Employment Status
This Agreement does not constitute a contract of employment or impose
on you any obligation to remain in the employ of the Company, nor does it impose
on the Company or any of its Subsidiaries any obligation to retain you in your
present or any other position, nor does it change the status of your employment
as an employee at will. Nothing in this Agreement shall in any way affect the
right of the Company or any of its Subsidiaries in its absolute discretion to
change or reduce your compensation at any time, or to change at any time one or
more benefit plans, including but not limited to pension plans, dental plans,
health care plans, savings plans, bonus plans, vacation pay plans, disability
plans, and the like.
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EXHIBIT 10.9
ARTICLE V
SUCCESSOR TO COMPANY
The Company shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally to assume and agree to perform the Company's obligations under
this Agreement, in the same manner and to the same extent that the Company would
be required to perform if no such succession or assignment had taken place. In
such event, the term "Company," as used in this Agreement, shall mean (from and
after, but not before, the occurrence of such event) the Company as herein
before defined and any successor or assignee to the business or assets which by
reason hereof becomes bound by the terms and provisions of this Agreement.
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<PAGE>
EXHIBIT 10.9
ARTICLE VI
CONFIDENTIALITY
6.1 Nondisclosure of Confidential Material
In the performance of your duties, you have previously had, and may in
the future have, access to confidential records and information, including, but
not limited to, development, marketing, purchasing, organizational, strategic,
financial, managerial, administrative, manufacturing, production, distribution
and sales information, data, specifications and processes presently owned or at
any time hereafter developed by the Company or its agents or consultants or used
presently or at any time hereafter in the course of its business, that are not
otherwise part of the public domain (collectively, the "Confidential Material").
All such Confidential Material is considered secret and has been and/or will be
disclosed to you in confidence. By your acceptance of your Severance Payment
under this Agreement, you shall be deemed to have acknowledged that the
Confidential Material constitutes proprietary information of the Company which
draws independent economic value, actual or potential, from not being generally
known to the public or to other persons who could obtain economic value from its
disclosure or use, and that the Company has taken efforts reasonable under the
circumstances, of which this Section 6.1 is an example, to maintain its secrecy.
Except in the performance of your duties to the Company, you shall not, directly
or indirectly for any reason whatsoever, disclose or use any such Confidential
Material, except that the foregoing disclosure prohibition shall not apply as to
Confidential Material that (i) has been publicly disclosed or was within your
possession prior to its being furnished to you by the Company or becomes
available to you on a nonconfidential basis from a third party (in any of such
cases, not due to a breach by you of your obligations to the Company or by
breach of any other person of a confidential, fiduciary or confidential
obligation, the breach of which you know or reasonably should know), (ii) is
required to be disclosed by you pursuant to applicable law, and you provide
notice to the Company of such requirement as promptly as possible, or (iii) was
independently acquired or developed by you without violating any of the
obligations under this Agreement and without relying on Confidential Material of
the Company. All records, files, drawings, documents, equipment and other
tangible items, wherever located, relating in any way to the Confidential
Material or otherwise to the Company's business, which you have prepared, used
or encountered or shall in the future prepare, use or encounter, shall be and
remain the Company's sole and exclusive property and shall be included in the
Confidential Material. Upon your termination of employment with the Company, or
whenever requested by the Company, you shall promptly deliver to the Company any
and all of the Confidential Material and copies thereof, not previously
delivered to the Company, that may be, or at any previous time has been, in your
possession or under your control.
6.2 Nonsolicitation of Employees
By your acceptance of your Severance Payment under this Plan, you agree
that, for a period of two (2) years following your termination of employment
with the Company or its Subsidiaries, neither you nor any Person or entity in
which you have an interest shall solicit any person who was employed on the date
of your termination of employment by the Company or any of its Subsidiaries to
leave the employ of the Company or any of its Subsidiaries. Nothing in
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<PAGE>
EXHIBIT 10.9
this Section 6.2, however, shall prohibit you or any Person or entity in which
you have an interest from placing advertisements in periodicals of general
circulation soliciting applications for employment, or from employing any person
who answers any such advertisement. For purposes of this Section 6.2, you shall
not be deemed to have an interest in any corporation whose stock is publicly
traded merely because you are the owner of not more than two percent (2%) of the
outstanding shares of any class of stock of such corporation, provided you have
no active participation in the business of such corporation (other than voting
your stock) and you do not provide services to such corporation in any capacity
(whether as an employee, an independent contractor or consultant, a board
member, or otherwise).
6.3 Equitable Relief
By your acceptance of your Severance Payment under this Agreement, you
shall be deemed to have acknowledged that violation of Sections 6.1 or 6.2 would
cause the Company irreparable damage for which the Company cannot be reasonably
compensated in damages in an action at law, and that therefore in the event of
any breach by you of Sections 6.1 or 6.2, the Company shall be entitled to make
application to a court of competent jurisdiction for equitable relief by way of
injunction or otherwise (without being required to post a bond). This provision
shall not, however, be construed as a waiver of any of the rights which the
Company may have for damages under this Agreement or otherwise, and, except as
limited in Article VII, all of the Company's rights and remedies shall be
unrestricted.
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<PAGE>
EXHIBIT 10.9
ARTICLE VII
ARBITRATION
Except for equitable relief as provided in Section 6.3, arbitration in
accordance with the then most applicable rules of the American Arbitration
Association shall be the exclusive remedy for resolving any dispute or
controversy between you and the Company or any of its Subsidiaries, including,
but not limited to, any dispute regarding your employment or the termination of
your employment or any dispute regarding the application, interpretation or
validity of this Agreement not otherwise resolved through the claims procedure
set forth in Section 8.10. The arbitrator shall be empowered to grant only such
relief as would be available in a court of law. In the event of any conflict
between this Agreement and the rules of the American Arbitration Association,
the provisions of this Agreement shall be determinative. If the parties are
unable to agree upon an arbitrator, they shall select a single arbitrator from a
list designated by the office of the American Arbitration Association having
responsibility for the city in which you primarily performed services for the
Company or its Subsidiaries immediately before your termination of employment of
seven arbitrators, all of whom shall be retired judges who are actively involved
in hearing private cases or members of the National Academy of Arbitrators, and
who, in either event, are residents of the area in which you primarily performed
services for the Company or its Subsidiaries immediately before your termination
of employment. If the parties are unable to agree upon an arbitrator from such
list, they shall each strike names alternatively from the list, with the first
to strike being determined by lot. After each party has used three strikes, the
remaining name on the list shall be the arbitrator. The fees and expenses of the
arbitrator shall initially be borne equally by the parties; provided, however,
that each party shall initially be responsible for the fees and expenses of its
own representatives and witnesses. Unless mutually agreed otherwise by the
parties, any arbitration shall be conducted at a location within fifty (50)
miles from the location in which you primarily performed services for the
Company or any of its Subsidiaries immediately before your termination of
employment. If the parties cannot agree upon a location for the arbitration, the
arbitrator shall determine the location within such fifty (50) mile radius.
Judgment may be entered on the award of the arbitrator in any court having
jurisdiction. The prevailing party in the arbitration proceeding, as determined
by the arbitrator, and in any enforcement or other court proceedings, shall be
entitled to the extent provided by law to reimbursement from the other party for
all of the prevailing party's costs (including but not limited to the
arbitrator's compensation), expenses and reasonable attorney's fees.
ARTICLE VIII
MISCELLANEOUS
8.1 Applicable Law
To the extent not preempted by the laws of the United States, the laws of the
State of
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EXHIBIT 10.9
California shall be the controlling law in all matters relating to this
Agreement, regardless of the choice-of-law rules of the State of California or
any other jurisdiction.
8.2 Construction
No term or provision of this Agreement shall be construed so as to
require the commission of any act contrary to law, and wherever there is any
conflict between any provision of this Agreement and any present or future
statute, law, ordinance, or regulation, the latter shall prevail, but in such
event the affected provision of this Agreement shall be curtailed and limited
only to the extent necessary to bring such provision within the requirements of
the law.
8.3 Severability
If a provision of this Agreement shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of this Agreement
and this Agreement shall be construed and enforced as if the illegal or invalid
provision had not been included.
8.4 Headings
The Section headings in this Agreement are inserted only as a matter of
convenience, and in no way define, limit, or extend or interpret the scope of
this Agreement or of any particular Section.
8.5 Assignability
Your rights or interests under this Agreement shall not be assignable
or transferrable (whether by pledge, grant of a security interest, or otherwise)
by you, your beneficiaries or legal representatives, except by will or by the
laws of descent and distribution.
8.6 Term
If no Change in Control has theretofore occurred, this Agreement shall
expire and be of no further force and effect on December 31, 1999; provided that
the Board may, at any time prior to the expiration hereof, extend the term of
this Agreement. If a Change in Control occurs on or before December 31, 1999 (or
before the expiration of the extended term if the Board had extended the term of
this Agreement), this Agreement shall continue in full force and effect until
its terms and provisions are completely carried out.
