FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-14950
Argonaut Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 95-4057601
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Avenue of the Stars, Suite 1175, Los Angeles, California 90067-4213
(Address of principal executive offices) (Zip code)
310.553.0561
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of August 10, 1998.
Title Outstanding
Common Stock, par value $.10 per share 23,947,735
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION: Page
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1998 and December 31, 3
1997.........................................................
Consolidated Statements of Income and Comprehensive Income
Three Months and Six Months Ended, June 30, 1998 and 4
1997................
Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1998 and 5
1997..................
Notes to The Condensed Consolidated Financial 6
Statements.......................
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Second Quarter Ended June 30, 1998 and 7
1997............................................
PART II. OTHER INFORMATION:
Item 1. Legal 8
Proceedings.....................................
Item 6. Exhibits and Reports on Form 8
8-K.............................................
Signatures................................................... 9
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Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
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ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In million except per share amounts)
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Jun 30, 98 Dec 31, 97
(unaudited) (audited)
ASSETS
Investments:
Fixed maturities, available for sale, at market $976.3 $857.6
(cost: 1998 - $960.7; 1997 - $845.8)
Equity securities, available for sale, at market 396.7 440.1
(cost: - 1998 - $199.1; 1997 - $227.4)
Short-term investments 18.3 80.9
Securities in transit 0.3 (9.5)
------------- -------------
1,391.6 1,369.1
Cash and cash equivalents 36.1 59.0
Accrued investment income 21.2 20.3
Receivables:
Reinsurance 204.2 210.2
Agents' balances 61.2 74.2
Accrued retrospective premiums 60.0 61.8
Cost in excess of net assets purchased 36.9 38.3
Unearned premiums on ceded reinsurance 1.0 0.8
Deferred Federal income taxes receivable 1.9 11.5
Other assets 15.8 15.3
------------- -------------
$1,829.9 $1,860.5
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $967.6 $1,024.9
Unearned premiums 47.9 40.2
Accrued policyholder dividends (1.7) (2.4)
Other liabilities 78.1 79.9
-------------
-------------
1,091.9 1,142.6
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Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares
authorized, 23,947,695 and 23,854,720 shares
issued and outstanding at June 30, 1998
and December 31, 1997, respectively 2.4 2.4
Additional paid-in capital 99.8 98.3
Retained earnings 497.2 471.2
Net unrealized appreciation on securities 138.6 146.0
-------------
-------------
738.0 717.9
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$1,829.9 $1,860.5
============= =============
See accompanying notes.
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Operations
(In millions except amounts per share) For the Quarter For the Six Months
(unaudited) Ended June 30, Ended June 30,
--------------------------- ---------------------------
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1998 1997
1998 1997
Premiums and other revenue:
Premiums, net $36.7 $37.7 $72.2 $83.3
Net investment income 19.5 21.7 39.8 42.6
Gains on sales of investments 0.1 1.3 42.2 2.7
------------ ------------- ------------- ------------
Total Revenue 56.3 60.7 154.2 128.6
Expenses:
Losses and loss adjustment expenses 22.6 25.5 46.8 54.3
Underwriting, acquisition, and
insurance expenses 19.1 18.6 38.3 35.5
Amortization of cost in excess of
net assets purchased 0.7 0.7 1.4 1.4
Policyholder dividends 0.3 (1.1) 0.5 (0.8)
------------ ------------- ------------- ------------
------------
Total Expenses 42.7 43.7 87.0 90.4
------------ ------------- ------------- ------------
Income before tax 13.6 17.0 67.3 38.2
Provision for taxes 4.8 4.2 21.8 9.9
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============ =============
Net Income $8.8 $12.8 $45.5 $28.3
============ ============= ============= ============
Income per common share:
Basic $0.37 $0.54 $1.90 $1.19
============ ============= ============= ============
Diluted $0.36 $0.53 $1.88 $1.18
============ ============= ============= ============
Weighted Average Common Shares:
Basic 23,934,531 23,819,102 23,911,239 23,810,278
============ ============= ============= ============
Diluted 24,169,801 24,013,932 24,168,147 24,011,159
============ ============= ============= ============
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Argonaut Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In millions except amounts per share) For the Quarter For the Six Months
(unaudited) Ended June 30, Ended June 30,
--------------------------- ---------------------------
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1998 1997 1998 1997
Net Income $8.8 $12.8 $45.5 $28.3
Other comprehensive income:
Unrealized gain on securities:
Gains arising during the year 8.9 48.7 30.8 40.2
Reclassification adjustment for gains included
in net income (0.2) (1.3) (42.4) (2.7)
------------ ------------- ------------- ------------
Other comprehensive income (loss) before tax 8.7 47.4 (11.6) 37.5
Income tax expense related to other
comprehensive income (loss) 3.1 16.6 (4.0) 13.1
------------ ------------- -------------
------------
Other comprehensive income (loss), net of tax 5.7 30.8 (7.5) 24.4
------------ ------------- ------------- ------------
Comprehensive income $14.5 $43.6 $38.0 $52.7
============ ============= ============= ============
See accompanying notes.
