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, 1999
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 5, 1999.
Title Outstanding
Common Stock, par value $.10 per share 23,806,620
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ARGONAUT GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1999 and December 31,
1998................................................3
Consolidated Statements of Income and Comprehensive
Income
Three Months and Six Months Ended, June 30, 1999 and
1998................................................4
Consolidated Statements of Cash Flows
Three Months and Six Months Ended June 30, 1999 and
1998................................................5
Notes to The Condensed Consolidated Financial
Statements..........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Second Quarter Ended June 30, 1999 and
1998................................................7
PART II. OTHER INFORMATION:
Item 1. Legal
Proceedings.........................................8
Item 6. Exhibits and Reports on Form
8K..................................................8
Signatures......................................................9
2
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Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In million except per share amounts)
Jun 30, 99 Dec 31, 98
<S> <C> <C>
(unaudited) (audited)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value $825.9 $942.8
(cost: 1999 - $838.8; 1998 - $915.5)
Equity securities, available for sale, at fair value 431.3 408.5
(cost: 1999 - $200.0; 1998 - $197.4)
Short-term investments 25.7 19.9
Securities in transit 0.1 1.6
------------- -------------
1,283.0 1,372.8
Cash and cash equivalents 18.7 24.5
Accrued investment income 17.2 18.7
Receivables:
Reinsurance 216.2 196.1
Agents' balances 57.3 63.8
Accrued retrospective premiums 49.1 52.8
Cost in excess of net assets purchased 34.1 35.5
Unearned premiums on ceded reinsurance 1.0 0.9
Other assets 13.4 15.5
------------- -------------
$1,690.0 $1,780.6
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses $854.9 $895.9
Unearned premiums 31.4 36.8
Accrued policyholder dividends (3.3) (2.5)
Deferred Federal income taxes payable, net 11.9 14.2
Other liabilities 64.0 81.8
-------------
-------------
958.9 1,026.2
------------- -------------
Shareholders' equity:
Common stock - $.10 par, 35,000,000 shares authorized, 23,806,605 and
24,077,792 shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively 2.4 2.4
Additional paid-in capital 102.5 102.9
Retained earnings 484.2 494.1
Net unrealized appreciation on securities 142.0 155.0
-------------
-------------
731.1 754.4
------------- -------------
$1,690.0 $1,780.6
============= =============
See accompanying notes.
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3
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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,
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Premiums and other revenue:
Premiums, net $33.6 $36.7 $61.2 $72.2
Net investment income 17.3 19.5 34.9 39.8
Gains on sales of investments 0.5 0.1 1.4 42.3
------------ ------------ ------------ -------------
Total Revenue 51.4 56.3 97.5 154.3
Expenses:
Losses and loss adjustment expenses 23.1 22.6 38.8 46.8
Underwriting, acquisition, and
insurance expenses 16.5 19.1 32.0 38.3
Amortization of cost in excess of
net assets purchased 0.7 0.7 1.4 1.4
Policyholder dividends 0.3 0.3 0.5 0.5
------------ ------------ ------------ -------------
------------ ------------
Total Expenses 40.6 42.7 72.7 87.0
------------ ------------ ------------ -------------
Income before tax 10.8 13.6 24.8 67.3
Provision for taxes 3.6 4.8 8.1 21.8
============ ============ ============ =============
Net Income $7.2 $8.8 $16.7 $45.5
============ ============ ============ =============
Income per common share:
Basic $0.30 $0.37 $0.70 $1.90
============ ============ ============ =============
Diluted $0.30 $0.36 $0.70 $1.88
============ ============ ============ =============
Weighted Average Common Shares:
Basic 23,934,234 23,934,531 23,994,566 23,911,239
============ ============ ============ =============
Diluted 23,940,632 24,169,801 24,001,110 24,168,147
============ ============ ============ =============
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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,
--------------------------- ---------------------------
1999 1999
1998 1998
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Net Income $7.2 $8.8 $16.7 $45.5
Other comprehensive income:
Unrealized gain on securities:
Gains arising during the year 6.0 8.9 (18.6) 30.8
Reclassification adjustment for gains included
in net income (0.5) (0.1) (1.4) (42.3)
------------ ------------ ------------ -------------
Other comprehensive income (loss) before tax 5.5 8.8 (20.0) (11.5)
Income tax expense related to other
comprehensive income (loss) 1.9 3.1 (7.0) (4.0)
------------ ------------ ------------ -------------
Other comprehensive income (loss), net of tax 3.6 5.7 (13.0) (7.5)
------------ ------------ ------------ -------------
Comprehensive income $10.8 $14.5 $3.7 $38.0
============ ============ ============ =============
See accompanying notes
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4
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ARGONAUT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In millions)
(unaudited)
For the Six Months
Ended June 30,
-------------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $16.7 $45.5
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation 3.5 4.7
Decrease (increase) in accrued investment income 1.5 (0.9)
Decrease (increase) in reinsurance receivables (20.1) 6.0
Decrease in agents' balances 6.5 13.0
Decrease in accrued retrospective premiums 3.7 1.8
Increase in unearned premiums on ceded reinsurance
(0.1) (0.2)
Decrease in deferred federal income taxes payable
4.7 13.6
Decrease in reserves for losses and
loss adjustment expense
(41.0) (57.3)
Increase (decrease) in unearned premiums
(5.4) 7.6
Increase (decrease) in accrued policyholder dividends
(0.8) 0.7
Increase (decrease) in income taxes payable
(2.4) 6.5
Decrease in other, net
(14.1) (9.7)
----------- ------------
(47.3) 31.3
----------- ------------
Cash flows from investing activities:
Sales of fixed maturity investments
41.9 -
Sales of equity
securities 8.1 35.5
Maturities and mandatory calls of fixed maturity investments
41.0 111.7
Purchases of fixed maturity investments
(7.4) (229.0)
Purchases of equity securities
(10.8) (7.1)
Decrease (increase) in short-term investments
(5.8) 62.6
Decrease (increase) in other, net
1.5 (9.9)
----------- ------------
68.5 (36.2)
----------- ------------
Cash flows from financing activities:
Repurchase of common stock
(8.0) -
Payment of cash dividend
(19.7) (19.5)
Exercise of stock options
0.7 1.6
----------- ------------
(27.0) (17.9)
----------- ------------
Decrease in cash and cash equivalents
(5.8) (22.8)
Cash and cash equivalents, beginning of period
24.5 59.0
----------- ------------
Cash and cash equivalents, end of period
18.7 36.2
=========== ============
See accompanying notes
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5
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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, 1999, and the related consolidated
statements of income for the three and six month periods ended June 30, 1999 and
1998 and the statements of cash flows for the six month periods ended June 30,
1999 and 1998 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 27, the Company declared a cash dividend of $0.41 per common share
payable to shareholders of record on August 10, 1999. The dividend will be paid
on August 24, 1999.