8.7 Amendment
Except as set forth in Section 8.6, no provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing and signed by you and the Company. No waiver by the
Company or you at any time or any breach by the other party of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or any prior or subsequent time. No agreement or representations,
written
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EXHIBIT 10.9
or oral, express or implied, with respect to the subject matter hereof, have
been made by either party which are not expressly set forth in this Agreement.
8.8 Notices
For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly
given when personally delivered, telecopied, or sent by certified or overnight
mail, return receipt requested, postage prepaid, addressed to the respective
addresses, or sent to the respective telecopier numbers, last given by each
party to the other, provided that all notices to the Company shall be directed
to the attention of the Board of Directors with a copy to the General Counsel.
All notices and communications shall be deemed to have been received on the date
of delivery thereof if personally delivered, upon return confirmation if
telecopied, on the third business day after the mailing thereof, or on the date
after sending by overnight mail, except that notice of change of address shall
be effective only upon actual receipt. No objection to the method of delivery
may be made if the written notice or other communication is actually received.
8.9 Administration
This Agreement is part of the Argonaut, Inc. Employee Retention Plan,
which is a welfare benefit plan within the meaning of Section 3(1) of ERISA. The
Administrator of such Plan, within the meaning of Section 3(16) of ERISA, and
the Named Fiduciary thereof, within the meaning of Section 402 of ERISA, is the
Company. Attached hereto as Exhibit "B" is a statement of your rights under
ERISA.
8.10 Claims
If you believe you are entitled to a benefit under this Agreement, you
may make a claim for such benefit by filing with the Company a written statement
setting forth the amount and type of payment so claimed. The statement shall
also set forth the facts supporting the claim. The claim may be filed by mailing
or delivering it to the Secretary of the Company.
Within sixty (60) calendar days after receipt of such a claim, the
Company shall notify you in writing of its action on such claim and if such
claim is not allowed in full, shall state the following in a manner calculated
to be understood by you:
(a) The specific reason or reasons for the denial;
(b) Specific reference to pertinent provisions of this Agreement on which
the denial is based;
(c) A description of any additional material or information necessary for
you to be entitled to the benefits that have been denied and an
explanation of why such material or information is necessary; and
(d) An explanation of this Agreement's claim review procedure.
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EXHIBIT 10.9
If you disagree with the action taken by the Company, you or your duly
authorized representative may apply to the Company for a review of such action.
Such application shall be made within one hundred twenty (120) calendar days
after receipt by you of the notice of the Company's action on your claim. The
application for review shall be filed in the same manner as the claim for
benefits. In connection with such review, you may inspect any documents or
records pertinent to the matter and may submit issues and comments in writing to
the Company. A decision by the Company shall be communicated to you within sixty
(60) calendar days after receipt of the application. The decision on review
shall be in writing and shall include specific reasons for the decision, written
in a manner calculated to be understood by you, and specific references to the
pertinent provisions of this Agreement on which the decision is based.
8.11 Notice of Termination
Following the Effective Time, any purported termination of your
employment by the Company or any of its Subsidiaries shall be communicated by a
written notice of termination, which such notice shall indicate the specific
termination provision in this Agreement, if any, relied upon and which shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of your employment under any provision so indicated.
If this Agreement is acceptable to you, please sign the enclosed copy
of this Agreement in the space provided below and return it to me.
Sincerely,
ARGONAUT GROUP, INC.
By: _____________________
Charles E. Rinsch,
President and CEO
ACCEPTED AND AGREED TO:
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EXHIBIT 10.10
ARGONAUT GROUP, INC.
250 Middlefield Road
Menlo Park, California 94025
February 24, 1998
To: Senior Vice Presidents, Vice Presidents, Assistant Vice Presidents, Division
Managers and Assistant Division Managers of Argonaut Insurance Company; the
President, Senior Vice President and Vice Presidents of Argonaut Great Central;
and the Assistant Secretary, Director of Internal Audit, Assistant Controller
and Director of Investments of Argonaut Group, Inc.
From: Charles E. Rinsch
Subject: Argonaut Group, Inc. Employee Retention Plan
Argonaut Group, Inc. has adopted the Argonaut Group Employee Retention
Plan (the "Plan"). The provisions of the Plan, as they apply to you, are as
follows:
DEFINITIONS
Definitions
Whenever used in this Plan, the following capitalized terms shall have
the meanings set forth in this Section 1.1, certain other capitalized
terms being defined elsewhere in this Plan:
"Board" means the Board of Directors of the Company.
(b) "Change in Control" shall mean the occurrence of any of the following:
(i) Any "Person" or "Group" (as such terms
are defined in Section 13(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") and the
rules and regulations promulgated thereunder) is or
becomes the "Beneficial Owner" (within the meaning of
Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company, or of any
entity resulting from a merger or consolidation
involving the Company, representing more than fifty
percent (50%) of the combined voting power of the
then outstanding securities of the Company or such
entity.
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<PAGE>
EXHIBIT 10.10
(ii) The individuals who, as of the date
hereof, are members of the Board (the "Existing
Directors"), cease, for any reason, to constitute
more than fifty percent (50%) of the number of
authorized directors of the Company as determined in
the manner prescribed in the Company's Certificate of
Incorporation and Bylaws; provided, however, that if
the election, or nomination for election, by the
Company's stockholders of any new director was
approved by a vote of at least fifty percent (50%) of
the Existing Directors, such new director shall be
considered an Existing Director; provided further,
however, that no individual shall be considered an
Existing Director if such individual initially
assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies by or on
behalf of anyone other than the Board (a "Proxy
Contest"), including by reason of any agreement
intended to avoid or settle any Election Contest or
Proxy Contest.
(iii) The consummation of (x) a merger,
consolidation or reorganization to which the Company
is a party, whether or not the Company is the Person
surviving or resulting therefrom, or (y) a sale,
assignment, lease, conveyance or other disposition of
all or substantially all of the assets of the
Company, in one transaction or a series of related
transactions, to any Person other than the Company,
where any such transaction or series of related
transactions as is referred to in clause (x) or
clause (y) above in this subparagraph (iii) (a
"Transaction") does not otherwise result in a "Change
in Control" pursuant to subparagraph (i) of this
definition of "Change in Control"; provided, however,
that no such Transaction shall constitute a "Change
in Control" under this subparagraph (iii) if the
Persons who were the stockholders of the Company
immediately before the consummation of such
Transaction are the Beneficial Owners, immediately
following the consummation of such Transaction, of
fifty percent (50%) or more of the combined voting
power of the then outstanding voting securities of
the Person surviving or resulting from any merger,
consolidation or reorganization referred to in clause
(x) above in this subparagraph (iii) or the Person to
whom the assets of the Company are sold, assigned,
leased, conveyed or disposed of in any transaction or
series of related transactions referred in clause (y)
above in this subparagraph (iii).
(c) "Company" means Argonaut Group, Inc., a Delaware corporation,
and any successor or assignee as provided in Article V.
(d) "Compensation" means and includes all of your base salary
attributable to your employment with the Company and/or any of
its Subsidiaries (including, but not limited to, any amounts
excludable from your gross income for federal income tax
purposes pursuant to Section 125 or Section 401(k) of the
Internal Revenue Code of 1986, as amended), in effect
immediately before the Change in Control. "Compensation" shall
not include your bonuses or other cash or non-cash
compensations or reimbursements, if any (e.g., the grant or
vesting of restricted
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EXHIBIT 10.10
stock, the grant, vesting, or exercise of stock options, automobile allowance
and gasoline reimbursement).
(e) "Disability" means a physical or mental infirmity which
substantially impairs your ability to perform your material
duties for a period of at least one hundred eighty (180)
consecutive calendar days, and, as a result of such
Disability, you have not returned to your full-time regular
employment prior to termination.
(f) "Effective Time" means February 24, 1998.
(g) "Eligible Employee" means any employee actively employed as a
Senior Vice President, Vice President, Assistant Vice President, Division
Manager or Assistant Division Manager of Argonaut Insurance Company; President,
Senior Vice President or Vice President of Argonaut Great Central; or Assistant
Secretary, Director of Internal Audit, Assistant Controller or Director of
Investments of Argonaut Group, Inc. on the Effective Time. If you
were employed in one of such capacities, but were on short term disability
leave on the Effective Time, you will be considered to have been actively
employed by the Company if you are available to return to your employment
immediately afteryour physician of record certifies that you are no longer
disabled. If you wereon long term disability leave on the Effective Time,
you will generally not be an Eligible Employee, but the Board may, in its
sole discretion, treat you as an Eligible Employee.
(h) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
(i)"Good Reason" means the occurrence, on or after the Effective Time, of any
of the following:
(i) The Company or any of its Subsidiaries
reduces your Compensation as in effect on
the Effective Time.
(ii) Without your express written consent, the
Company or any of its Subsidiaries requires
you to change the location of your job or
office, so that you will be based at a
location more than fifty (50) miles from the
location of your job or office on the
Effective Time.