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ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Six Months
Ended June 30,
-------------------------
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1998 1997
Cash flows from operating activities:
Net income $45.5 28.3
Adjustments to reconcile net income to
net cash provided by operations:
Amortization and depreciation 4.7 6.3
Decrease (Increase) in accrued investment income (0.9) 2.4
Decrease in reinsurance receivables 6.0 5.2
Decrease (increase) in agents' balances 13.0 (2.5)
Decrease in accrued retrospective premiums 1.8 46.5
Decrease (increase) in unearned premiums on ceded reinsurance (0.2) 0.2
Decrease in deferred Federal income taxes receivable 13.6 9.9
Decrease in reserves for losses and
loss adjustment expense (57.3) (112.1)
Increase (decrease) in unearned premiums 7.6 (13.5)
Increase (decrease) in accrued policyholder dividends 0.7 (0.8)
Increase in income taxes payable 6.5 42.1
Decrease in other, net (9.7) (4.1)
------------ -----------
31.3 7.9
------------ -----------
Cash flows from investing activities:
Sales of fixed maturity investments 13.0
-
Sales of equity 35.5 39.1
securities
Maturities and mandatory calls of fixed maturity investments 111.7 131.2
Purchases of fixed maturity investments (229.0) (120.4)
Purchases of equity securities (7.1) (5.4)
Decrease (increase) in short-term investments 62.6 (49.0)
Increase in other, net (9.9) (3.2)
------------ -----------
(36.2) 5.3
------------ -----------
Cash flows from financing activities:
Payment of cash dividend (19.5) (18.6)
Exercise of stock options 1.6 0.5
------------ -----------
(17.9) (18.1)
------------ -----------
Decrease in cash and cash equivalents (22.8) (4.9)
Cash and cash equivalents, beginning of period 59.0 30.6
------------ -----------
Cash and cash equivalents, end of period $36.2 $25.7
============ ===========
See accompanying notes
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The consolidated balance sheet as of June 30, 1998, and the related
consolidated statements of income for the three and six month periods ended June
30, 1998 and 1997 and the statements of cash flows for the six month periods
ended June 30, 1998 and 1997 are unaudited, and, in the opinion of management,
include all adjustments which are necessary for a fair presentation of such
statements. Such adjustments consist of only normal recurring items. Interim
results are not necessarily indicative of results for other interim periods or
for a full year.
Note 2 - Dividends Declared
On July 24, the Company declared a cash dividend of $0.41 per share payable
to stockholders of record on August 4, 1998. The dividend will be paid on August
18, 1998.
Note 3 - Recently Issued Accounting Pronouncements
In February of 1997, the FASB issued SFAS No. 128, Earnings Per Share
which became effective for the 1997 Annual Report. Earlier application was not
permitted, however, restatement of all prior periods presented is required. The
Statement replaces primary earnings per share (EPS) with basic earnings per
common share. Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. The Statement also requires presentation of EPS assuming dilution. This
is computed similarly to the fully diluted EPS that was previously required.