Note 3 - Recently Issued Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued on June 16, 1998. The Company's required adoption date is January 1,
2000. The Company does not anticipate SFAS No. 133 to have an impact on its
results of operations or financial position.
6
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The Company reported consolidated net income of $7.2 million ($0.30 per diluted
common share) on total revenue of $51.4 million for the quarter ended June 30,
1999 compared with, 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. For the six
months ended June 30, 1999, consolidated net income was $16.7 million ($0.70 per
diluted common share) on total revenue of $97.5 million, compared with net
income of $45.5 million ($1.88 per diluted common share) on total revenue of
$154.3 million for the same period in 1998.
Consolidated operating income after tax was $6.9 million ($0.29 per diluted
common share) for the quarter ended June 30, 1999, compared with $8.7 million
($0.36 per diluted common share) for the same period last year. For the six
months ended June 30, 1999, consolidated operating income after tax was $15.8
million ($0.66 per diluted common share), compared with $18.0 million ($0.75 per
diluted common share)for the same six-month period last year. Operating income
excludes gains on the sale of investments.
Shareholders' equity per common share at June 30, 1999 increased to $30.71,
compared with $30.63 at March 31, 1999. The increase, primarily due to an
increase in market value of investments and the repurchase by the Company of its
own shares of stock, partially offset by payment of a shareholder dividend in
excess of earnings for the quarter.
Total revenue includes gains on sales of investments of $500,000 for the current
quarter, compared with $100,000 for the second quarter in 1998. For the six
months ended June 30, 1999, gains on sales of investments were $1.4 million,
compared with $42.3 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.
For the second quarter of 1999, earned premium decreased $3.1 million to $34.7
million, compared with $36.7 million in the second quarter of 1998. This decline
in premium revenues is due primarily to management actions to purchase addi-
tional reinsurance protection and to non-renew certain unprofitable accounts.
Additionally, price competition remains very aggressive despite significant rate
reductions (as much as 40-50% in many states across the country). This competi-
tive environment has resulted in the loss of accounts at renewal to competitors
at prices which the Company did not consider prudent based on historical and
estimated losses.
Year 2000
On October 19, 1998, the Year 2000 Information and Readiness Disclosure Act
("Y2K Act")(Pub. L. No. 105-271, 12 Stat. 2386 (1998) to
be codified at 15 U.S.C. ss. 1) was enacted into law by President Clinton.
The following disclosure is defined by section 3(9) of the
Y2K Act.
The Company established a Year 2000 project team in November of 1996 to prepare
its computer hardware, operating system software, computer programs, and voice
and data communications to address Year 2000 compliance and remediation issues.
The Company's external Year 2000 plan covers the information exchange process
with vendors and business partners, and includes validating and testing the
readiness of its outsource data center service providers.
It is the opinion of management that the Company's clientserver policy manage-
ment, policy rating and claims processing systems are Year 2000 compliant as of
April 30, 1998. These computer systems use a four-position field to store and
process all dates. In addition, it is the opinion of management that the
Company's mission critical mainframe legacy systems were remediated to process
dates beyond the Year 2000 as of September 30, 1998. The Company has completed
testing its mission critical business processing client server and mainframe
legacy systems, computer hardware, computer infrastructure systems software and
office automation software to assure continuity of service beyond the Year 2000.
During the second quarter of 1999, the Company continued the testing of
non-mission critical user systems and validating the above mission critical
systems for Year 2000 compliance/remediation. This includes the completion of
system testing and installation of the Company's vendor upgraded and year 2000
compliant Accounts Payable and General Ledger software by August 31, 1999.
An extensive and detailed contingency plan that includes a designated team to
resolve any unforeseen problems that arise beyond the Year 2000 has been
prepared and is in the final stages of completion. The finalized plan is
expected to be in place by September 30, 1999.
The total project cost is estimated to be approximately $4.4 million.
All costs associated with the project have been expensed as
incurred.
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,
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, 1998.
Item 6. Exhibits and Reports on Form 8-K.
1. Exhibit 27 Financial Data Schedule for June 30, 1999 Form 10-Q.
2. During the quarter covered by this report, the Registrant did not file any
reports on Form 8-K.
7
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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 11, 1999
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<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 826
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<TOTAL-INVEST> 1257
<CASH> 19
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<TOTAL-ASSETS> 1690
<POLICY-LOSSES> 855
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