(iii) A successor to the Company fails or refuses
to assume the obligations of the Company
under this Agreement.
(iv) The Company or any successor breaches any of
the material provisions of this Agreement.
(j) "Just Cause" means the termination of your employment as a
result of (i) fraud, misappropriation of or intentional and
material damage to the property or business
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EXHIBIT 10.10
of the Company (including its Subsidiaries), (ii) conviction
of a felony involving moral turpitude, or (iii) material
neglect, failure or refusal to follow the reasonable
directions of your supervisors, to perform the duties
reasonably assigned to you, or to follow material Company
policies, if you do not begin to cure such neglect, failure or
refusal within ten (10) days after receiving written notice
from the Company to do so.
(k) "Person" shall have the meaning set forth in the definition
of
"Change in Control."
(l) "Release" means the Separation and General Release Agreement
in the form attached hereto as Exhibit "A".
(m) "Severance Payment" means the payment of severance compensation as
provided in Article III.
(n) "Subsidiary" means any corporation or other Person, a majority
of the voting power, equity securities or equity interest of
which is owned directly or indirectly by the Company.
(o) "WARN" means the Worker Adjustment and Retraining
Notification
Act, 29 U.S.C.
ss. 2101 et seq.
ARTICLE II
EXCISE TAX LIMITATION
2.1 Limitation
Notwithstanding anything contained in this Plan to the contrary, in the
event that any payment or benefit (within the meaning of Section 280G(b)(2) of
the Code) to you or for your benefit paid or payable or distributed or
distributable pursuant to the terms of this Plan or otherwise in connection
with, or arising out of, your employment with the Company or any of its
Subsidiaries or a Change of Control within the meaning of Section 280G of the
Code (a "Payment" or "Payments"), would be subject to the excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), then the Payments shall be reduced
(but not below zero) but only to the extent necessary that no portion thereof
shall be subject to the excise tax imposed by Section 4999 of the Code (the
"Section 4999 Limit"). Unless you shall have given prior written notice
specifying a different order to the Company to effectuate the limitations
described in the preceding sentence, the Company shall reduce or eliminate the
Payments by first reducing or eliminating those Payments or benefits which are
not payable in cash and then by reducing or eliminating cash Payments, in each
case in reverse order beginning with payments or benefits which are to be paid
the farthest in time from the Determination (as hereinafter defined). Any notice
given by you pursuant to the preceding sentence shall take precedence over the
provisions of any other plan, arrangement or agreement governing your rights and
entitlements to any benefits or compensation.
10.10-4
5
<PAGE>
EXHIBIT 10.10
2.2 Determinations
All determinations required to be made under this Article III (each, a
"Determination") shall be made, at the Company's expense, by a nationally
recognized accounting firm designated by the Company and reasonably acceptable
to you (the "Accounting Firm"). The Accounting Firm shall provide its
calculations, together with detailed supporting documentation, both to the
Company and to you before payment of your Severance Payment hereunder (if
requested at that time by the Company or you) or such other time as requested by
the Company or you (in either case provided that the Company or you believe in
good faith that any of the Payments may be subject to the Excise Tax); provided,
however, that if the Accounting Firm determines that no Excise Tax is payable by
you with respect to a Payment or Payments, it shall furnish you with an opinion
reasonably acceptable to you that no Excise Tax will be imposed with respect to
any such Payment or Payments. Within ten (10) calendar days of the delivery of
the Determination to you, you shall have the right to dispute the Determination
(the "Dispute"). The existence of any Dispute shall not in any way affect your
right to receive the Payments in accordance with the Determination. If there is
no Dispute, the Determination by the Accounting Firm shall be final, binding and
conclusive upon the Company and you, subject to the application of Section 2.3.
2.3 Adjustments
As a result of the uncertainty in the application of Sections 4999 and 280G of
the Code, it is possible that the Payments either will have been made or will
not have been made by the Company, in either case in a manner inconsistent with
the limitations provided in Section 2.1 (an "Excess Payment" or "Underpayment",
respectively). If it is established pursuant to (i) a final determination of a
court for which all appeals have been taken and finally resolved or the time for
all appeals has expired, or (ii) an Internal Revenue Service (the "IRS")
proceeding which has been finally and conclusively resolved, that an Excess
Payment has been made, such Excess Payment shall be deemed for all purposes to
be a loan to you made on the date you received the Excess Payment and you shall
repay the Excess Payment to the Company on demand, together with interest on the
Excess Payment at one hundred twenty percent (120%) of the applicable federal
rate (as defined in Section 1274(d) of the Code) compounded semi-annually from
the date of your receipt of such Excess Payment until the date of such
repayment. If it is determined (i) by the Accounting Firm, the Company (which
shall include the position taken by the Company, together with its consolidated
group, on its federal income tax return) or the IRS, (ii) pursuant to a
determination by a court, or (iii) upon the resolution to your satisfaction of
the Dispute, that an Underpayment has occurred, the Company shall pay an amount
equal to the Underpayment to you within ten (10) calendar days of such
determination or resolution, together with interest on such amount at one
hundred twenty percent (120%) of the applicable federal rate compounded
semi-annually from the date such amount should have been paid to you pursuant to
the terms of this Plan or otherwise, but for the operation of this Section 2.3,
until the date of payment.
I
SEVERANCE PAYMENTS
3.1 Right to Severance Payment; Release
Conditioned on the execution and delivery by you (or your beneficiary
or personal
10.10-5
6
<PAGE>
EXHIBIT 10.10
representative, if applicable) of the Release, you shall be entitled to receive
a Severance Payment from the Company in the amount provided in Section 3.2 if
(a) you are an Eligible Employee, and (b) within eighteen (18) months after the
occurrence of a Change in Control, your employment is involuntarily terminated
by the Company or any of its Subsidiaries for any reason other than Just Cause
or your death or Disability, or you voluntarily terminate your employment with
the Company and all Subsidiaries for Good Reason within sixty (60) days after
the occurrence of such Good Reason. Notwithstanding the foregoing, you will not
be entitled to receive a Severance Payment (i) if you perform services as of the
occurrence of a Change in Control for which the Company or any of its
Subidiaries bills Unitrin, Inc. or any of its subsidiaries or affiliates
(collectively, "Unitrin"), and, on or after the occurrence of a Change in
Control, Unitrin offers you employment (whether or not you accept such offer) to
perform services substantially similar to those you performed before the Change
in Control for compensation and on terms substantially similar to those you
received immediately before the Change in Control, or (ii) to the extent you
receive payments which the Company or its Subsidiaries are required to make to
you under WARN.
3.2 Amount of Severance Payment
If you become entitled to a Severance Payment under this Plan, the
amount of your Severance Payment, when added to any payments which the Company
or its Subsidiaries are required to make to you under WARN, shall equal the sum
of:
(a) your monthly Compensation multiplied by a multiple
determined by the Board and set forth in a letter to you, which such multiple
shall not be reduced after a Change in Control, plus
(b) the amount of your annual bonus for the fiscal year of the
Company preceding the fiscal year in which the Change in Control occurs.
3.3 No Mitigation
The Company acknowledges and agrees that you shall be entitled to
receive your entire Severance Payment regardless of any income which you may
receive from other sources following your termination on or after the Effective
Time.
3.4 Payment of Severance Payment
The Severance Payment to which you are entitled shall be paid to you,
in cash and in full, not later than eight (8) calendar days after execution and
delivery by you (or your beneficiary or personal representative, if applicable)
of the Release Agreement, but in no event before the date on which such Release
becomes effective. If you should die before all amounts payable to you have been
paid, such unpaid amounts shall be paid to your beneficiary under this Agreement
or, if you have not designated such a beneficiary in writing to the Company, to
the personal representative(s) of your estate.
10.10-6
7
<PAGE>
EXHIBIT 10.10
3.5 Health Benefits Coverage
If you are entitled to receive a Severance Payment under Section 3.1,
you will also be entitled to receive health benefits coverage for you and your
dependents under the same plan(s) or arrangement(s) under which you were covered
immediately before your termination of employment or plan(s) established or
arrangement(s) provided by the Company or any of its Subsidiaries thereafter.
Such health benefits coverage shall be paid for by the Company to the same
extent as if you were still employed by the Company, and you will be required to
make such payments as you would be required to make if you were still employed
by the Company. The benefits provided under this Section 3.5 shall continue
until the earlier of (a) the expiration of the number of months equal to the
multiple described in paragraph (a) of Section 3.2, or (b) the date you become
covered under any other group health plan not maintained by the Company or any
of its Subsidiaries; provided, however, that if such other group health plan
excludes any pre-existing condition that you or your dependents may have when
coverage under such group health plan would otherwise begin, coverage under this
Section 3.5 shall continue (but not beyond the number of months equal to the
multiple described in paragraph (a) of Section 3.2) with respect to such
pre-existing condition until such exclusion under such other group health plan
lapses or expires. In the event you are required to make an election under
Sections 601 through 607 of ERISA (commonly known as COBRA) to qualify for the
benefits described in this Section 3.5, the obligations of the Company and its
Subsidiaries under this Section 3.5 shall be conditioned upon your timely making
such an election.