Basic and diluted EPS for the second quarter of 1998 are $0.37 and $0.36, and
for the six months ended 1998 are $1.90 and $1.88, respectively. Basic and
diluted EPS for the second quarter of 1997 are $0.54 and $0.53, and for the six
months ended 1997 are $1.19 and $1.18, respectively. In June of 1997, SFAS No.
130, Reporting Comprehensive Income, was issued. The Company has adopted this
standard which requires the display of comprehensive income and its components
in the financial statements. The Company has chosen to disclose Comprehensive
Income, which includes unrealized gains and losses on debt and equity securities
classified as available for sale, as a separate statement of comprehensive
income. Prior years have been restated to conform to the requirements of SFAS
No. 130.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Consolidated Operating Results
The Company reported consolidated net income of $8.8 million ($0.36 per
diluted common share) on total revenue of $56.3 million for the second quarter
of 1998, compared with $12.8 million ($0.53 per diluted common share) on total
revenue of $60.7 million for the same quarter last year. For the six months
ended June 30, 1998, consolidated net income was $45.5 million ($1.88 per
diluted common share) on total revenue of $154.3 million, compared with net
income of $28.3 million ($1.18 per diluted common share) on total revenue of
$128.6 million for the same period in 1997. Consolidated operating income after
tax was $8.7 million for the quarter ended June 30, 1998, compared with $12.0
million for the same period last year. For the six months ended June 30, 1998,
consolidated operating income after tax was $18.0 million, compared with $26.5
million for the same six-month period last year. Operating income excludes gains
on the sale of investments. Total revenue includes gains on sales of investments
of $100,000 for the current quarter, compared with $1.3 million for the second
quarter in 1997. For the six months ended June 30, 1998, gains on sales of
investments were $42.3 million, compared with $2.7 million for the same period
last year. The 1998 gains resulted primarily from the call of Navistar
International Series D preferred stock. The Company cannot anticipate when or if
similar gains may occur in the future. While written premiums were somewhat
higher than for 1997, both for the quarter and year-to-date, earned premiums
continue to lag compared with 1997, primarily as a result of adjustments to
accrued retrospective premiums related to prior periods, and the timing of
premium on some large construction wrap-up accounts. 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 slightly over $2.0 million. All
costs associated with the project have been expensed as incurred. On January 28,
1998, the Company announced that it had engaged Credit Suisse First Boston
Corporation to assist in reviewing a range of strategic alternatives, including
the potential combination of the Company with another company. There can be no
assurance that any strategic combination or other transaction will result from
this review.
Liquidity and Capital Resources
The liquidity requirements of the Company have been met by funds provided
from premiums and investment income as well as maturities of invested assets.
The primary use of funds was to pay claims, policy benefits, operating expenses,
and commissions and to purchase new investments. Management believes that the
Company maintains sufficient liquidity to pay claims and expenses. Management
also believes that the Company possesses adequate capital resources to cover
unforeseen events such as reinsurer insolvencies, inadequate premium rates, or
reserve deficiencies.
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company s Annual Report to Stockholders
on Form 10-K for the fiscal year ended December 31, 1997.
Item 6. Exhibits and Reports on Form 8-K.
1. Exhibit 27 Financial Data Schedule for June 30, 1998 Form 10-Q. 2.
During the quarter covered by this report, the Registrant did not file any
reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Argonaut Group, Inc.
(Registrant)
/s/ Charles E. Rinsch
Charles E. Rinsch
President (principal executive
officer)
/s/ James B Halliday
James B Halliday
Vice President and Treasurer
(principal financial and
accounting officer)
August 12, 1998
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<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<DEBT-HELD-FOR-SALE> 976
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 397
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1373
<CASH> 36
<RECOVER-REINSURE> 204
<DEFERRED-ACQUISITION> 5462
<TOTAL-ASSETS> 1830
<POLICY-LOSSES> 968
<UNEARNED-PREMIUMS> 48
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0
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72
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</TABLE>