3.6 Automobile
If you become entitled to receive a Severance Payment under Section
3.1, and you then have the use of an automobile that is provided to you at the
expense of the Company or any Subsidiary, you shall have the right, for ninety
(90) days following your termination of employment, (a) to continue your use of
the automobile on the same basis on which you used it immediately before your
termination of employment, or (b) to purchase the automobile from the Company or
Subsidiary for its low wholesale bluebook value, or, if the Company or
Subsidiary has leased the automobile, to assume the lease, or (c) to take the
actions described in clauses (a) and (b) of this sentence.
3.7 Withholding of Taxes
The Company may withhold from any amounts payable under this Plan all
federal, state, city or other taxes required by applicable law to be withheld by
the Company.
ARTICLE IV
OTHER RIGHTS AND BENEFITS NOT AFFECTED
4.1 Other Benefits
This Plan does not provide a pension for you, nor shall any payment
hereunder be characterized as deferred compensation. Except as set forth in
Section 4.2, neither the provisions of this Plan nor the Severance Payment
provided for hereunder shall reduce any amounts
10.10-7
EXHIBIT 10.10
8
<PAGE>
otherwise payable, or in any way diminish your rights as an employee, whether
existing now or hereafter, under any written benefit, incentive, retirement,
stock option, stock bonus or stock purchase plan or any written employment
agreement or other written plan or arrangement not related to severance.
4.2 Other Severance Plans Superseded
As of the Effective Time, this Plan will supersede any and all other
severance plans of the Company or its Subsidiaries and severance agreements
between you and the Company and its Subsidiaries, and your participation in any
other severance plan of the Company and its Subsidiaries will be hereby
terminated.
4.3 Employment Status
This Plan does not constitute a contract of employment or impose on you
any obligation to remain in the employ of the Company, nor does it impose on the
Company or any of its Subsidiaries any obligation to retain you in your present
or any other position, nor does it change the status of your employment as an
employee at will. Nothing in this Plan shall in any way affect the right of the
Company or any of its Subsidiaries in its absolute discretion to change or
reduce your compensation at any time, or to change at any time one or more
benefit plans, including but not limited to pension plans, dental plans, health
care plans, savings plans, bonus plans, vacation pay plans, disability plans,
and the like.
ARTICLE V
SUCCESSOR TO COMPANY
The Company shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Company, expressly and
unconditionally to assume and agree to perform the Company's obligations under
this Plan, in the same manner and to the same extent that the Company would be
required to perform if no such succession or assignment had taken place. In such
event, the term "Company," as used in this Plan, shall mean (from and after, but
not before, the occurrence of such event) the Company as herein before defined
and any successor or assignee to the business or assets which by reason hereof
becomes bound by the terms and provisions of this Plan.
10.10-8
9
<PAGE>
EXHIBIT 10.10
ARTICLE VI
CONFIDENTIALITY
6.1 Nondisclosure of Confidential Material
In the performance of your duties, you have previously had, and may in
the future have, access to confidential records and information, including, but
not limited to, development, marketing, purchasing, organizational, strategic,
financial, managerial, administrative, manufacturing, production, distribution
and sales information, data, specifications and processes presently owned or at
any time hereafter developed by the Company or its agents or consultants or used
presently or at any time hereafter in the course of its business, that are not
otherwise part of the public domain (collectively, the "Confidential Material").
All such Confidential Material is considered secret and has been and/or will be
disclosed to you in confidence. By your acceptance of your Severance Payment
under this Plan, you shall be deemed to have acknowledged that the Confidential
Material constitutes proprietary information of the Company which draws
independent economic value, actual or potential, from not being generally known
to the public or to other persons who could obtain economic value from its
disclosure or use, and that the Company has taken efforts reasonable under the
circumstances, of which this Section 6.1 is an example, to maintain its secrecy.
Except in the performance of your duties to the Company, you shall not, directly
or indirectly for any reason whatsoever, disclose or use any such Confidential
Material, except that the foregoing disclosure prohibition shall not apply as to
Confidential Material that (i) has been publicly disclosed or was within your
possession prior to its being furnished to you by the Company or becomes
available to you on a nonconfidential basis from a third party (in any of such
cases, not due to a breach by you of your obligations to the Company or by
breach of any other person of a confidential, fiduciary or confidential
obligation, the breach of which you know or reasonably should know), (ii) is
required to be disclosed by you pursuant to applicable law, and you provide
notice to the Company of such requirement as promptly as possible, or (iii) was
independently acquired or developed by you without violating any of the
obligations under this Plan and without relying on Confidential Material of the
Company. All records, files, drawings, documents, equipment and other tangible
items, wherever located, relating in any way to the Confidential Material or
otherwise to the Company's business, which you have prepared, used or
encountered or shall in the future prepare, use or encounter, shall be and
remain the Company's sole and exclusive property and shall be included in the
Confidential Material. Upon your termination of employment with the Company, or
whenever requested by the Company, you shall promptly deliver to the Company any
and all of the Confidential Material and copies thereof, not previously
delivered to the Company, that may be, or at any previous time has been, in your
possession or under your control.
6.2 Nonsolicitation of Employees
By your acceptance of your Severance Payment under this Plan, you agree
that, for a period of two (2) years following your termination of employment
with the Company or its Subsidiaries, neither you nor any Person or entity in
which you have an interest shall solicit any person who was employed on the date
of your termination of employment by the Company or any of its Subsidiaries to
leave the employ of the Company or any of its Subsidiaries. Nothing in
10.10-9
10
<PAGE>
EXHIBIT 10.10
this Section 6.2, however, shall prohibit you or any Person or entity in which
you have an interest from placing advertisements in periodicals of general
circulation soliciting applications for employment, or from employing any person
who answers any such advertisement. For purposes of this Section 6.2, you shall
not be deemed to have an interest in any corporation whose stock is publicly
traded merely because you are the owner of not more than two percent (2%) of the
outstanding shares of any class of stock of such corporation, provided you have
no active participation in the business of such corporation (other than voting
your stock) and you do not provide services to such corporation in any capacity
(whether as an employee, an independent contractor or consultant, a board
member, or otherwise).
6.3 Equitable Relief
By your acceptance of your Severance Payment under this Plan, you shall
be deemed to have acknowledged that violation of Sections 6.1 or 6.2 would cause
the Company irreparable damage for which the Company cannot be reasonably
compensated in damages in an action at law, and that therefore in the event of
any breach by you of Sections 6.1 or 6.2, the Company shall be entitled to make
application to a court of competent jurisdiction for equitable relief by way of
injunction or otherwise (without being required to post a bond). This provision
shall not, however, be construed as a waiver of any of the rights which the
Company may have for damages under this Plan or otherwise, and, except as
limited in Article VII, all of the Company's rights and remedies shall be
unrestricted.
10.10-10
11
<PAGE>
EXHIBIT 10.10
ARTICLE VII
ARBITRATION
Except for equitable relief as provided in Section 6.3, arbitration in
accordance with the then most applicable rules of the American Arbitration
Association shall be the exclusive remedy for resolving any dispute or
controversy between you and the Company or any of its Subsidiaries, including,
but not limited to, any dispute regarding your employment or the termination of
your employment or any dispute regarding the application, interpretation or
validity of this Plan not otherwise resolved through the claims procedure set
forth in Section 8.10. The arbitrator shall be empowered to grant only such
relief as would be available in a court of law. In the event of any conflict
between this Plan and the rules of the American Arbitration Association, the
provisions of this Plan shall be determinative. If the parties are unable to
agree upon an arbitrator, they shall select a single arbitrator from a list
designated by the office of the American Arbitration Association having
responsibility for the city in which you primarily performed services for the
Company or its Subsidiaries immediately before your termination of employment of
seven arbitrators, all of whom shall be retired judges who are actively involved
in hearing private cases or members of the National Academy of Arbitrators, and
who, in either event, are residents of the area in which you primarily performed
services for the Company or its Subsidiaries immediately before your termination
of employment. If the parties are unable to agree upon an arbitrator from such
list, they shall each strike names alternatively from the list, with the first
to strike being determined by lot. After each party has used three strikes, the
remaining name on the list shall be the arbitrator. The fees and expenses of the
arbitrator shall initially be borne equally by the parties; provided, however,
that each party shall initially be responsible for the fees and expenses of its
own representatives and witnesses. Unless mutually agreed otherwise by the
parties, any arbitration shall be conducted at a location within fifty (50)
miles from the location in which you primarily performed services for the
Company or any of its Subsidiaries immediately before your termination of
employment. If the parties cannot agree upon a location for the arbitration, the
arbitrator shall determine the location within such fifty (50) mile radius.
Judgment may be entered on the award of the arbitrator in any court having
jurisdiction. The prevailing party in the arbitration proceeding, as determined
by the arbitrator, and in any enforcement or other court proceedings, shall be
entitled to the extent provided by law to reimbursement from the other party for
all of the prevailing party's costs (including but not limited to the
arbitrator's compensation), expenses and reasonable attorney's fees.
ARTICLE VIII
MISCELLANEOUS
8.1 Applicable Law
To the extent not preempted by the laws of the United States, the laws
of the State of California shall be the controlling law in all matters relating
to this Plan, regardless of the choice-of-law rules of the State of California
or any other jurisdiction.
8.2 Construction
No term or provision of this Plan shall be construed so as to require
the commission of
10.10-11
12
<PAGE>
EXHIBIT 10.10
any act contrary to law, and wherever there is any conflict between any
provision of this Plan and any present or future statute, law, ordinance, or
regulation, the latter shall prevail, but in such event the affected provision
of this Plan shall be curtailed and limited only to the extent necessary to
bring such provision within the requirements of the law.
8.3 Severability
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of this Plan and
this Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
8.4 Headings
The Section headings in this Plan are inserted only as a matter of
convenience, and in no way define, limit, or extend or interpret the scope of
this Plan or of any particular Section.
8.5 Assignability
Your rights or interests under this Plan shall not be assignable or
transferrable (whether by pledge, grant of a security interest, or otherwise) by
you, your beneficiaries or legal representatives, except by will or by the laws
of descent and distribution.
8.6 Term
If no Change in Control has theretofore occurred, this Plan shall
expire and be of no further force and effect on December 31, 1999; provided that
the Board may, at any time prior to the expiration hereof, extend the term of
this Plan. If a Change in Control occurs on or before December 31, 1999 (or
before the expiration of the extended term if the Board had extended the term of
this Plan), this Plan shall continue in full force and effect until its terms
and provisions are completely carried out.
8.7 Amendment
This Plan may be amended in any respect by resolution adopted by the
Board until a Change in Control occurs; provided, however, that this Section 8.7
shall not be amended, and no amendment shall delay the payment of the Severance
Payments, or reduce the amount of the Severance Payments or any other benefits
under this Plan. After a Change in Control occurs, this Plan shall no longer be
subject to amendment, change, substitution, deletion, revocation or termination
in any respect whatsoever. No agreement or representations, written or oral,
express or implied, with respect to the subject matter hereof, have been made by
the Company which are not expressly set forth in this Plan.
8.8 Notices
For purposes of this Plan, notices and all other communications provided for
herein shall
10.10-12
13
<PAGE>
EXHIBIT 10.10
be in writing and shall be deemed to have been duly given when personally
delivered, telecopied, or sent by certified or overnight mail, return receipt
requested, postage prepaid, addressed to the respective addresses, or sent to
the respective telecopier numbers, last given by each party to the other,
provided that all notices to the Company shall be directed to the attention of
the Board of Directors with a copy to the General Counsel. All notices and
communications shall be deemed to have been received on the date of delivery
thereof if personally delivered, upon return confirmation if telecopied, on the
third business day after the mailing thereof, or on the date after sending by
overnight mail, except that notice of change of address shall be effective only
upon actual receipt. No objection to the method of delivery may be made if the
written notice or other communication is actually received.
8.9 Administration
This Plan constitutes a welfare benefit plan within the meaning of
Section 3(1) of ERISA. This letter constitutes the governing document of the
Plan. The Administrator of the Plan, within the meaning of Section 3(16) of
ERISA, and the Named Fiduciary thereof, within the meaning of Section 402 of
ERISA, is the Company. Attached hereto as Exhibit "B" is a statement of your
rights under ERISA.
8.10 Claims
If you believe you are entitled to a benefit under this Plan, you may
make a claim for such benefit by filing with the Company a written statement
setting forth the amount and type of payment so claimed. The statement shall
also set forth the facts supporting the claim. The claim may be filed by mailing
or delivering it to the Secretary of the Company.
Within sixty (60) calendar days after receipt of such a claim, the
Company shall notify you in writing of its action on such claim and if such
claim is not allowed in full, shall state the following in a manner calculated
to be understood by you:
(a) The specific reason or reasons for the denial;
(b) Specific reference to pertinent provisions of this Plan on which the
denial is based;
(c) A description of any additional material or information necessary for
you to be entitled to the benefits that have been denied and an
explanation of why such material or information is necessary; and
(d) An explanation of this Plan's claim review procedure.
10.10-13
14
<PAGE>
EXHIBIT 10.10
If you disagree with the action taken by the Company, you or your duly
authorized representative may apply to the Company for a review of such action.
Such application shall be made within one hundred twenty (120) calendar days
after receipt by you of the notice of the Company's action on your claim. The
application for review shall be filed in the same manner as the claim for
benefits. In connection with such review, you may inspect any documents or
records pertinent to the matter and may submit issues and comments in writing to
the Company. A decision by the Company shall be communicated to you within sixty
(60) calendar days after receipt of the application. The decision on review
shall be in writing and shall include specific reasons for the decision, written
in a manner calculated to be understood by you, and specific references to the
pertinent provisions of this Plan on which the decision is based.
Sincerely,
ARGONAUT GROUP, INC.
By: _____________________
10.10-14
1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 13
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
In millions For the Years Ended December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Premiums:
Workers compensation $140.6 $129.5 $176.7 $240.2 $280.0
Other insurance 24.3 32.2 31.4 39.5 35.4
- -------------------------------------------------------------------------------------------------------------------
164.9 161.7 208.1 279.7 315.4
Net investment income 87.2 89.5 102.0 110.7 118.1
Gains on sales of investments 4.5 21.6 3.1 3.8 5.4
- -------------------------------------------------------------------------------------------------------------------
Total revenue $256.6 $272.8 $313.2 $394.2 $438.9
===================================================================================================================
Underwriting gain (loss) before income taxes:
Workers compensation $(24.0) $(7.5) $(0.2) $3.9 $(10.7)
Other continuing lines (8.8) (125.2) (35.2) (24.4) (19.8)
Run off lines 2.4 (127.4) - 12.0 24.9
- -------------------------------------------------------------------------------------------------------------------
$(30.4) $(260.1) $(35.4) $(8.5) $(5.6)
===================================================================================================================
Income (loss) before income taxes $61.3 $(149.0) $ 69.7 $106.0 $117.9
Provision for income taxes 12.8 (55.0) 12.8 29.3 28.8
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $48.5 $(94.0) $ 56.9 $76.7 $89.1
===================================================================================================================
Income (loss) per common share:
Basic $2.04 $(3.92) $2.34 $3.00 $3.48
===================================================================================================================
Diluted $2.02 $(3.92) $2.32 $2.97 $3.44
===================================================================================================================
BALANCE SHEET DATA
Portfolio investments $1,369.1 $1,395.5 $1,489.2 $1,484.8 $1,564.4
===================================================================================================================
Total assets $1,860.5 $1,944.4 $1,977.5 $2,058.8 $2,182.7
===================================================================================================================
Reserves for losses and loss
adjustment expenses $1,024.9 $1,158.8 $1,026.1 $1,161.5 $1,284.1
===================================================================================================================
Shareholders' equity $717.9 $665.3 $810.8 $745.6 $729.6
===================================================================================================================
Cash dividends declared per
common share $1.60 $1.44 $1.28 $1.12 $0.96
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
13-1
2
<PAGE>
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, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and their results of
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Francisco, California
January 7, 1998
13-2
3
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
In millions except per share amounts December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $ 857.6 $ 945.3
(cost: 1997-$845.8; 1996-$938.5)
Equity securities, available for sale, at fair value 440.1 442.9
(cost: 1997-$227.4; 1996-$288.1)
Short-term investments, available for sale, at fair value 80.9 6.1
Securities in transit (9.5) 1.2
- -------------------------------------------------------------------------------------------------------------------
1,369.1 1,395.5
Cash and cash equivalents 59.0 30.6
Accrued investment income 20.3 22.4
Receivables:
Reinsurance 210.2 234.6
Agents' balances 74.2 76.5
Accrued retrospective premiums 61.8 80.6
Cost in excess of net assets purchased 38.3 41.1
Unearned premiums on ceded reinsurance 0.8 1.0
Deferred federal income taxes receivable 11.5 46.8
Other assets 15.3 15.3
- -------------------------------------------------------------------------------------------------------------------
$1,860.5 $1,944.4
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $1,024.9 $1,158.8
Unearned premiums 40.2 65.3
Accrued policyholder dividends (2.4) 1.3
Other liabilities 79.9 53.6
- -------------------------------------------------------------------------------------------------------------------
1,142.6 1,279.1
===================================================================================================================
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares authorized, 23,854,720 and
23,788,285 shares issued and outstanding
at December 31, 1997 and December 31, 1996, respectively 2.4 2.4
Additional paid-in capital 98.3 97.1
Retained earnings 471.2 460.9
Net unrealized appreciation on securities 146.0 104.9
- -------------------------------------------------------------------------------------------------------------------
717.9 665.3
- -------------------------------------------------------------------------------------------------------------------
$1,860.5 $1,944.4
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13-3
4
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
In millions except per share amounts For the Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other revenue:
Premiums, net $164.9 $ 161.7 $208.1
Net investment income 87.2 89.5 102.0
Gains on sales of investments 4.5 21.6 3.1
- -------------------------------------------------------------------------------------------------------------------
Total revenue 256.6 272.8 313.2
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 112.8 346.2 152.8
Underwriting, acquisition, and
insurance expenses 80.6 64.1 67.3
Amortization of cost in excess of
net assets purchased 2.8 2.8 2.8
Policyholder dividends (0.9) 8.7 20.6
- -------------------------------------------------------------------------------------------------------------------
Total expenses 195.3 421.8 243.5
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 61.3 (149.0) 69.7
Provision for income taxes 12.8 (55.0) 12.8
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 48.5 $ (94.0) $ 56.9
===================================================================================================================
Income (loss) per common share:
Basic $ 2.04 $ (3.92) $ 2.34
===================================================================================================================
Diluted $ 2.02 $ (3.92) $ 2.32
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
13-4
5
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
COSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In millions except per share amounts Common Additional Retained Net Shareholders'
Stock Paid-In Earnings Unrealized Equity
Capital Appreciation
on Securities
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net income 48.5 48.5
Change in net unrealized
appreciation on securities 41.1 41.1
Cash dividends ($1.60 per share) (38.2) (38.2)
Stock options exercised 1.2 1.2
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 2.4 $98.3 $471.2 $146.0 $717.9
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
13-5
6
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
In millions For the Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 48.5 $ (94.0) $ 56.9
Adjustments to reconcile net income (loss) to
net cash used by operations:
Amortization and depreciation 12.1 12.1 11.9
Decrease in accrued investment income 2.1 1.5 5.7
Decrease (increase) in reinsurance receivables 24.4 (36.0) 36.8
Decrease (increase) in agents' balances 2.3 (2.5) 1.1
Decrease (increase) in accrued retrospective premiums 18.8 11.9 (17.3)
Decrease in unearned premiums on ceded reinsurance 0.2 1.6 0.8
Decrease (increase) in deferred federal income taxes receivable 13.4 (27.6) 6.7
Increase (decrease) in reserves for losses and loss adjustment
expenses (134.0) 132.8 (135.4)
Increase (decrease) in unearned premiums (25.1) 1.3 (9.5)
Increase (decrease) in accrued policyholder dividends (3.7) 6.2 (5.2)
Increase (decrease) in income taxes payable 38.6 (36.8) 1.3
Increase (decrease) in other assets and liabilities (15.0) 4.4 (1.2)
- -------------------------------------------------------------------------------------------------------------------
(17.4) (25.1) (47.4)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Sales of fixed maturity investments 13.0 35.7 224.2
Maturities and mandatory calls of fixed maturity investments 392.0 165.1 28.6
Sales of equity securities 76.0 28.5 4.6
Purchases of fixed maturity investments (319.2) (112.6) (2.2)
Purchases of equity securities (15.0) (64.4) (155.4)
Decrease (increase) in short-term investments (74.8) 28.8 0.3
Other, net 10.7 (4.1) (2.1)
- -------------------------------------------------------------------------------------------------------------------
82.7 77.0 98.0
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repurchase of common stock - (10.8) (25.9)
Payment of cash dividend (38.1) (34.6) (31.1)
Exercise of stock options 1.2 0.8 0.5
- -------------------------------------------------------------------------------------------------------------------
(36.9) (44.6) (56.5)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 28.4 7.3 (5.9)
Cash and cash equivalents, beginning of period 30.6 23.3 29.2
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 59.0 $ 30.6 $ 23.3
===================================================================================================================
Additional disclosure:
Income taxes paid $ 0.0 $ 9.2 $ 3.1
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
13-6
7
<PAGE>
EXHIBIT 13
NOTE 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 balances have been
restated to reflect current year classifications.
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, 1997 and 1996
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.
RECEIVABLES Agents' balances are presented net of a reserve for uncollectible
accounts of $1.4 million at December 31, 1997 and 1996.
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
$38.3 million at December 31, 1997 and $41.1 million at December 31, 1996,
relate to Teledyne, Inc.'s acquisition of Argonaut Insurance Company in 1969,
and is net of accumulated amortization of $31.3 million and $28.6 million,
respectively. Cost in excess of net assets purchased is being amortized on a
straight-line basis 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.
13-7
8
<PAGE>
EXHIBIT 13
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.
PER SHARE DATA In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share", which requires the presentation of "basic" and "diluted"
earnings per share ("EPS") and is effective for periods ending after December
15, 1997. Basic EPS is calculated based on the weighted-average number of shares
outstanding and diluted EPS includes the effects of dilutive potential common
shares. The effect of this accounting change on reported EPS data is as follows.
<TABLE>
<CAPTION>
For the Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
($ in millions) (Dollars)
<S> <C> <C> <C>
Basic EPS:
Income available to
common stockholders
1997 $ 48.5 23,827,934 $ 2.04
1996 $(94.0) 23,984,543 $(3.92)
1995 $ 56.9 24,286,245 $ 2.34
Effect of Dilutive
Securities:
Options issued
1997 231,850
1996 247,421
1995 264,248
Diluted EPS:
Income available to
common stockholders +
assumed conversions
1997 $ 48.5 24,059,784 $ 2.02
1996 $(94.0) 24,231,964 $(3.92)
1995 $ 56.9 24,550,493 $ 2.32
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Diluted earnings per common share for 1996 is the same as basic earnings per
share because the result of the calculation is antidilutive due to the net
operating loss reported for the year.
13-8
9
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
NOTE 2. INVESTMENTS
Gains on sales and calls of investments for the years ended December 31, were as
follows.
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $0.4 $ 0.3 $2.9
Equity securities 4.1 21.3 0.2
- -------------------------------------------------------------------------------------------------------------------
$4.5 $21.6 $3.1
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and market values of fixed maturity investments as of
December 31, were as follows.
In millions 1997
- -------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities $454.9 $ 5.5 $ - $460.4
U.S Government agencies 281.2 4.1 - 285.3
Obligations of states and
political subdivisions 95.8 1.8 0.2 97.4
Redemptive
preferred stock 13.9 0.8 0.2 14.5
- -------------------------------------------------------------------------------------------------------------------
$845.8 $12.2 $0.4 $857.6
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
In millions 1996
- -------------------------------------------------------------------------------------------------------------------
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury securities $766.6 $6.4 $1.2 $771.9
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
Redemptive
preferred stock 13.7 0.6 0.2 14.1
- -------------------------------------------------------------------------------------------------------------------
$938.5 $8.9 $2.1 $945.3
===================================================================================================================
</TABLE>
13-9
10
<PAGE>
EXHIBIT 13
<TABLE>
<CAPTION>
The amortized cost and market values of fixed maturity investments as of
December 31, 1997 by contractual maturity, are shown below.
In millions Amortized Fair
Cost Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $231.8 $233.0
Due after one year to five years 219.5 222.0
Due after five years to ten years 394.5 402.6
Due after ten years - -
- -------------------------------------------------------------------------------------------------------------------
$845.8 $857.6
===================================================================================================================
</TABLE>
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 $13.0 million, $35.7
million, and $224.2 million in 1997, 1996, and 1995, respectively. Gross gains
of $0.3 million, $0.4 million, and $4.0 million and gross losses of $0 million,
$0 million, and $0.7 million were realized on those sales in 1997, 1996, and
1995, respectively.
At December 31, 1997 the fair value and amortized cost of bonds on deposit
with various insurance regulatory agencies were $399.2 million and $404.3
million, respectively. Additionally, U.S. Treasury Notes with an amortized cost
of $8.7 million and fair value of $8.8 million were pledged as collateral for
surety bonds which were issued to various states in lieu of depositing bonds.
At December 31, 1997 and 1996, there were no investments in any one
investee exceeding 10% of shareholders' equity.
13-10
11
<PAGE>
EXHIBIT 13
NOTE 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 $9.3 million and $9.9 million as of December 31,
1997 and 1996, respectively. Under certain of the reinsurance agreements, funds
are held to secure performance of reinsurers in meeting their obligations. The
amount of such funds was $25.8 million and $29.3 million at December 31, 1997
and 1996, respectively.
Estimated losses recoverable from reinsurers and the ceded portion of
unearned premiums are reported as assets. Losses and loss adjustment expenses
of $112.8 million, $346.2 million, and $152.8 million for the years ending
December 31, 1997, 1996, and 1995, respectively, are net of cessions of $27.1
million, $72.9 million, and $15.3
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).
<TABLE>
<CAPTION>
Premiums for the years ended December 31, were as follows.
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct written premiums $165.7 $187.8 $196.6
Reinsurance ceded to
other companies (15.8) (15.6) (30.4)
Reinsurance assumed from
other companies 8.3 4.0 13.8
- -------------------------------------------------------------------------------------------------------------------
Net written premiums $158.2 $176.2 $180.0
===================================================================================================================
Direct earned premiums 176.6 172.2 $223.9
Reinsurance ceded to
other companies (16.0) (17.4) (29.2)
Reinsurance assumed from
other companies 4.3 6.9 13.4
- -------------------------------------------------------------------------------------------------------------------
Net earned premiums $164.9 $161.7 $208.1
===================================================================================================================
Percentage of reinsurance
assumed to net earned premiums 2.6% 4.3% 6.4%
</TABLE>
13-11
12
<PAGE>
EXHIBIT 13
NOTE 4. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
The following table provides a reconciliation of reserves for losses and loss
adjustment expenses for the years ended December 31, 1997, 1996, and 1995.
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves for losses and loss
adjustment expenses at
beginning of year $1,158.9 $1,026.1 $1,161.5
Losses and loss adjustment expenses:
Provision for losses and loss
adjustment expenses for claims
occurring in the current year 132.6 178.8 183.6
Increase (decrease) in estimated
losses and loss adjustment
expenses for claims occurring
in prior years 7.3 240.3 (15.5)
- -------------------------------------------------------------------------------------------------------------------
139.9 419.1 168.1
- -------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment
expense payments for claims
occurring during:
Current year 39.7 42.1 38.4
Prior years 234.2 244.2 265.1
- -------------------------------------------------------------------------------------------------------------------
273.9 286.3 303.5
- -------------------------------------------------------------------------------------------------------------------
Reserves for losses and
loss adjustment expenses
at end of year $1,024.9 $1,158.9 $1,026.1
===================================================================================================================
</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 are 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.
1996 reserves were substantially affected by a $229 million increase of loss
reserves, principally relating to certain general liability and reinsurance
policies.
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 1997 and 1996. The amount of
unamortized discount was $38.7 million at December 31, 1997 and $26.7 million at
December 31, 1996.
13-12
13
<PAGE>
EXHIBIT 13
NOTE 5. INCOME TAXES
<TABLE>
<CAPTION>
The Company's income tax provision includes the following components.
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision $(0.3) $(27.6) $ 6.1
Deferred tax provision related to:
Future tax deductions 18.9 (6.7) 11.0
Net operating loss carryforward (5.1) (18.8) -
Deferred alternative minimum
tax provision (0.7) (1.9) (4.3)
- -------------------------------------------------------------------------------------------------------------------
Income tax provision $12.8 $(55.0) $12.8
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
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.
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at statutory
tax rates (35%) $21.1 $(52.6) $24.0
Tax effect of:
Tax exempt interest (1.7) (1.9) (4.7)
Dividends received deduction (6.1) (5.0) (4.2)
Other permanent adjustments, net (1.6) 3.4 (3.4)
State income tax provision 1.1 1.1 1.1
- -------------------------------------------------------------------------------------------------------------------
Income tax provision $12.8 $(55.0) $12.8
===================================================================================================================
</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, 1997, 1996, and 1995 result from the following tax-effected
temporary differences.
<TABLE>
<CAPTION>
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred liability on unrealized
gains $(78.6) $(56.5) $(60.2)
Deferred tax
assets:
Reserve discounting 53.8 74.9 68.9
Alternative minimum tax 6.8 6.3 4.3
Net operating loss carryforward 23.9 18.8 -
Other, net 5.6 3.3 2.7
- -------------------------------------------------------------------------------------------------------------------
Deferred tax asset, net $11.5 $46.8 $15.7
===================================================================================================================
</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 $68.4 million which will expire after 2011.
13-13
14
<PAGE>
EXHIBIT 13
NOTE 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, 1997.
During 1996, the Company reacquired and retired 360,245 shares of its common
stock at prevailing market prices. No shares were reacquired during 1997.
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 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 68.1 $(122.6) $ 58.1
Surplus $575.0 $ 487.1 $630.8
- -------------------------------------------------------------------------------------------------------------------
</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, 1997, $9.8 million was available for
dividends to Argonaut Group without prior regulatory approval. During 1997,
dividends of $38.3 million were paid to Argonaut Group.
13-14
15
<PAGE>
EXHIBIT 13
NOTE 7. NET INVESTMENT INCOME
Investment income and expenses for the years ended December 31, were as follows.
<TABLE>
<CAPTION>
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Interest and dividends on
fixed maturities $62.0 $69.2 $82.9
Dividends on equity securities 20.7 24.2 17.9
Interest on short-term investments 2.8 1.6 1.2
Other 2.1 1.2 1.1
- -------------------------------------------------------------------------------------------------------------------
87.6 96.2 103.1
Investment expenses (0.4) (1.0) (1.1)
Interest relating to Prop 103 - (5.7) -
- -------------------------------------------------------------------------------------------------------------------
Net investment income $87.2 $89.5 $102.0
===================================================================================================================
</TABLE>
NOTE 8 UNDERWRITING, ACQUISITION, AND INSURANCE EXPENSES
Underwriting, acquisition, and insurance expenses for the years ended December
31, were as follows.
<TABLE>
<CAPTION>
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions $15.8 $13.0 $12.2
General expenses 45.1 44.3 44.8
State assessments 12.5 2.2 6.8
Taxes, licenses, and bureau fees 6.0 5.2 4.5
- -------------------------------------------------------------------------------------------------------------------
79.4 64.7 68.3
Amortization (deferral) of policy
acquisition costs 1.2 (0.6) (1.0)
- -------------------------------------------------------------------------------------------------------------------
$80.6 $64.1 $67.3
===================================================================================================================
</TABLE>
13-15
16
<PAGE>
EXHIBIT 13
NOTE 9. BENEFIT PLANS
PENSION The Company sponsors a qualified defined benefit plan which covers
substantially all of its employees. The benefits are based on years of service
and the employee's compensation during the last ten years of employment. The
Company's funding policy is to contribute annually the maximum allowable by the
Employee Retirement Income Security Act of 1974, as amended. Contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future.
The Company also maintains a non-qualified unfunded supplemental defined
benefit plan designed to compensate individuals to the extent their benefits
under the Company's qualified plan are curtailed due to Internal Revenue Code
Limitations.
The following table sets forth a reconciliation of the plan's funded status
and amounts recognized in the Company's balance sheet as of December 31 with
respect to the qualified and non-qualified pension plans.
<TABLE>
<CAPTION>
In millions 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
(vested benefits:
1997-$(19.0); 1996-$(16.2) $(19.5) $(16.7)
===================================================================================================================
Projected benefit obligation for service
rendered to date $(25.6) $(21.9)
Plan assets at fair value, primarily Treasury
bonds 30.6 27.1
- -------------------------------------------------------------------------------------------------------------------
Plan assets (less than) in excess of projected
benefit obligation 5.0 5.2
Unrecognized net gain (loss) from past experience
different from that assumed and effects of
changes in assumptions (3.0) (4.4)
Unrecognized prior service cost 1.4 1.4
Unrecognized net asset (0.4) (0.4)
Adjustment required to recognize
minimum liability (0.3) (0.5)
- -------------------------------------------------------------------------------------------------------------------
Pension asset recognized in the Balance Sheet $2.7 $1.3
===================================================================================================================
</TABLE>
Net pension cost included the following:
<TABLE>
<CAPTION>
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 1.5 $ 1.5 $ 1.3
Interest cost on projected
benefit obligation 1.6 1.4 1.4
Actual return on plan assets (1.7) (1.4) (2.9)
Net amortization (0.2) (0.3) 1.5
- -------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 1.2 $ 1.2 $ 1.3
===================================================================================================================
</TABLE>
In determining the actuarial present value of the projected benefit obligation
as of December 31, 1997 and 1996, the weighted average discount rate was 7.0%
and 7.5% respectively. The rate of increase in future compensation levels was
4.5% and the long-term rate of return on assets was 6.0% in 1997 and 1996.
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. An amendment to
13-16
17
<PAGE>
EXHIBIT 13
the Plan increasing the number of shares of common stock issuable under the Plan
from 1,500,000 to 2,000,000 was approved on April 23, 1996 at the Company's
Annual Meeting. Under the 1986 Stock Option Plan, options to purchase shares of
Argonaut Group, Inc. common stock may be granted to certain key employees. 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 Standard 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, 1997, 529,540 shares were available for future grant. The
options 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,
1997, 1996, and 1995 is presented in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Number Weighted-Average Number Weighted-Average Number Weighted-Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year 1,036,170 $23.79 970,860 $22.32 924,790 $21.60
Granted 151,900 29.01 168,250 32.86 120,600 30.00
Exercised (64,880) 17.84 (43,440) 17.39 (19,380) 22.16
Cancelled (42,250) 30.05 (59,500) 30.23 (55,150) 27.05
-------- -------- --------
Outstanding at end of the year 1,080,940 $24.63 1,036,170 $23.79 970,860 $22.32
Exercisable at end of year 560,560 19.91 521,040 18.13 456,860 16.06
Weighted-average fair value of options
granted during the year $ 4.26 $ 4.69 $ 4.93
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Price Outstanding at Remaining Exercise Price Exercisable Exercise Price
12/31/97 Contractual Life at 12/31/97
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.58 to $23.75 327,840 1.75 yrs. $14.33 327,840 $14.33
$26.25 to $33.00 753,100 7.83 yrs. $29.11 232,720 $27.78
-------
1,080,940
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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 1997, 1996 and 1995, respectively: risk-free
rates of 6.32% and 6.73% for options issued in 1997, 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 5.10%, 4.62%, and 4.17%; expected lives of 6.15, 5.51, and
4.85 years; and expected volatility of 16.65%, 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 per year in 1997,
1996, and 1995.
13-17
18
<PAGE>
EXHIBIT 13
NOTE 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 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums:
Workers compensation $140.6 $ 129.5 $176.7
Other insurance 24.3 32.2 31.4
- -------------------------------------------------------------------------------------------------------------------
$164.9 $ 161.7 $208.1
===================================================================================================================
Pre-tax underwriting income
(loss):
Workers compensation $ (24.0) $ (7.5) $ (0.2)
Other insurance (6.4) (252.6) (35.2)
- -------------------------------------------------------------------------------------------------------------------
$ (30.4) $(260.1) $ (35.4)
Net investment income 87.2 89.5 102.0
Gains on sales of investments 4.5 21.6 3.1
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes $ 61.3 $(149.0) $ 69.7
===================================================================================================================
</TABLE>
NOTE 11. COMMITMENTS AND CONTINGENCIES
Rental expenses for operating leases, principally for offices, were
$4.0 million, $3.8 million, and $3.8 million in 1997, 1996, and 1995,
respectively.
As of December 31, 1997, future minimum noncancellable operating lease
commitments are as follows: $3.6 million in 1998, $2.9 million in 1999, $2.7
million in 2000, $1.8 million in 2001, $1.9 million in 2002 and thereafter for a
total of $12.9 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 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.
13-18
19
<PAGE>
Exhibit 13
NOTE 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 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Run off lines:
Medical liability $10.7 $11.2 $12.6
Hospital liability 43.7 46.6 49.3
Other* 217.8 229.4 134.7
- -------------------------------------------------------------------------------------------------------------------
272.2 287.2 196.6
Continuing lines 752.7 871.7 829.5
- -------------------------------------------------------------------------------------------------------------------
Total reserves $1,024.9 $1,158.9 $1,026.1
===================================================================================================================
</TABLE>
* Primarily casualty reinsurance assumed
UNDERWRITING INCOME (LOSS)
<TABLE>
<CAPTION>
In millions 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Run off lines:
Medical liability $ 0.4 $ 0.0 $ 2.4
Hospital liability 1.6 0.1 9.9
Other* 0.4 (127.5) (12.3)
- -------------------------------------------------------------------------------------------------------------------
2.4 (127.4) 0.0
Continuing lines (32.8) (132.7) (35.4)
- -------------------------------------------------------------------------------------------------------------------
Total underwriting loss $(30.4) $(260.1) $(35.4)
===================================================================================================================
</TABLE>
* Primarily casualty reinsurance assumed
NOTE 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 Commissioners ("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 agency 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.
13-19
20
<PAGE>
EXHIBIT 13
QUARTERLY FINANCIAL DATA -- UNAUDITED
The following table represents unaudited quarterly financial data for the years
ended December 31, 1997 and 1996. 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 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
1997
Total revenues $67.9 $60.7 $ 60.3 $67.7
Underwriting (loss) (1.1) (6.0) (10.8) (12.5)
Net income 15.5 12.8 9.3 10.9
Income per common share
Basic* 0.65 0.54 0.39 0.46
Diluted* 0.65 0.54 0.39 0.45
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
Income (loss) per common
share
Basic* 1.14 0.10 (5.82) 0.66
Diluted* 1.10 0.10 (5.82) 0.65
</TABLE>
- --------------------------------------------------------------------------------
*Basic and diluted earnings per share are 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.
<TABLE>
<CAPTION>
COMMON STOCK MARKET PRICES -- UNAUDITED
The following table shows the high, low, and closing prices during each quarter
in the past two years.
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
1997
High 31 1/2 31 3/8 36 3/8 38 1/8
Low 27 1/4 26 3/4 29 1/2 29 5/8
Close 28 29 1/2 34 7/8 33 7/8
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
- ------------------------------------------------------------
</TABLE>
13-20
21
<PAGE>
Exhibit 13
MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS Earned premium income increased slightly to $164.9 million
in 1997 from $161.7 million in 1996, and down from $208.1 million in 1995.
Despite new business activity and better retention of renewal accounts, premium
continues to be impacted by significant rate decreases in several areas of the
country, aggressive competition, and a large percentage of accounts being
written with lower premiums as a result of large deductible provisions. The
impact of large deductible programs on inforce premium, however, decreased to
approximately $86.6 million at December 31, 1997 from approximately $100 million
in 1996 and 1995.
Net investment income was $87.2 million, $89.5 million, and $102.0 million
for 1997, 1996, and 1995, respectively. Lower interest rates, some restructuring
of the investment portfolio, and negative cash flow as claims from discontinued
lines of business are paid contribute to the decrease.
Pre-tax gains on sales of investments were $4.5 million, $21.6 million, and
$3.1 million for 1997, 1996, and 1995, respectively. The 1996 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 similar gains or losses may occur in the future.
Losses and loss adjustment expenses were $112.8 million, $346.2 million and
$152.8 million in 1997, 1996, and 1995, respectively. 1996 results were
substantially affected by a $229 million increase of loss reserves, principally
relating to certain liability and reinsurance policies. The Company's loss
ratio, including our run off lines of business, was 68% in 1997, 214% in 1996,
and 81% in 1995. The loss ratio in our workers compensation line of business was
65% in 1997 and 63% in 1996 and 1995. The loss ratio in other continuing lines
of business was 94%, 427%, and 173% in 1997, 1996, and 1995, respectively.
In the opinion of management, the Company's reserves 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, will not occur.
Underwriting expenses totaled $80.6 million in 1997, $64.1 million in 1996,
and $67.3 million in 1995. Underwriting expenses are composed of four
components: general expenses, commissions, premium taxes, and state fees and
assessments. The $16.5 million increase is due primarily to an increase in
assessments related to mandatory assigned risk pools and a provision for
nonrecoverable ceded reinsurance.
Policyholder dividend expense (recapture) was $(0.9) million in 1997, $8.7
million in 1996, and $20.6 million in 1995. 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.
After-tax income from operations was $48.5 million in 1997 compared with a
loss of $94.0 million in 1996, and income of $56.9 million in 1995. Operations
for the current year were impacted primarily by the increased charges in
assessments related to mandatory assigned risk pools. The after-tax loss in 1996
was a result of the strengthening of loss reserves discussed above.
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, 1997, the Company generated sufficient
capital from operating and 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 liabilities
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, 1997, Argonaut
Insurance could pay to Argonaut Group, Inc. a maximum dividend of $9.8 million
without the Insurance Commissioner's approval. During 1997, Argonaut Insurance
paid the Company dividends of $38.3 million.
13-21
22
<PAGE>
Exhibit 13
On April 22, 1997, the Company's Board of Directors increased the quarterly
dividend from $0.37 per common share to $0.41 per common share. During 1997,
total cash dividends paid by the Company to its shareholders were $1.60 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, of which
5,367,636 have been reacquired to date. 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 February of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(FAS 128). The Company has provided the additional required disclosures on the
Statement of Operations and in Note 1 to the financial statements.
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.
13-22
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 7, 1998,
included in Argonaut Group, Inc.'s 1997 Annual Report to Shareholders. It should
be noted that we have not audited any consolidated financial statements of the
Company subsequent to December 31, 1997 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
San Francisco, California
March 4, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 858
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 440
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,369
<CASH> 59
<RECOVER-REINSURE> 30
<DEFERRED-ACQUISITION> 4
<TOTAL-ASSETS> 1,861
<POLICY-LOSSES> 1,025
<UNEARNED-PREMIUMS> 40
<POLICY-OTHER> (2)
<POLICY-HOLDER-FUNDS> 43
<NOTES-PAYABLE> 0
0
0
<COMMON> 2
<OTHER-SE> 716
<TOTAL-LIABILITY-AND-EQUITY> 1,861
165
<INVESTMENT-INCOME> 87
<INVESTMENT-GAINS> 5
<OTHER-INCOME> 0
<BENEFITS> 113
<UNDERWRITING-AMORTIZATION> 1
<UNDERWRITING-OTHER> 79
<INCOME-PRETAX> 61
<INCOME-TAX> 13
<INCOME-CONTINUING> (33)
<DISCONTINUED> 2
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49
<EPS-PRIMARY> 2
<EPS-DILUTED> 2
<RESERVE-OPEN> 1,159
<PROVISION-CURRENT> 133
<PROVISION-PRIOR> 7
<PAYMENTS-CURRENT> 40
<PAYMENTS-PRIOR> 234
<RESERVE-CLOSE> 1,025
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
